A eficacia da politica fiscal anti-ciclica do governo Obama esta sendo pesadamante criticada pela forte alta do desemprego.  Apesar de ter aprovado o maior pacote fiscal da historia, o desemprego ja de longe superou a pior expectativa da equipe de Obama quando o pacote foi anunciado, de uma taxa de 8.5%. Agora muitos esperam uma taxa de 10% ou mais. Em sua defesa, Obama alega que problemas burocraticos tem criado dificuldades na execucao do pacote (lembra algo no Brasil?); que o pacote foi crucial em estabilizar as expectativas no inicio do ano, e que sua eficacia deveria ser julgada mais perto do seu termino, daqui dois anos. Os seus criticos, muito deles no partido Republicano, dizem que a alta no desemprego eh prova que o pacote foi uma iniciativa equivocada. O fato eh que a popularidade de Obama, apesar de ainda alta, esta  comecando a cair, especialemente em estados onde o desemprego esta crescendo mais.

Apesar disso Obama tem negado a necessidade de um segundo pacote, apesar disso ser uma recomendacao de alguns membros de sua equipe, e de outros economistas, como Paul Krugman (ver o New York Times hoje...).

 Acho que ambos os lados nesse debate estao esquescendo o que para mim eh o ponto mais importante, e que no lancamento do pacote fiscal me deixou muito cetico sobre sua eficaia. O ato eh que os mercados financeiros e de credito ainda estao extremamamnte debilitados. ouve uma melhora sensivel, eh verdade, mas o programa de salvacao dos bancos de Obama parece simplismente ter solidificado um certo status-quo onde os bancos vao "empurrando com a barriga" o problema dos ativos podres, contando com o tempo (e a garantia implicita/expllicita de ajuda estatal) para resolver seus problemas. Enquanto isso, agem de forma extremamente conservadora na concessao de credito.

Jogar um pacote fiscal nessa economia, com todos os problemas de execucao que tal medidas tem, soh poderia ter um resultado ineficaz. A falta de uma solucao definitiva para os problemas bancarios nos EUA eh ainda o grande ponto fraco da politica de Obama e o grande riso para a sustentabilidade da incipiente recuperacao que temos hoje aqui nos EUA.

De Nova York,

Tony Volpon 

Depois de quase cinco anos trabalhando na CM Capital Markets, excelente empresa  e sem duvida a melhor corretora de derivativos do Brasil,  aceitei o convite para ser Estrategista de Juros par América latina do banco inglês Standard Chartered em Nova York.

O Standard Chartered, apesar de ser inglês,  é um dos bancos com a melhor penetração na Ásia e no Oriente Médio do mundo, e esta apostando pesado no fluxo Ásia-America Latina, algo que eu também acredito vai aumentar muito nos próximos anos.

Com isso, terei a oportunidade de conhecer toda uma gama nova de clientes nessa área do mundo, complementando o trabalho já feito aqui no Brasil e nos EUA. Com isso, espero poder trazer um olhar novo para o trabalho desenvolvido aqui.

Tony Volpon

Amigos,

Depois de quase cinco anos trabalhando na CM Capital Markets, excelente empresa  e sem duvida a melhor corretora de derivativos do Brasil,  aceitei o convite para ser Estrategista de Juros par América latina do banco inglês Standard Chartered em Nova York.

O Standard Chartered, apesar de ser inglês,  é um dos bancos com a melhor penetração na Ásia e no Oriente Médio do mundo, e esta apostando pesado no fluxo Ásia-America Latina, algo que eu também acredito vai aumentar muito nos próximos anos.

Com isso, terei a oportunidade de conhecer toda uma gama nova de clientes nessa área do mundo, complementando o trabalho já feito aqui no Brasil e nos EUA. Com isso, espero poder trazer um olhar novo para o trabalho desenvolvido aqui.

Tony Volpon

Os números do PIB do primeiro trimestre deste ano vieram melhores do que esperado, mas mostram uma economia “dividida no meio” e com um processo de recuperação ainda em questão.

Podemos perceber isso olhando a comparação entre os dados do ultimo trimestre contra as do segundo trimestre de 2008, o trimestre antes da crise. Vemos que enquanto o crescimento do consumo ainda se manteve em território positivo (+0.78%), e os gastos do governo tiveram o melhor desempenho (+2.65%), os investimentos tiveram a pior queda desta década, caindo -17.34%, como as exportações (-20.58%) e as importações (-20.91%).

Isso mostra que a “aposta” de sustentar a economia via consumo por ora esta funcionando. Os aumentos nas transferências, no salário mínimo e os cortes de impostos sobre consumo funcionaram. O que certamente não esta funcionando é o PAC e a tentativa de impulsionar os investimentos via os bancos públicos (lembram dos “R$100 bilhões” do BNDES?)

Isso é bom ou ruim? Do ponto de vista de gerenciamento do ciclo, manter o consumo impulsionado ajuda o setor provado a mais rapidamente trabalhar seu excesso de estoques, o que ajuda amenizar e acelerar o ajuste do lado da oferta. Mas deve ficar claro que sem aumento nos investimentos e na demanda externa, que os fundamentos de renda e do emprego vão piorar ao longo do tempo, independente de todo a malabarismo redistribucionista do governo.

Porem só podemos afirmar que já vimos “o fundo do poço” na economia brasileira se a economia internacional de fato se recuperar, o que vai impulsionar os investimentos e a demanda externa. Se o atual otimismo dos mercados se provar uma miragem, não vamos ver a volta dos investimentos de forma a sustentar o consumo nos patamares ainda elevados  em que se encontram.

Finalmente, podemos ver nesses números o porque da ainda alta popularidade do governo Lula. Mantendo o consumo intacto, não há porque sua popularidade cair. Se isso vai continuar agora depende na ainda frágil recuperação internacional.

Tony Volpon

Dizem por ai que a oposição não em proposta; dizem por ai que todos os candidatos são “desenvolvimentistas”, ou que nada de mais vai mudar em 2010.

Isso tudo pode ser verdade. Afinal, vide as pesquisas, a população como um todo parece contente com a situação atual; a crise econômica parece estar “esfriando”, diminuindo a vontade por mudanças e reformas em vários paises (isso esta ficando muito evidente nos EUA); e, como fica claro, o processo político brasileiro é profundamente conservador e averso a risco.

De fato, se era para “apostar”, a aposta racional agora é essa mesmo: ganhe quem ganhe, a tendência na economia é mais do mesmo.

Agora se isso não acontecer não vai ser por falta de idéias e propostas.  Acho que aqui nesse Portal, se a gente pensar sobre a soma do seu conteúdo, já temos o bastante para desenhar uma proposta alternativa para a política econômica. Vou tentar resumir o que eu vejo de mais interessante.

O primeiro ponto é a questão da reforma de Estado e da política como condição sina qua non de uma reforma econômica. O Estado brasileiro atual, e o processo político que o sustenta, é simplesmente muito conservador e “captado” por interesses dentro e fora da “maquina” para ser o canal para reformas econômicas mais ousadas. Tudo aqui (pense na reforma tributaria) “morre na praia” pelas inconveniências políticas e eleitorais. De fato, acredito que a grande critica que a Historia terá do Lula será porque um presidente que atingiu o nível de popularidade que ele atingiu não a usou para fazer mais; mas talvez essa pouca “produtividade” de Lula seja também culpa de um sistema que ele em nada mudou (ou ate piorou).

No sistema atual, grandes mudanças econômicas parecem só possíveis quando o sistema político entra em colapso. Para mim (tese que defendi no meu livro) o Plano real só aconteceu por causa do caos político causado pelo impeachment do Collor, bem aproveitado por FHC, esse sim um estadista com visão do processo histórico.

Mas se isso sobre a nossa política é verdade, é muito ruim, razão por qual temos que dar a reforma política e depois do Estado, prioridade total.

Acho que há duas outras vertentes reformistas do lado econômico que podem e devem ser trabalhadas.

Do lado macro, foca mais e mais claro para mim que temos que escapar o dualismo “Keynesiano x Ortodoxos” e inovar. Para mim a proposta de, no nível da CMN, gerar um nível de coordenação e programação entre as políticas monetárias, cambiais e fiscais, tornado a política fiscal fortemente anticíclica, algo que pode ser uma verdadeira revolução na condução macroeconômica, assegurando que não vamos mais cair na já conhecida tendência de sempre ter os juros e o cambio como “variável de ajuste” em momentos de relativa melhora. Temos que criar nova flexibilidade no orçamento publico, trabalhar para desvincular gastos e começar um processo progressivo de trocar gastos correntes por investimentos, e não só aumentar gastos.

 Do lado micro temos que repensar a política industrial. Hoje ela é difusa e “captada” por setores que nem de longe apresentam as maiores perspectivas de crescimento, mas sim seu poder de lobby. Temos que criar mecanismos de escolher os setores certos, e concentrar recursos neles de forma agressiva.  É ridículo dar apoio estatal as grandes empresas maduras com pouco conteúdo tecnológico. Temos que ter a coragem de taxar uma Vale e dar esse recursos para uma empresa “star-up” de software. Temos que ter a coragem de taxar as exportações dos setores primários da economia e apoiar setores onde podemos com boas chances construir vantagens competitivas.

Então que infelizmente tudo pode ficar como esta pode ate ser o resultado final, mas que ninguém venha com papo que isso é por falta de propostas concretas.

Tony Volpon

Vou tentar responder as muito boas perguntas do Daniel, Antonio Jose e Valmir sobre meu post “O BC como ‘formador de preço’ no mercado de cambio”.

Primeiro, respondendo ao Valmir, no caso brasileiro não é muito claro de fato qual a política de intervenção do BC. Perguntado sobre isso, nossas autoridades monetárias sempre negam que estejam mirando um nível especifico do dólar, o que nem sempre parece ser verdade. Mas deixando essa questão de lado, o BC parece atuar com duas metas (1) gerenciar suas próprias reservas para ter um certo tamanho frente algum calculo do seu nível “ótimo” como um tipo de seguro (algo também nunca muito bem explicitado); (2) para retirar um “excesso” de oferta frente a demanda por dólares, com o intuito de diminuir a volatilidade/suavizar os movimentos do mercado. 

Perceba que em nenhuma dessas duas formas de atuar há um julgamento se o nível do cambio reflete de forma correta os fundamentos. Qualquer calculo sobre o nível ótimo de reservas vai levar em conta variáveis como, por exemplo, o tamanho da economia, o tamanho da corrente de comercio, a volatilidade esperada dessas variáveis, o custo de carregamento etc., mas o nível do cambio vai ser, se isso, somente uma das considerações. No segundo caso também podemos ver “excesso” de volatilidade em vários níveis do cambio, inclusive aqueles onde o BC pode julgar que o nível esteja compatível com os fundamentos.

Agora a pergunta obvia aqui parece ser, implicitamente, a do Daniel e do Antonio Jose, que parecem perguntar qual tipo de “modelo”, ou talvez “visão”, do mercado de cambio que eu tenho para advogar esse tipo de atuação. Vou aqui mesclar o que eu vejo como intuições da literatura com a minha pratica de operador e analista de mercado. Depois vou tentar responder suas perguntas mais diretamente.

Me parece obvio em um mundo onde o mercados financeiros tenham tal importância e abregencia como gerador de preços que determinam a alocação de capital que vivemos em um mundo de múltiplo equilíbrios. Sei que isso é uma opinião minoritária, mas na verdade nada heterodoxo. O economista Roger Farmer, da UCLA (veja, por exemplo, esse paper recente) tem trabalhado muito nessa linha, e eu o recomendo fortemente.

O que eu tiro dessa literatura é o que eu vejo nos mercados, que na realidade o mercado “gera” sua própria realidade via expectativas auto-realizáveis. Agora não temos que cair em um certo niilismo advogado por correntes pós-keynesianas sobre essa questão; o mercado muitas vezes “erra” e os fundamentos concretos se afirmam. A questão na pratica é complexa (ver outro recente paper, exatamente sobre o mercado de cambio, aqui). 

Agora se você tem essa “visão” do mundo e, ao mesmo tempo, aceita que há muito “noise trading” no mercado, em parte devido as inerentes incertezas do processo, e em parte devido ao tipo de incentivo financeiro sobre qual o mercado trabalha, acho que fica mais claro como um BC mais atuante, de fato atuando visando lucro mas SEM a restrição temporal de ter que gerar esse lucro em um prazo curto/especifico, pode ter um papel importante para ser formador de preço.

Agora vamos as perguntas mais especificas:

Daniel lembre que junto com um BC “formador de preço” eu também advogo um nível de coordenação maior entre todas as políticas do Estado. Pense sobre a questão dos juros alto no Brasil; me parece obvio que poderíamos caminhar em uma direção de menor pressão fiscal, ajudando a baixar os juros e depreciar o cambio ao longo do tempo. O BC como “formador de preço” não atua para determinar a trajetória do cambio no longo prazo, mas para ser mais um “player” no mercado de tal forma a advogar, via sua atuação, que o cambio reflita o conjunto dos fundamentos, inclusive o que esta sendo feito nas políticas monetárias e fiscais. Lembre que eu digo que o BC deve tentar ter lucro com sua atuação, isso somente vai acontecer se ele atuar de forma consistente com o conjunto dos fundamentos (inlcusive os monetários). Tentativas de “tabelar” o cambio em um nível dito “competitivo” e, ao mesmo tempo, baixar de forma drástica o juros, a proposta de muitos pós-keynesianos, obviamente levaria a uma posição insustentável onde o BC certamente perderia dinheiro. A idéia que a atuação do BC deve dar LUCRO é o que disciplina a atuação, e é o que separa a minha proposta da dos pós-keynesianos brasileiros.

Antonio Jose, você esta certo que se o BC ganha, alguém perde, mas não há nada de errado com isso, dês do que se mantenha um nível claro de transparência na atuação do BC. Isso de fato já acontece na pratica. O BC não é só regulador em nenhum lugar do mundo, mas há sim questões de desenho ótimo institucionais muito interessantes sobre essa questão que merecem toda uma outra reflexão. Confesso que não entendi muito bem seu ponto sobre “passivo monetário”; na pratica enfrentamos um nível não perfeito de mobilidade de capitais, então se pode (ate um certo limite) separa a atuação cambial da monetária/política de juros. Mas por favor, se quiser, explique melhor sua questão.

Um abraço a todos,

Tony Volpon

Gostaria de expandir uma idéia importante que apresentei no meu ultimo post “Mais uma vez a questão do cambio e juros”.

Nesse post critiquei o extremismo de uma certa visão ortodoxa que o mercado livre sozinho é eficiente na fixação do nível do cambio, contra a visão desenvolvimentista/keynesiana que o Estado, via sua tecnocracia, é mais bem colocado para essa tarefa.

A minha proposta de ter o BC como “formador de preço” pode parecer simplesmente a conhecida noção do “dirty floating”, algo que já vemos na pratica.  Cadê a novidade?

Na verdade minha proposta tem a ver com o “dirty float”, (flutuação suja) mas acho que seria melhor denominado, para inventar um termo, de “directed float” (flutuação direcionada). Com isso quero dizer que a autoridade monetária, reconhecendo a importância estratégica do cambio na economia, atuaria em todas as dimensões do mercado para assim ser o mais importante, apesar de não único, formador de preço.

Com “formador de preço” quero dizer um agente que, frente a um conjunto de informações, decidi comprar ou vender um ativo financeiro. Um formador de preço (em inglês, “market dealer”) é o elo entre a informação/choque/novidade e o preço.

Qual seria a diferença da atuação do BC em um “directed float” contra um “dirty float”. No “dirty float” (como praticada no Brasil pelo menos) a autoridade monetária responde se contrapondo quando ocorre um desequilibro entre a oferta e demanda pela moeda, desequilibro que tem como resultado um aumento forte na volatilidade, gerando um mercado direcional.  O que inicia a intervenção é o desequilibro, independente do nível da moeda ou a razão.

Em um “directed float”, como eu a imagino, esse tipo de desequilibro não seria condição necessária nem suficiente para a autoridade monetária atuar. A autoridade monetária poderia atuar sempre que, dentro do seu julgamento, haver uma oportunidade de lucro no mercado.

Por que isso?  Como que tornar o BC mais um “especulador” ajudaria? Basicamente se o nível do cambio atual é insustentável, deve existir uma oportunidade de lucro. Como mostrado no importante paper de Summers et al. “Noise Trader Risk in Financial Markets”, a existência de operadores que não seguem os fundamentos junto com outros que seguem, mas sofrem restrições sobre o tamanho de suas posições, pode ser suficiente para gerar bolhas especulativas. Mas se diminuímos essas restrições, o mercado chega mais perto de ser eficiente.

Um banco central “formador de preço”, por não sofrer como as outras instituições a necessidade de gerar lucros no curto prazo, pode tomar posições de longo prazo que, se corretas, vão gerar lucro e, ao mesmo tempo, gerar uma maior convergência entre preço e fundamentos. O BC, como outros agentes de mercado, procuraria o lucro, mas seria diferente em não sofrer uma restrição temporal estrita para tal.

Se você acredita, como eu acredito, na existência de múltiplos equilíbrios, alguns mais benéficos que outros, a atuação do BC como formador de preço pode ajudar o cambio a convergir para equilíbrios mais benéficos, sustentados pelo conjunto da política econômica (ver a discussão sobre a necessidade de coordenar políticas no meu ultimo post).

Um BC atuante, que vai alem de meramente gerenciar as reservas, pode ser uma parte importante da solução sobre como gerenciar a questão do cambio sem cair nos extremos da flutuação quase-pura ou do cambio administrado.

Tony Volpon

Com a queda do dólar abaixo da “psicologicamente” importante barreira de R$2.00, já estamos vendo a turma desenvolvimentista reclamando, e sugerindo, como sempre sugerem, queda de juros e controle/taxação do fluxo de capitais como respostas. Do outro lado do debate, economistas mais ortodoxos apontam na necessidade de deixar o cambio flutuar, que os juros devem mirar somente a inflação, e que taxar o fluxo é algo ineficaz.

Quem acompanha o cenário econômico brasileiro sabe que esse debate, em exatamente esses termos, se repete faz anos, e em quase exatamente os mesmos termos. Vou tentar aqui sair dessa mesmice que só gera tédio.

Vamos desabar alguns mitos sobre esse debate, dos dois lados.

Primeiro os desenvolvimentista estão inteiramente certos em afirmar que a nível do cambio é um “preço” importantíssimo para a economia como um todo, tanto para o equilíbrio macroeconômico, como o padrão de desenvolvimento. Também é verdade que dado a natureza dos mercados financeiros, que um cambio flutuante pode, e vai, sofrer o impacto de fluxos muita vezes altamente especulativos, que pode gerar níveis de apreciação e depreciação insustentável.

Contra uma certa noção ultra-orotodoxa que TUDO deve ser determinado pelo mercado, podemos contrapor que se isso é verdade, porque que apoiamos a idéia que a taxa de juros básica, no caso brasileiro a Selic, deve ser determinada pelo Banco Central? Isto é, fora alguns “ultras” austríacos, todo mundo parece concordar que o banco central deve fixar alguma ancora nominal (seja os juros hoje, em outros tempos algum agregado monetário), então vamos no mínimo, no dois lado do debate,  concordar que há sim espaço para a determinação de variáveis macro por um agente do Estado.

Agora infelizmente para os desenvolvimentistas nada disso deve nos levar a concluir que necessariamente o Estado, via o BC, deve, controlar a taxa de cambio, isso por duas razoes.

A primeira e mais básica é que reconhecer  que o mercado comete “n” besteiras especulativas (vide a bolsa!) não implica que o Estado vai ser em nada melhor. Aqui devemos lembrar a famosa frase de Churchill sobre  democracia, como um péssimo regime, só que melhor que todos os outros. Reconhecer que o mercado sofre, ou talvez ate seja definido como, uma continuidade de “bolhas” especulativas em nada deve nos levar a conclusão neo-hegeliana que o Estado e seu quadro tecnocrata vai ser melhor na função.

A segunda é que ate admitindo que o Estado deve influenciar a determinação do cambio, devemos ter muito cuidado em pensar sobre os custos de fazer isso. Todo o tipo de controle de capitais vai gerar um aumento de custo de captação. Então se impomos, como já foi feito e esta aparentemente “em debate” hoje, IOF sobre fluxos para a renda fixa, elevamos o custo de captação do Tesouro Nacional. Então vale a pena onerar o Tesouro (lembrando que o Tesouro é você, o contribuinte) para depreciar a moeda, algo que ajuda transferir renda para alguns setores? Vale a pena impor controles sobre os fluxos indo para a bolsa de valores, o que deve diminuir o preço das ações, e assim aumentando o custo de captação das empresas? Isso são perguntas importantes, e o debate sobre o controle de capitais carece de uma discussão seria e técnica sobre os custos, com muitos desenvolvimentistas simplesmente presumindo implicitamente que tais controles não geram custos para ninguém.

Uma visão pragmática da questão de controle de capitais deve partir de duas verdades. Primeiro, que se a medida não for abrangente, atingindo uma boa parte do fluxo cambial, não vai afetar o nível do cambio. Então seus defensores devem ter a honestidade de dizer que tais medidas devem afetar fluxos considerados como “bons”, por exemplo, investimentos diretos. Segundo, que temos que ter uma noção do custo desses controles para diferentes setores, lembrando que muitos custos podem estar relativamente escondidos, e que outros, como no caso do IOF sobre o Tesouro, são de fácil aplicação por não haver algum poderoso grupo de lobby contra. Quando se impõe IOF sobre a renda fixa, o que onera o Tesouro=contribuinte, poucos são contra; gostaria de ver a gritaria se o governo colocasse IOF sobre fluxos indo para a Bolsa!

Isso tudo deve nos levar a ser muito céticos sobre controle de capitais como ferramenta principal para influenciar o nível do cambio. Mas essa conclusão não deve no levar a concluir que nada deve ser feito no mercado cambial.

Primeiro, em um nivel mais geopolítico, devemos entender que a queda estrutural do dólar americano é uma realidade do realinhamento de poder econômico focado nas economias emergentes. Isso vai ser um processo complicado e longo, e o Brasil deve tomar uma posição mais ativa, e não simplesmente neo-mercantilista como adotado pelo governo Lula, nessa complexa questão.

Do lado mais “pratico”, enquanto devemos evitar a crescente pseudo-keynesiana tentação de ver no Estado a solução para tudo (lembrando que Keynes era um liberal, e certamente não concordaria com a visão de muitos dos seus suposto discípulos abaixo da linha do equador) a experiência pratica parece apoiar a idéia que em um mercado importante como o cambial, que o Banco Central deve ser uma gente muito atuante, ajudando a formar preços ao longo de todas as dimensões de risco.

Isso nosso Banco Central já faz. Apesar disso, eu acredito que nosso BC poderia ter uma atuação mais agressiva, e que deve pensar ativamente ate que ponto sua tentativa de agir de forma “transparente”, algo bom em si, não prejudica sua atuação como formador de preço (e não mero gerenciador de reservas internacionais). Acredito que o BC deve rever seu modos operandi para ser um dos formadores de preço do mercado, algo hoje muito restrito pela forma de atuar.

A segunda maneira de atuar seria a de perceber que no final do dia, a taxa de cambio é um preço determinado sobre um complexo de influencias, sito é, ela é resultado de um equilíbrio geral em que não só questões da política monetária, mas também as fiscais, são determinantes. Então não da para ficar reclamando do nível do cambio e, ao mesmo tempo, apoiar políticas fiscais expansionistas que tem como resultado elevar o nível do cambio.  Essa tendência de “fatiar” mentalmente as influencias da política econômica tem que ser abandonada na teoria e na pratica. Cambio não é só juros!

Para acabar com isso, devemos pensar na reestruturação da forma decisória da política monetária para dar a ela um nível maior de coordenação.  A idéia que a política fiscal deve mirar simplesmente o nível do superávit primário para gerenciar a trajetória do endividamento liquido, enquanto a política monetária mira a inflação, é de fato um bom arranjo institucional que tem nos servido bem nesse anos, mas eu acredito que podemos, e devemos, criar uma instancia de coordenação entre as políticas fiscais/tributarias, monetárias e cambias. Minha proposta, já defendida em recente paper, seria a de dar a uma “turbinada” CMN, nosso Conselho Monetária Nacional, a papel de coordenação dessas políticas, dando para todas elas o mesmo nível de planejamento e transparecia que hoje somente temos na política monetária.

Em resumo, podemos e devemos pensar sobre como influenciar a taxa de cambio. Mas isso só vai acontecer de fato se sairmos da mesmice do debate atual, abandonando noções adotadas pelos dois lados dessa questão. Como diz os americanos “its time to think outside the box”.

Tony Volpon

This is not exactly a paper about Albert Hirschman.

In the first place, I am unqualified to write such a paper. My acquaintance with Hirschman's works is very limited. In essence, the Hirschman I know is the author of The Strategy of Economic Development and little else. So I am in no position to write about his larger vision.

Furthermore, while I am a great admirer of The Strategy of Economic Development, I do not think that it was helpful to development economics. That may sound paradoxical, but I'll try to explain what I mean as I go along. To put it briefly, however, I regard the intellectual strategy that Hirschman adopted in writing that book as an understandable but wrong response to what had become a crisis in the field of economic development. Perversely, the very brilliance and persuasiveness of the book made it all the more destructive.

If this paper is not about Hirschman, what is it about? It is some reflections on two intertwined themes. One is the strange history of development economics, or more specifically the linked set of ideas that I have elsewhere (Krugman 1993) called "high development theory". This set of ideas was and is highly persuasive as at least a partial explanation of what development is about, and for a stretch of about 15 years in the 1940s and 1950s it was deeply influential among both economists and policymakers. Yet in the late 1950s high development theory rapidly unravelled, to the point where by the time I studied economics in the 1970s it seemed not so much wrong as incomprehensible. Only in the 1980s and 1990s were economists able to look at high development theory with a fresh eye and see that it really does make a lot of sense, after all.

The second theme is the problem of method in the social sciences. As I will argue, the crisis of high development theory in the late 1950s was neither empirical nor ideological: it was methodological. High development theorists were having a hard time expressing their ideas in the kind of tightly specified models that were increasingly becoming the unique language of discourse of economic analysis. They were faced with the choice of either adopting that increasingly dominant intellectual style, or finding themselves pushed into the intellectual periphery. They didn't make the transition, and as a result high development theory was largely purged from economics, even development economics.

Hirschman's Strategy appeared at a critical point in this methodological crisis. It is a rich book, full of stimulating ideas. Its most important message at that time, however, was a rejection of the drive toward rigor. In effect, Hirschman said that both the theorist and the practical policy-maker could and should ignore the pressures to produce buttoned-down, mathematically consistent analyses, and adopt instead a sort of muscular pragmatism in grappling with the problem of development. Along with some others, notably Myrdal, Hirschman didn't wait for intellectual exile: he proudly gathered up his followers and led them into the wilderness himself. Unfortunately, they perished there.

The irony is that we can now see that high development theory made perfectly good sense after all. But in order to see that, we need to adopt exactly the intellectual attitude Hirschman rejected: a willingness to do violence to the richness and complexity of the real world in order to produce controlled, silly models that illustrate key concepts.

This paper, then, is a meditation on economic methodology, inspired by the history of development economics, in which Albert Hirschman appears as a major character. I hope that it is clear how much I admire his work; he is not a villain in this story so much as a tragic hero.
 

THE FALL AND RISE OF DEVELOPMENT ECONOMICS
 

The glory days of "high development theory" spanned about 15 years, from the seminal paper of Rosenstein Rodan (1943) to the publication of Hirschman's Strategy (1958).

Loosely, high development theory can be described as the view that development is a virtuous circle driven by external economies -- that is, that modernization breeds modernization. Some countries, according to this view, remain underdeveloped because they have failed to get this virtuous circle going, and thus remain stuck in a low level trap. Such a view implies a powerful case for government activism as a way of breaking out of this trap.

It's not that easy, of course -- just asserting that there are virtuous and vicious circles does not qualify as a theory. (Although Myrdal (1957) is essentially a tract that emphasizes the importance of "circular and cumulative causation" without -- unlike Hirschman (1958), which is often treated as a counterpart work -- providing much in the way of concrete examples of how it might arise). The distinctive features of high development theory came out of its explanation of the nature of the positive feedback that can lead to self-reinforcing growth or stagnation.

In most versions of high development theory, the self-reinforcement came from an interaction between economies of scale at the level of the individual producer and the size of the market. Crucial to this interaction was some form of economic dualism, in which "traditional" production paid lower wages and/or participated in the market less than the modern sector. The story then went something like this: modern methods of production are potentially more productive than traditional ones, but their productivity edge is large enough to compensate for the necessity of paying higher wages only if the market is large enough. But the size of the market depends on the extent to which modern techniques are adopted, because workers in the modern sector earn higher wages and/or participate in the market economy more than traditional workers. So if modernization can be gotten started on a sufficiently large scale, it will be self-sustaining, but it is possible for an economy to get caught in a trap in which the process never gets going.

The clearest and simplest version of this story is in the original paper by Rosenstein Rodan (1943) himself. In that seminal paper, he illustrated his argument for coordinated investment by imagining a country in which 20,000 (!) "unemployed workers ... are taken from the land and put into a large new shoe factory. They receive wages substantially higher than their previous income in natura." Rosenstein-Rodan then went on to argue that this investment is likely to be unprofitable in isolation, but profitable if accompanied by similar investments in many other industries. Both key assumptions are clearly present: the assumption of economies of scale, embodied in the assertion that the factory must be established at such a large scale, and the assumption of dualism, embedded in the idea that these workers can be drawn from unemployment or low paying agricultural employment.

I regard Rosenstein Rodan's Big Push story as the essential high development model. Admittedly, some of the classics of high development theory differed in their emphasis from this central vision. On one side, Arthur Lewis's famous "Economic development with unlimited supplies of labor" emphasized dualism while ignoring the role of economies of scale and circular causation. On the other side, some authors, notably Fleming (1954), argued that owing to the role of intermediate goods in production -- what Hirschman would later memorably dub forward and backward linkages -- self-reinforcing development could conceivably occur even without dualism.

There were also disputes over the nature of the policies that might be required to break a country out of a low-level trap. Rosenstein Rodan and others appeared to imply that a coordinated, broadly based investment program -- the Big Push -- would be required. Hirschman disagreed, arguing that a policy of promoting a few key sectors with strong linkages, then moving on to other sectors to correct the disequilibrium generated by these investments, and so on, was actually the right approach. Indeed, Hirschman structured his book as an argument with what he called the "balanced growth" school. He did not acknowledge that he had far more in common with Rosenstein Rodan and other "balanced growth" advocates like Nurkse (1953) than any of them had with the way that mainstream economics was going.

For mainstream economics was, by the late 1950s, becoming increasingly hostile to the kinds of ideas involved in high development theory. Above all, economics was going through an extended period in which increasing returns to scale, so central to that theory, tended to disappear from discourse.

It may not be obvious just how crucial economies of scale were to high development theory. One of the characteristics of the writing of many of its expositors was a certain vagueness that makes it hard to know exactly what the essence of their arguments were -- a vagueness that, as we will soon see, was no accident. Still, if reads carefully, one finds that increasing returns are invariably crucial to the argument.

Consider, for example, what may have been Hirschman's most cited concept, that of "linkages." Some crude followers of Hirschman have identified these directly with having a lot of entries in the input-output table.⁽¹⁾ But Hirschman's own discussion makes it clear that the idea involved the interaction between market size and economies of scale.

In Hirschman's definition of backward linkages the role of market-size externalities linked to economies of scale is quite explicit: an industry creates a backward linkage when its demand enables an upstream industry to be established at at least minimum economic scale. The strength of an industry's backward linkages is to be measured by the probability that it will in fact push other industries over the threshhold.

Forward linkages are also defined by Hirschman as involving an interaction between scale and market size; in this case the definition is vaguer, but seems to involve the ability of an industry to reduce the costs of potential downstream users of its products and thus, again, push them over the threshhold of profitability.

So economies of scale were crucial to high development theory. Why did that present a problem? Because economies of scale were very difficult to introduce into the increasingly formal models of mainstream economic theory.
 

THE EVOLUTION OF IGNORANCE
 

A friend of mine who combines a professional interest in Africa with a hobby of collecting antique maps has written a fascinating paper called "The evolution of European ignorance about Africa." The paper describes how European maps of the African continent evolved from the 15th to the 19th centuries.

You might have supposed that the process would have been more or less linear: as European knowledge of the continent advanced, the maps would have shown both increasing accuracy and increasing levels of detail. But that's not what happened. In the 15th century, maps of Africa were, of course, quite inaccurate about distances, coastlines, and so on. They did, however, contain quite a lot of information about the interior, based essentially on second- or third-hand travellers' reports. Thus the maps showed Timbuktu, the River Niger, and so forth. Admittedly, they also contained quite a lot of untrue information, like regions inhabited by men with their mouths in their stomachs. Still, in the early 15th century Africa on maps was a filled space.

Over time, the art of mapmaking and the quality of information used to make maps got steadily better. The coastline of Africa was first explored, then plotted with growing accuracy, and by the 18th century that coastline was shown in a manner essentially indistinguishable from that of modern maps. Cities and peoples along the coast were also shown with great fidelity.

On the other hand, the interior emptied out. The weird mythical creatures were gone, but so were the real cities and rivers. In a way, Europeans had become more ignorant about Africa than they had been before.

It should be obvious what happened: the improvement in the art of mapmaking raised the standard for what was considered valid data. Second-hand reports of the form "six days south of the end of the desert you encounter a vast river flowing from east to west" were no longer something you would use to draw your map. Only features of the landscape that had been visited by reliable informants equipped with sextants and compasses now qualified. And so the crowded if confused continental interior of the old maps became "darkest Africa", an empty space.

Of course, by the end of the 19th century darkest Africa had been explored, and mapped accurately. In the end, the rigor of modern cartography led to infinitely better maps. But there was an extended period in which improved technique actually led to some loss in knowledge.

Between the 1940s and the 1970s something similar happened to economics. A rise in the standards of rigor and logic led to a much improved level of understanding of some things, but also led for a time to an unwillingness to confront those areas the new technical rigor could not yet reach. Areas of inquiry that had been filled in, however imperfectly, became blanks. Only gradually, over an extended period, did these dark regions get re-explored.

Economics has always been unique among the social sciences for its reliance on numerical examples and mathematical models. David Ricardo's theories of comparative advantage and land rent are as tightly specified as any modern economist could want. Nonetheless, in the early 20th century economic analysis was, by modern standards, marked by a good deal of fuzziness. In the case of Alfred Marshall, whose influence dominated economics until the 1930s, this fuzziness was deliberate: an able mathematician, Marshall actually worked out many of his ideas through formal models in private, then tucked them away in appendices or even suppressed them when it came to publishing his books. Tjalling Koopmans, one of the founders of econometrics, was later to refer caustically to Marshall's style as "diplomatic": analytical difficulties and fine points were smoothed over with parables and metaphors, rather than tackled in full view of the reader. (By the way, I personally regard Marshall as one of the greatest of all economists. His works remain remarkable in their range of insight; one only wishes that they were more widely read).

High development theorists followed Marshall's example. From the point of view of a modern economist, the most striking feature of the works of high development theory is their adherence to a discursive, non-mathematical style. Economics has, of course, become vastly more mathematical over time. Nonetheless, development economics was archaic in style even for its own time. Of the four most famous high development works, Rosenstein Rodan's was approximately contemporary with Samuelson's formulation of the Heckscher-Ohlin model, while Lewis, Myrdal, and Hirschman were all roughly contemporary with Robert Solow's initial statement of growth theory.

As in Marshall's case, this was not because development economists were peculiarly mathematically incapable. Hirschman made a significant contribution to the formal theory of devaluation in the 1940s, while Fleming helped create the still influential Mundell-Fleming model of floating exchange rates. Moreover, the development field itself was at the same time generating mathematical planning models -- first Harrod-Domar type growth models, then linear programming approaches -- that were actually quite technically advanced for their time.

So why didn't high development theory get expressed in formal models? Almost certainly for one basic reason: high development theory rested critically on the assumption of economies of scale, but nobody knew how to put these scale economies into formal models.

The essential problem is that of market structure. From Ricardo until about 1975, what economists knew how to model formally was a perfectly competitive economy, one in which firms take prices as given rather than actively trying to affect them. There is a standard theory of the behavior of an individual monopolist who faces no comparably-sized competitors, but there is no general theory of how oligopolists, firms who have substantial market power but also face large rivals, will set prices and output. Still less is there any general approach to modeling the aggregate behavior of a whole economy largely peopled by oligopolistic rather than perfectly competitive industries.

Since the mid 1970s economists have broken through this barrier in a number of fields: international trade, economic growth, and, finally, development. The way they have done this is essentially by making some peculiar assumptions that allow them to exploit the bag of tricks that industrial organization theorists developed for thinking about such issues in the 1970s. (We'll see an example of the power and limitations of this kind of intellectual trickery below, when I present a quick formal version of the Big Push story). In the 1950s, although the technical level of the leading development economists was actually quite high enough to have allowed them to do the same thing, the bag of tricks wasn't there. So development theorists were placed in an awkward bind, with basically sensible ideas that they could not quite express in fully worked-out models. And the drift of the economics profession made the situation worse. In the 1940s and even in the 1950s it was still possible for an economist to publish a paper that made persuasive points verbally, without tying up all the loose ends. After 1960, however, an attempt to publish a paper like Rosenstein Rodan's would have immediately gotten a grilling: "Why not build a smaller factory (for which the market is adequate)? Oh, you're assuming economies of scale? But that means imperfect competition, and nobody knows how to model that, so this paper doesn't make any sense." It seems safe to say that such a paper would have been unpublishable any time after 1970, if not earlier.

Some development theorists responded by getting as close to a formal model as they could. This is to some extent true of Rosenstein Rodan, and certainly the case for Fleming (1954), which gets painfully close to being a full model. But others at least professed to see a less formal, less disciplined approach as a virtue rather than an awkward necessity. It is in this light that one needs to see Hirschman and Myrdal. These authors are often cited today (by me among others) as forerunners of the recent emphasis in several fields on strategic complementarity. In fact, however, their books marked the end, not the beginning of high development theory. Myrdal's central thesis was the idea of "circular causation." But the idea of circular causation is essentially already there in Allyn Young (1928), not to mention Rosenstein Rodan, and Nurkse in 1952 referred repeatedly to the circular nature of the problem of getting growth going in poor countries. So Myrdal was in effect providing a capsulization of an already extensive and familiar set of ideas rather than a new departure. Similarly, Hirschman's distinctive idea of linkages was more distinctive for the effectiveness of the term and the policy advice that he derived loosely from it than for its intellectual novelty; in effect Rosenstein Rodan was already talking about linkages, and Fleming very explicitly had both forward and backward linkages in his discussion.

What marked Myrdal and Hirschman was not so much the novelty of their ideas but their stylistic and methodological stance. Until their books, economists doing high development theory were trying to be good mainstream economists. They could not develop full formal models, but they got as close as they could, trying to keep close to the increasingly model-oriented mainstream. Myrdal and Hirschman abandoned this effort, and eventually in effect took stands on principle against any effort to formalize their ideas.

One imagines that this was initially very liberating for them and their followers. Yet in the end it was a vain stance. Economic theory is essentially a collection of models. Broad insights that are not expressed in model form may temporarily attract attention and even win converts, but they do not endure unless codified in a reproducible -- and teachable -- form. You may not like this tendency; certainly economists tend to be too quick to dismiss what has not been formalized (although I believe that the focus on models is basically right). Like it or not, however, the influence of ideas that have not been embalmed in models soon decays. And this was the fate of high development theory. Myrdal's effective presentation of the idea of circular and cumulative causation, or Hirschman's evocation of linkages, were stimulating and immensely influential in the 1950s and early 1960s. By the 1970s (when I was myself a student of economics), they had come to seem not so much wrong as meaningless. What were these guys talking about? Where were the models? And so high development theory was not so much rejected as simply bypassed.

The exception proves the rule. Lewis's surplus labor concept was the model that launched a thousand papers, even though surplus labor assumptions were already standard among development theorists, the empirical basis for assuming surplus labor was weak, and the idea of external economies/strategic complementarity is surely more interesting. The point was, of course, that precisely because he did not mix economies of scale into his framework, Lewis offered theorists something they could model using available tools.
 

METAPHORS AND MODELS
 

I have just acknowledged that the tendency of economists to emphaisze what they know how to model formally can create blind spots; yet I have also claimed that the insistence on modeling is basically right. What I want to do now is call a time out and discuss more broadly the role of models in social science.

It is said that those who can, do, while those who cannot, discuss methodology. So the very fact that I raise the issue of methodology in this paper tells you something about the state of economics. Yet in some ways the problems of economics and of social science in general are part of a broader methodological problem that afflicts many fields: how to deal with complex systems.

It is in a way unfortunate that for many of us the image of a successful field of scientific endeavor is basic physics. The objective of the most basic physics is a complete description of what happens. In principle and apparently in practice, quantum mechanics gives a complete account of what goes on inside, say, a hydrogen atom. But most things we want to analyze, even in physical science, cannot be dealt with at that level of completeness. The only exact model of the global weather system is that system itself. Any model of that system is therefore to some degree a falsification: it leaves out some (many) aspects of reality.

How, then, does the meteorological researcher decide what to put into his model? And how does he decide whether his model is a good one? The answer to the first question is that the choice of model represents a mixture of judgement and compromise. The model must be something you know how to make -- that is, you are constrained by your modeling techniques. And the model must be something you can construct given your resources -- time, money, and patience are not unlimited. There may be a wide variety of models possible given those constraints; which one or ones you choose actually to build depends on educated guessing.

And how do you know that the model is good? It will never be right in the way that quantum electrodynamics is right. At a certain point you may be good enough at predicting that your results can be put to repeated practical use, like the giant weather-forecasting models that run on today's supercomputers; in that case predictive success can be measured in terms of dollars and cents, and the improvement of models becomes a quantifiable matter. In the early stages of a complex science, however, the criterion for a good model is more subjective: it is a good model if it succeeds in explaining or rationalizing some of what you see in the world in a way that you might not have expected.

Notice that I have not specified exactly what I mean by a model. You may think that I must mean a mathematical model, perhaps a computer simulation. And indeed that's mostly what we have to work with in economics. But a model can equally well be a physical one, and I'd like to describe briefly an example from the pre-computer era of meteorological research: Fultz's dish-pan.

Dave Fultz was a meteorological theorist at the University of Chicago, who asked the following question: what factors are essential to generating the complexity of actual weather? Is it a process that depends on the full complexity of the world -- the interaction of ocean currents and the atmosphere, the locations of mountain ranges, the alternation of the seasons, and so on -- or does the basic pattern of weather, for all its complexity, have simple roots?

He was able to show the essential simplicity of the weather's causes with a "model" that consisted of a dish-pan filled with water, placed on a slowly rotating turntable, with an electric heating element bent around the outside of the pan. Aluminum flakes were suspended in the water, so that a camera perched overhead and rotating with the pan could take pictures of the pattern of flow.

The setup was designed to reproduce two features of the global weather pattern: the temperature differential between the poles and the equator, and the Coriolis force that results from the Earth's spin. Everything else -- all the rich detail of the actual planet -- was suppressed. And yet the dish-pan exhibited an unmistakable resemblance to actual weather patterns: a steady flow near the rim evidently corresponding to the trade winds, constantly shifting eddies reminiscent of temperate-zone storm systems, even a rapidly moving ribbon of water that looked like the recently discovered jet stream.

What did one learn from the dish-pan? It was not telling an entirely true story: the Earth is not flat, air is not water, the real world has oceans and mountain ranges and for that matter two hemispheres. The unrealism of Fultz's model world was dictated by what he was able to or could be bothered to build -- in effect, by the limitations of his modeling technique. Nonetheless, the model did convey a powerful insight into why the weather system behaves the way it does.

The important point is that any kind of model of a complex system -- a physical model, a computer simulation, or a pencil-and-paper mathematical representation -- amounts to pretty much the same kind of procedure. You make a set of clearly untrue simplifications to get the system down to something you can handle; those simplifications are dictated partly by guesses about what is important, partly by the modeling techniques available. And the end result, if the model is a good one, is an improved insight into why the vastly more complex real system behaves the way it does.

When it comes to physical science, few people have problems with this idea. When we turn to social science, however, the whole issue of modeling begins to raise people's hackles. Suddenly the idea of representing the relevant system through a set of simplifications that are dictated at least in part by the available techniques becomes highly objectionable. Everyone accepts that it was reasonable for Fultz to represent the Earth, at least for a first pass, with a flat dish, because that was what was practical. But what do you think about the decision of most economists between 1820 and 1970 to represent the economy as a set of perfectly competitive markets, because a model of perfect competition was what they knew how to build? It's essentially the same thing, but it raises howls of indignation.

Why is our attitude so different when we come to social science? There are some discreditable reasons: like Victorians offended by the suggestion that they were descended from apes, some humanists imagine that their dignity is threatened when human society is represented as the moral equivalent of a dish on a turntable. Also, the most vociferous critics of economic models are often politically motivated. They have very strong ideas about what they want to believe; their convictions are essentially driven by values rather than analysis, but when an analysis threatens those beliefs they prefer to attack its assumptions rather than examine the basis for their own beliefs.

Still, there are highly intelligent and objective thinkers who are repelled by simplistic models for a much better reason: they are very aware that the act of building a model involves loss as well as gain. Africa isn't empty, but the act of making accurate maps can get you into the habit of imagining that it is. Model-building, especially in its early stages, involves the evolution of ignorance as well as knowledge; and someone with powerful intuition, with a deep sense of the complexities of reality, may well feel that from his point of view more is lost than is gained. It is in this honorable camp that I would put Albert Hirschman and his rejection of mainstream economics.

The cycle of knowledge lost before it can be regained seems to be an inevitable part of formal model-building. Here's another story from meteorology. Folk wisdom has always said that you can predict future weather from the aspect of the sky, and had claimed that certain kinds of clouds presaged storms. As meteorology developed in the 19th and early 20th centuries, however -- as it made such fundamental discoveries, completely unknown to folk wisdom, as the fact that the winds in a storm blow in a circular path -- it basically stopped paying attention to how the sky looked. Serious students of the weather studied wind direction and barometric pressure, not the pretty patterns made by condensing water vapor.

It was not until 1919 that a group of Norwegian scientists realized that the folk wisdom had been right all along -- that one could identify the onset and development of a cyclonic storm quite accurately by looking at the shapes and altitude of the cloud cover.

The point is not that a century of research into the weather had only reaffirmed what everyone knew from the beginning. The meteorology of 1919 had learned many things of which folklore was unaware, and dispelled many myths. Nor is the point that meteorologists somehow sinned by not looking at clouds for so long. What happened was simply inevitable: during the process of model-building, there is a narrowing of vision imposed by the limitations of one's framework and tools, a narrowing that can only be ended definitively by making those tools good enough to transcend those limitations.

But that initial narrowing is very hard for broad minds to accept. And so they look for an alternative.

The problem is that there is no alternative to models. We all think in simplified models, all the time. The sophisticated thing to do is not to pretend to stop, but to be self-conscious -- to be aware that your models are maps rather than reality.

There are many intelligent writers on economics who are able to convince themselves -- and sometimes large numbers of other people as well -- that they have found a way to transcend the narrowing effect of model-building. Invariably they are fooling themselves. If you look at the writing of anyone who claims to be able to write about social issues without stooping to restrictive modeling, you will find that his insights are based essentially on the use of metaphor. And metaphor is, of course, a kind of heuristic modeling technique.

In fact, we are all builders and purveyors of unrealistic simplifications. Some of us are self-aware: we use our models as metaphors. Others, including people who are indisputably brilliant and seemingly sophisticated, are sleepwalkers: they unconsciously use metaphors as models.
 

THE BIG PUSH
 

We can now return to the story of development economics. By the late 1950s, as I have argued, high development theory was in a difficult position. Mainstream economics was moving in the direction of increasingly formal and careful modeling. While this trend was clearly overdone in many instances, it was an unstoppable and ultimately an appropriate direction of change. But it was difficult to model high development theory more formally, because of the problem of dealing with market structure.

The response of some of the most brilliant high development theorists, above all Albert Hirschman, was simply to opt out of the mainstream. They would build a new development school on suggestive metaphors, institutional realism, interdisciplinary reasoning, and a relaxed attitude toward internal consistency. The result was some wonderful writing, some inspiring insights, and (in my view) an intellectual dead end. High development theory simply faded out. A constant-returns, perfect-competition view of reality took over the development literature, and eventually via the World Bank and other institutions much of real-world development policy as well.

And yet in the end it turned out that mainstream economics eventually did find a place for high development theory. Like the Norwegians who discovered that the shapes of clouds do mean something, mainstream economics discovered that as its modeling techniques became more sophisticated some neglected insights could be brought back in.

Since this sounds rather abstract, it will be best if I explicitly present an example of how one can now do a formal treatment of the classic model of high development theory: Rosenstein-Rodan's Big Push. The treatment is a streamlined version of the exposition in Murphy, Shleifer, and Vishny (1989), and reproduces my presentation in Krugman (1993).

Our paper-and-pencil dish-pan -- our model economy -- consists of a set of assumptions about the supply of resources; technology; demand; and market structure.

Resources. The only resource in the economy is labor -- that is, we neglect the role of capital, physical or human. Labor is in fixed total supply L. It can, however, be employed in either of two sectors: a "traditional" sector, characterized by constant returns, or a "modern" sector, characterized by increasing returns. Although the same quality of labor is used in the traditional and modern sectors, it is not paid the same wage. Workers must be paid a premium to move from traditional to modern employment. We let w>1 be the ratio of the wage rate that must be paid in the modern sector to that in the traditional sector.

Technology. It is assumed that the economy produces N goods, where N is a large number. We choose units so that the productivity of labor in the traditional sector is unity in each of the goods. In the modern sector, average labor cost is decreasing in the scale of production. For simplicity, decreasing costs take a linear form. Let Q_i be the production of good i in the modern sector. Then if the modern sector produces the good at all, the labor requirement will be assumed to take the form

L_i = F + cQ_i

where c<1 is the marginal labor requirement. Note that for this example it is assumed that the relationship between input and output is the same for all N goods.

Demand. Each good receives a constant share N of expenditure. The model will be static, with no asset accumulation or decumulation; so expenditure equals income.

Market structure. The traditional sector is assumed to be characterized by perfect competition. Thus for each good there is a perfectly elastic supply from the traditional sector at the marginal cost of production; given our choice of units, this supply price is unity in terms of traditional sector labor. By contrast, a single entrepreneur is assumed to have the unique ability to produce each good in the modern sector.

How will such a producer price? She cannot raise her price as much as she would like. The reason is that potential competition from the traditional sector puts a limit on the price: she cannot go above a price of 1 (in terms of traditional labor) without being undercut by traditional producers. So each producer in the modern sector will set the same price, unity, as would have been charged in the traditional sector.
 

We can now ask the question, will production actually take place in the traditional or the modern sector?

To answer this, it is useful to draw a simple diagram ( Figure 1 ). On the horizontal axis is the labor input, L_i, used to produce a typical good. On the vertical axis is that sector's output Q_i. The two solid lines represent the technologies of production in the two sectors: a 45-degree line for the traditional sector, a line with a slope of 1/c for the modern sector.

From this figure it is immediately possible to read off what the economy would produce if all labor were allocated either to the modern or the traditional sector. In either case L/N workers would be employed in the production of each good. If all goods are produced traditionally, each good would have an output Q¹. If they are all produced using modern techniques, the output is Q². As drawn, Q²>Q¹; this will be the case provided that

[(L/N) - F]/c > L/N

i.e., as long as the marginal cost advantage of modern production is sufficiently large and/or fixed costs are not too large. Since this is the interesting case, we focus on it.

But even if the economy could produce more using modern methods, this does not mean that it will. It must be profitable for each individual entrepreneur in the modern sector to produce, taking into account the necessity of paying the premium wage w -- and also the decisions of all the other entrepreneurs.

Suppose that an individual firm starts modern production while all other goods are produced using traditional techniques. The firm will charge the same price as that on other goods, and hence sell the same amount; since there are many goods, we may neglect any income effects and suppose that each good continues to sell Q¹. Thus this firm would have the production and employment illustrated by point A.

Is this a profitable move? The firm uses less labor than would be required for traditional production, but must pay that labor more. Draw in a ray from the origin whose slope is the modern relative wage w; OW in the figure is an example. Then modern production is profitable given traditional production elsewhere if and only if OW passes below A. As drawn, this test is of course failed: it is not profitable for an individual firm to start modern production.

On the other hand, suppose that all modern firms start simultaneously. Then each firm will produce Q², leading to production and employment at point B. Again, this will be profitable if the wage line OW passes below B. As drawn, this test is satisfied.

Obviously, there are three possible outcomes⁽²⁾. If the wage premium w-1 is low, the economy always "industrializes"; if it is high, it never industrializes; and if it takes on an intermediate value, there are both low- and high-level equilibria.

One would hardly conclude from this model that the high development idea that countries can be caught in low-income traps, but that self-reinforcing growth is also possible, is necessarily right. Even within this model, that story is true only for some parameter values. And the specific assumptions are obviously unrealistic. Yet the model illustrates several key points about the realtionship between mainstream economics and high development theory.

First, it shows that it is possible to tell high development-style stories in the form of a rigorous model. The methods of mainstream economics may have created a predisposition to constant returns, perfect competition models, but they need not be restricted to such models.

Second, this example, like Fultz's dish-pan, shows that the essential logic of high development stories emerges even in a highly simplified setting. It is common for those who haven't tried the exercise of making a model to assert that underdevelopment traps must necessarily result from some complicated set of factors -- irrationality or short-sightedness on the part of investors, cultural barriers to change, inadequate capital markets, problems of information and learning, and so on. Perhaps these factors play a role, perhaps they don't: what we have just seen that a low-level trap can arise with rational entrpreneurs, without so much as a whiff of cultural influences, in a model without capital, and with everyone fully informed.

Third, the model, unlike a purely verbal exposition, reveals the sensitivity of the conclusions to the assumptions. In particular, verbal expositions of the Big Push story make it seem like something that must be true. In this model we see that it is something that might be true. A model like this makes one want to go out and start measuring, to see whether it looks at all likely in practice, whereas a merely rhetorical presentation gives one a false feeling of security in one's understanding.

Finally, the model tells us something about what attitude is required to deal with complex issues in economics. This model may seem childishly simple, but I can report from observation that until Murphy et al. published their formalization of Rosenstein-Rodan its conclusions were not obvious to many people, even those who have specialized in development. Economists tended to regard the Big Push story as essentially nonsensical -- if modern technology is better, then rational firms would simply adopt it! (They missed the interaction between economies of scale and market size). Non-economists tended to think that Big Push stories necessarily involved some rich interdisciplinary stew of effects, missing the simple core. In other words, economists were locked in their traditional models, non-economists were lost in the fog that results when you have no explicit models at all.

How did Murphy et al break through this wall of confusion? Not by trying to capture the richness of reality, either with a highly complex model or with the kind of lovely metaphors that seem to evade the need for a model. They did it instead by daring to be silly: by representing the world in a dish-pan, to get at an essential point.
 

CONCLUDING THOUGHTS
 

When I look at the Murphy et al representation of the Big Push idea, I find myself wondering whether the long slump in development theory was really necessary. The model is so simple: three pages, two equations, and one diagram. It could, it seems, have been written as easily in 1955 as in 1989. What would have happened to development economics, even to economics in general, if someone had legitimized the role of increasing returns and circular causation with a neat model 35 years ago?

But it didn't happen, and perhaps couldn't. Those economists who were attracted to the idea of powerful simplifications were still absorbed in the possibilities of perfect competition and constant returns; those who were drawn to a richer view, like Hirschman, became impatient with the narrowness and seeming silliness of the economics enterprise.

That the story may have been preordained does not keep it from being a sad one. Good ideas were left to gather dust in the economics attic for more than a generation; great minds retreated to the intellectual periphery. It is hard to know whether economic policy in the real world would have been much better if high development theory had not decayed so badly, since the relationship between good economic analysis and successful policy is far weaker than we like to imagine. Still, one wishes things had played out differently.

One would like to draw some morals from this story. It is easy to give facile advice. For those who are impatient with modeling and prefer to strike out on their own into the richness that an uninhibited use of metaphor seems to open up, the advice is to stop and think. Are you sure that you really have such deep insights that you are better off turning your back on the cumulative discourse among generally intelligent people that is modern economics? But of course you are.

And for those, like me, who basically try to understand the world through the metaphors provided by models, the advice is not to let important ideas slip by just because they haven't been formulated your way. Look for the folk wisdom on clouds -- ideas that come from people who do not write formal models but may have rich insights. There may be some very interesting things out there. Strangely, though, I can't think of any.

The truth is, I fear, that there's not much that can be done about the kind of apparent intellectual waste that took place during the fall and rise of development economics. A temporary evolution of ignorance may be the price of progress, an inevitable part of what happens when we try to make sense of the world's complexity.
 

REFERENCES
 

Fleming, J.M. 1955. "External Economies and the Doctrine of Balanced Growth." Economic Journal. June.
 

Hirschman, A. 1958. The Strategy of Economic Development. New Haven, Conn.: Yale University press.
 

Leibenstein, H. 1957. Economic Backwardness and Economic Growth. New York: Wiley.
 

Lewis, W.A. 1954. "Economic Development with Unlimited Supplies of Labor." The Manchester School. May.
 

----------. 1955. The Theory of Economic Growth. London: Allen and Unwin.
 

Little, I.M.D. 1982. Economic Development. New York: 20th Century Fund.
 

Little, I., T. Scitovsky, and M. Scott. 1970. Industry and Trade in Some Developing Countries. Oxford: Oxford University Press.
 

Murphy, R., A. Shleifer, and R. Vishny. 1989. "Industrialization and the Big Push." Journal of Political Economy.
 

Myrdal, G. 1957. Economic Theory and Under-developed Regions. London: Duckworth.
 

Nelson, R. 1956. "A Theory of the Low Level Equilibrium Trap in Underdeveloped Economies." American Economic Review. May.
 

Rosenstein-Rodan, P. 1943. "Problems of Industrialization of Eastern and South-Eastern Europe." Economic Journal. June-September.
 

Scitovsky, T. 1954. "Two Concepts of External Economies." Journal of Political Economy. April.
 

Young, A. 1928. "Increasing Returns and Economic Progress." Economic Journal. December.

http://web.mit.edu/krugman/www/dishpan.html

Materia no Valor de hoje:

 A avaliação do governo federal é de que 91% das grandes obras do Programa de Aceleração do Crescimento (PAC) estavam em ritmo satisfatório até dezembro do ano passado. O quadro de execução muda de cara, porém, quando as pequenas, mas numerosas, obras de saneamento e habitação entram no balanço. Segundo levantamento da organização não governamental (ONG) Contas Abertas, com base em relatórios da Casa Civil , contendo todo o conjunto de 10.914 empreendimentos do programa em todos os Estados, apenas 3% foram concluídos após dois anos do programa, enquanto 74% das obras nem foram iniciadas.

Em valores, os empreendimentos concluídos somam R$ 47,7 bilhões, 7,3% do total de R$ 646 bilhões previstos para o PAC, segundo o Contas Abertas

Mas e mais devria estar claro para toda a sociedade que o PAC eh um mecanismo de propaganda, para fornecer oportunidades ao Presidente e sua candidata para aparecer na TV, puro "media staging". A pena eh que nossa midia apoia esse processo de forma acritica. Parabens para a Contas Abertas, que diferentemente de tantas ONGs nao foi captada por dinheiro publico.

Tony Volpon