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Chapter Seven - Effective Demand, Surplus Labour and the Pace of Development: Rereading Kalecki and Kahn

Published online by Cambridge University Press:  23 February 2022

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Summary

Introduction

The inspiration for this chapter springs from some theoretical reflections on Tanzania's economic experience in the last decade characterized by a revival of development planning (Five-Year Development Plans) as the focal instrument of economic policy to achieve high GDP per capita growth and rapid industrialization. The plans envisage a process of socio-economic transformation in which the structure of aggregate output and of employment shifts away from agriculture towards industry and towards manufacturing in particular (Wuyts and Kilama 2015). This new emphasis signalled an abrupt change in Tanzania's economic policies, which, from the mid-1980s onwards, had predominantly been guided by a sequence of structural adjustment programmes and, subsequently, after the Heavily Indebted Poor Countries (HPIC) initiative, the adoption of poverty reduction strategies in which the International Monetary Fund (IMF) and the World Bank played a leading role in conditioning their design and implementation.

A familiar premise underlying these two recent ambitious five-year development plans in Tanzania is that achieving rapid industrialization requires stepping up the rate of investment and thus, by implication, the rate of savings within the economy. More specifically, economic growth is said to be constrained by the rate of savings. Savings determines investment, and investment in the factors of production, labour, capital and land determine the rate of growth. Consumption, therefore, is seen as a leakage from savings and leads to lower investment over time. Put differently, investing in rapid industrialization, it is argued, inevitably involves a trade-off between present and future consumption to enable greater mobilization of domestic public and private savings. This premise is taken as given – a mantra – that requires no further elaboration or clarification.

This premise puts the emphasis in development planning and policy squarely (and almost exclusively) on supply-side constraints that limit the pace of economic development. Domestic resource mobilization by raising the rate of savings to finance investment is seen as the binding constraint on the pace of development. In this chapter, I shall argue that this near exclusive focus on supply-side factors deflects attention away from the role of effective demand in shaping processes of accumulation and, in particular, of the interplay between consumption and investment in the process of industrialization, particularly in a context of a surplus-labour economy.

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Reclaiming Development Studies
Essays for Ashwani Saith
, pp. 131 - 146
Publisher: Anthem Press
Print publication year: 2021

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