All opinions expressed here are not necessarily those of the mod team as a whole and does not guarantee in-game economic success. Instead, this post is intended to serve as a framework for the writing of econ posts. Much of this is shamelessly copped from Joseph Studwell’s book “How Asia Works” with some additional inspiration taken from Pettis and Klein's "Trade Wars are Class Wars" case anyone wants to do homework for XPowers.

Introduction: Developmentalism is when you buy machines

And it’s more developmentalism the more machines you buy, and if you buy a real lot of machines, that’s industrialization.

There are many ways for a country to become rich. However, for most countries, the preferred method, from a long-term perspective, is probably joining the club of highly productive manufacturers which have dominated the world economy for the last two hundred years. For this post, we’ll just ignore the alternatives, which are usually some variation of “get things out of the ground” or “arbitrage other people’s financial markets,” since those options are only accessible to a few nations and have noticeable downsides besides.

Becoming rich by making things is essentially an exercise in capital accumulation. Capital is essentially defined as things which you can use to make more things. Typically, this means buildings full of business equipment (factories, office parks, and so on), the main type of physical capital. Capital takes labor and raw materials as inputs, and puts out goods and services. The total sum of capital in a country is that country’s capital stock, which is more or less the theoretical productive capacity of that country. The capital stock is assumed to depreciate over time as things break down, but since capital can be used to make more capital, having a lot of capital and being able to use it effectively will presumably put you on the virtuous cycle of increasing innovation and productivity that everyone dreams of. (In the most abstract sense, this is what the Harrod-Domar Model is supposed to represent.)

Part 1: So, your GDPPC is $15, and you want a military manufacturing sector

Suppose, then, that your country is poor and wants to become rich by making things in buildings full of industrial machinery. As one does. Take the example of trying to start your nation’s first car company. You immediately run into several problems:

• No one knows how to make cars (uh oh).

• Even if they did, the local financial system doesn’t have enough liquid capital to fund your factory. Savings equal investment, and a really poor country doesn’t have much in the way of savings to invest.

• Even if you had the money, it would be mostly in your local currency, which will pay for labor and little else, because being poor means you can’t manufacture your own capital goods.

Shucks! That’s ok though, you can secure these things from abroad. Students can be sent to study in foreign universities, machine lathes can be purchased, whatever. But the only sellers will be the existing club of industrialized nations, which in 1960 means North America, the USSR, parts of Europe, or Japan. They’ll need to be paid with something though, and they won’t accept your domestic currency. What would they want it for?

Part 1a: We require more minerals capital

Foreign Capital

So it's well established that if you want to do something, you'll need to buy the prerequisites. If the source is a non-communist country, the preferred method of payment will be the primary medium of international trade, US Dollars, followed by whatever their domestic currency is, followed by in-kind payments. If the source is the USSR, the ruble isn’t convertible, so in-kind payment, or (god forbid) solid gold will have to do.

Either way, you’ll have to sell things to buy things, or in more specific terms export goods and services to earn hard currency (or the nominal communist equivalent of it). Given that the whole reason you’re in this situation in the first place is that your country is poor, your hard currency earnings will typically come from three sources:

• Exports of agricultural products or natural resources

• Remittances from the diaspora, if you have one

• Foreign aid (which is really payment for political services)

If you’re willing to be more flexible, there’s two other options:

• Loans, though if you get in over your head and have to default, you’re in hell, or even worse, Argentina or Pakistan (I once met the guy who had to go around trying to repossess the entire Argentine merchant fleet in 2001, it wasn’t pretty)

• Foreign direct investment — letting foreigners pay their own money to start businesses in your country, comes with the obvious downside that they’ll own the businesses in question

The important part of this is that the foreign currency you acquire is strictly for the use of importing things you can’t make yourself, namely people with doctorates and bulky industrial machinery. Unfortunately, your political elite will be tempted to use it to purchase Gucci bags and Buicks, and the average citizen will be tempted to import televisions and gas stoves. It falls upon you, the “benevolent developmentalist”, to ensure that the country continues down the “path of progress” through the suppression of living standards.

Some people, usually communists, have taken this line of thinking one step further. If capital is absolutely vital for industrial development, while the agricultural sector only exists to produce goods for export to acquire more capital, why not just squeeze harder? Stalin and Mao certainly thought this was reasonable — the great Soviet and Chinese famines were in large part caused by excessive quantities of grain being sold abroad. No comment.

Domestic Capital

While this is the less important part of the equation, it is still important. Money is, fundamentally, a token that can be exchanged for goods and services, and so money is how you will convince your country's labor markets to provide the people needed to staff the sweatshops, and pay for whatever inputs you can secure locally. As mentioned before, it is unlikely that enough liquid capital exists within your domestic financial markets on a normal basis to fund what you want funded — US financial markets routinely make loans of billions of dollars to private corporations, and the US government borrows trillions every year in treasury bonds, but this is because Americans are rich and have money to invest. Your people are poor, and so your government and financial sector do not possess the financial might to relocate a large portion of the workforce to industry.

One way to do this is to print more money, which will be used to attract workers to the industrial sector. Unfortunately, as soon as it becomes obvious that you're printing money, inflation will probably set in as people realize the increasing amount of money you're using to divert the workforce to industry isn't matched by an increasing quantity of goods (in fact, probably a decreasing quantity of goods, since all the money previously used to import consumer goods is now being used to import capital goods). Honestly, this is probably fine. Inflation is genuinely inconvenient for people and in theory erodes confidence in the financial system, leading to unrest, but if you make good investments the quantity of goods will catch up in the long run, allowing you to literally grow your way out of it.

Another way is to quite literally squeeze the money to pay the people from the people themselves. The most obvious way is through taxes, but those are unpopular. An arguably cleverer way is to nationalize all the banks, force the interest rates paid on savings down to nearly nothing, and use the deposits to grant cheap loans to industrial enterprises. Inflation will act as a stealth tax on the national savings, and so the people will see their own savings used as loans to pay for them to work in sweatshops.

Finally, increasing the overall savings rate will generate more domestic capital for usage in industry. This will necessarily decrease living standards by diverting money away from consumption, but we don't care about that. How can the people be made to spend less and save more? The simplest way is to simply offer people high interest rates, but if you're using that money to lend to business at low rates, you're effective back to just printing money. A more malevolent (and elegant) solution is to deliberately depress consumption, which will necessarily lead to greater savings. For example, maybe you could gut the social safety net — this will force people to put more savings in the bank to avoid starving in retirement while saving the government money. If your population is generally young, the amount of savings being put in will in the short term far exceed the actual consumption of the elderly, especially if low life expectancies mean a large portion of people die before retiring. Thus, extra capital.

This does carry the risk that by depressing consumption you break your own economy, so exports become not only a convenient source of revenue but an economic necessity in order to make up for the demand shortfall in your domestic economy that you've artificially created. This in turn has a bunch of interlocking relationships with exchange rates and so on which we'll discuss some other time, but it all follows from the accounting identity that savings is investment is the inverse of consumption.

As an aside, if you run a dictatorship, you can in theory bypass the question of money entirely. Recruiting people as corvee labor is functionally identical to printing money to induce them to shift their labor to a different industry, only you're more likely to get overthrown as a result.

Part 2: Learning from the example of Comrade Gletkin

”How old were you when the watch was given you?”

“I don’t quite know,” said Rubashov; “eight or nine probably.”

“I,” said Gletkin in his usual correct voice, “was sixteen years old when I learnt that the hour was divided into minutes. In my village, when the peasants had to travel to town, they would go to the railway station at sunrise and lie down to sleep in the waiting-room until the train came, which was usually at about midday; sometimes it only came in the evening or next morning. These are the peasants who now work in our factories.”

“For example, in my village is now the biggest steel-rail factory in the world. In the first year, the foremen would lie down to sleep between two emptyings of the blast furnace, until they were shot. In all other countries, the peasants had one or two hundred years to develop the habit of industrial precision and of the handling of machines. Here they only had ten years. If we didn’t sack them and shoot them for every trifle, the whole country would come to a standstill, and the peasants would lie down to sleep in the factory yards until grass grew out of the chimneys and everything became as it was before.”

“Last year a women’s delegation came to us from Manchester in England. They were shown everything, and afterwards they wrote indignant articles, saying that the textile workers in Manchester would never stand such treatment. I have read that the cotton industry in Manchester is two hundred years old. I have also read, what the treatment of the workers there was like two hundred years ago, when it started. You, Comrade Rubashov, have just used the same arguments as this women’s delegation from Manchester. You, of course, know better than these women. So one may wonder at your using the same arguments. But then, you have something in common with them: you were given a watch as a child. ...”

Let’s be clear — your first attempt at making something, anything, through modern manufacturing methods will likely be an absolute disaster. The horror stories abound, and generally share a common theme: no one has a clue what they’re doing. The businessman in charge of the factory used to hawk tobacco at the bazaar — they now own a textile mill and don’t understand the necessity of having an engineer on call. The bank manager is a former payday loan lender — they never went to high school and can’t calculate an amortization schedule. The guy in charge of securing the technology transfer agreement with the West Germans doesn’t understand time zones. And so on.

These people are not stupid. They simply learned in a very different environment from the one they now inhabit, and their learning will take time. For Great Britain, getting to where they are now took two hundred years, and you don’t have that time. Luckily, everyone who is already rich has gone to the trouble of learning for you, and so your task is simply to relearn what they already know. Unfortunately, business school is, for lack of a better word, useless, and so the only reliable way to learn is simply by throwing a lot of shit at the wall and hoping something sticks if you do it long enough.

For this to occur, your companies, whether they be state-owned or private, have to actually be doing something, something usually being making products and selling them. Because you have no idea what you’re doing, no one in their right mind is going to want to buy the things you make, especially when there are reliable, high quality goods produced by rich countries on the market. So the only solution is to force people to buy your products, and the only people you can do that to are your own. The most common way to do this is tariffs — if you make the competing products expensive enough, people will stop buying them, and begrudgingly buy your crappy local alternatives. Usually, this isn’t enough — your companies will be so utterly incompetent that even with guaranteed customers they will lose money. Therefore, they will have to be subsidized for them to survive.

Part 2a: I would simply avoid getting overthrown in a coup

Actually learning something is more difficult than it sounds, because pretty much everyone else in the process has little incentive to do so. There are many ways you can end up spending immense amounts of money and getting little to nothing out of it, which is hardly surprising, considering how often it happens. Usually, the adventure ends in one of three ways:

Corruption

If things are going to plan, pretty much every business you’ve created is only alive because of favorable government policies. For the people running these companies, it is immediately obvious that it is more profitable, at least in the short term, to ensure the continuation of these policies. The alternative, creating good products, is risky and difficult, and will also most likely result in the end of the subsidies.

So the owners of the companies, whether they be private or state-owned, have every incentive to lobby for extensive protections regardless of whether they are actually successful, and because you’ve funneled all of your money to them and therefore given them immense power, they often succeed at this, turning your infant industries into perpetually money-losing corruption holes.

Getting bonked by Wall Street

Suppose you’ve partnered with a foreign company or government to start a joint business venture in your country. This is perfectly logical — they can provide the knowledge and expertise you lack, and using their money you can start a functioning business, which will hopefully help start new domestically owned companies. The only problem is that the foreigners have no incentive at all to teach you anything — they’re here for cheap labor, and training local workers or letting the locals copy the technology only ensures there will be no competitors. Thus any successful joint venture should end with the foreign partner being screwed in some way and their technology and employees stolen to start new domestic knockoffs.

The issue with doing this is that you can only do it once, because afterwards no investor will trust you again. Sometimes, you can’t even do it once, because the investor will descend upon your country with an army of lawyers, who will do what they do best and ruin your life forever (refer back to the Argentine merchant fleet incident, I’m not kidding). Either way, if you screw up, you become a pariah among multinational corporations and things get very difficult down the line. Tread at your own risk.

Reactionaries

Finally, there’s always the risk that the aforementioned local elites overthrow your government in a coup. This is perfectly logical — local elites usually own profitable agricultural and natural-resource based industries, so by attempting to industrialize you’re effectively taking all the money they were using to buy foreign luxury goods and handing it to a bunch of upstarts. Often the local elites in question have close relationships with the foreign companies and governments that were previously on the other end of your country’s neocolonial era, so the two will often gang up on you.

The one silver lining is that while you will no longer have industry, several decades later your leftist intellectuals will write several highly-acclaimed books on dependency theory.

And yeah, all three of these have happened to Egypt at some point.

Part 3: Money matters

Uh, so, I’m lazy, and even though this is poorly organized I just want to get something out to appease the Ratboy gods. Maybe next week.