The new politics of growth and stagnation (part 2): growth models at scale

MIKE BLYTH: From the Rhodes Center for International Finance and Economics at Brown University, this is the Rhodes Center Podcast. I'm the director of the Rhodes Center and your host Mike Blyth. Today, I'd like to present part 2 in our series on the Politics of Growth and Stagnation, that is the new politics.

Last year, I co-wrote a book called Diminishing Returns, The New Politics of Growth and Stagnation. In the last episode, my two co-editors and I walked through the key themes of the book. If you haven't listened to that yet, I recommend you go to that before starting in on this episode. It'll make more sense.

One thing we discussed in that episode was how growth models are like the business model for a country. But, of course, countries don't exist in isolation. They rise and fall together and operate as regional economies tied into wider global networks.

So why do growth models look like at scale when you move beyond the single country focus? How should we even think about them? To talk more about this, I spoke with two contributors to the book. Jazmin Sierra is a political scientist whose work focuses on the political economy of Latin America. Alison Johnston is a political scientist whose work focuses on the European Union. Here's our conversation.

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MARK BLYTH: Hello, Alison. Hello, Jazmin.

ALISON JOHNSTON: Hello.

JAZMIN SIERRA: Hi. Thank you for having us.

MARK BLYTH: Of course, of course, it's a real pleasure. Alison, give us a quick overview of how you think about the growth models concept, number one, and then how do you think it applies to a multi-country thing like the European Union.

ALISON JOHNSTON Well, I think one attractive thing about the growth model paradigm is, in comparative capitalism research, we talk about various stages of how we study national economies. And one of the first pivotal contributions, Varieties of Capitalism written by David Soskice and Peter Hall, talked about comparative advantage and the institutions that led to comparative advantage. Did countries focus on goods that required incremental skills, or did they have radical innovation strategies?

But one problem with this framework is that it really only focused on the traded sector. So I think one pivotal thing that growth models bring in is it focuses on sheltered sectors. It considers the public sector. It considers private sector, which is largely domestic-oriented and revolves around domestic consumption. Because for the most part, very few economies has the export sector as their dominant sector. So I think kind of the pivotal contribution of growth models is by looking at the economy holistically.

And then in terms of what our chapter tries to do is, our chapter tries to examine how international organizations, specifically the European Union, can shape or impact countries growth models and the mix between whether the export sector is prioritized or whether the shelter domestic sector is prioritized and how that particularly has impacted economic specializations and growth strategies within member states.

MARK BLYTH: So in a way the European Union kindly provided you with, if you will, a 20-year long natural experiment in how this works. That is to say, we had a period before the financial crisis where a variety of different growth models co-existed, some based on exports, some based upon consumption, some based weirdly extensively on housing, et cetera, et cetera. And they all fitted together.

Then there was the crisis. The advice from the people with the money was, everyone needs to become a bit more German. And to a certain extent they did. Can you put all that into growth model terms for us and tell us that story.

ALISON JOHNSTON Yes. So really our chapter unpacks the impact of the EU on the growth models of its member states into two phases. So the first phase is before the European debt crisis, and this was a phase where different growth models got different things out of particularly the euro area, so export-centric growth models in countries like Germany, but also balanced growth models with strong export sectors.

And countries like the Netherlands, they benefited from essentially not having to worry about a nominal exchange rate because their competitiveness was purely determined by their own inflation. And so they were able to grow their trade balances and particularly their trade surpluses.

But you also had growth models that revolved around the domestic sector, strong domestic consumption. Vibrant wage growth also receive benefit from the euro because you had influxes of foreign capital. Credit became much more available. Credit became cheaper. So this really elevated and intensified debt-led growth models, including those that focused around housing and real estate.

But unfortunately, what this created for these countries is, it really exposed them externally to significant external lending. And so when the European debt crisis happened these countries essentially were on the hook. I mean, you had a country like Greece where, OK, its public balances impacted its exposure. But countries like Spain, Ireland, et cetera, these were countries that had great fiscal balances, but really it was that exposure to net external borrowing that got them in trouble.

And so because countries like Germany and the Netherlands didn't have that external lending exposure and weren't so significantly exposed to the crisis, they essentially got to call the shots that these debtor countries needed them to provide them with financial assistance.

This was done through the European Stability Mechanism. And essentially they got to dictate what their economies would look like. And they also were able to build a new macroeconomic regime by which the European Union set out, OK, what are the metrics that countries should follow.

And this not only included fiscal metrics and intensifying the EU's prior fiscal rules, but this even included things like monitoring external imbalances, which the European Union had never done. And so it really was one that championed export-led growth and outcomes that looked very similar to the types of outcomes that Germany accomplished.

MARK BLYTH: So we then ended up with this aggregate growth model that's still disaggregated in the sense that there are national economies. And with this move to exports and fiscal rigor, et cetera, that happened after Twenty-Twelve and has become, if you will, the policy norm, COVID off to one side for a moment, but that's the policy norm. Is it fair to say that there is one-size-fits-all growth model for Europe, or is it just too variegated? Is it not really capable of disciplining the entire continent into basically functioning as one growth model?

ALISON JOHNSTON So I say that's probably the EU's biggest problem is that you have these legacies of how economies have been structured particularly within debtor countries and the EU periphery, and they can't change their growth model overnight. So this is why when this German recipe of how the economy should function when it was imposed on a country like Greece where the public sector is really important and employs a lot of people, Greece essentially faced a crippling depression that it still has not fully recovered from.

Now countries like Spain and Ireland and also to a lesser extent Portugal, they were able to pivot slightly from having buoyant domestic consumption towards attracting foreign FDI. So this is something that I think Aidan Reagan's chapter in this book focuses on, is how Ireland really went big on attracting American foreign direct investment. And this really buoyed and helped return growth.

But, again, not all countries have this opportunity. And so those countries that were able to successfully attract FDI, they were able to recover more quickly. But countries like Greece, and I think also to a lesser extent Italy, which though it was not a formal debtor country, it was really on the brink of potentially becoming one, they had to endure economic stagnation for a very long time because they couldn't really adapt to this new export-focused growth regime.

MARK BLYTH: Italy didn't really grow before the crisis, and it hasn't grown since the crisis. Is it the attempt to basically form this much more disciplined export-focused growth model that's really to blame for Italy's permanent stagnation, or do we still need to look within countries for country specific explanations in that regard?

ALISON JOHNSTON Yes, absolutely. So I think Italy's story of sclerotic growth is really one that's kind of driven by Southern Italy. If we look at Northern Italy, this is an economy that can be comparable to Germany's. And for the most part, you don't have a lot of economic activity in the South. It is heavily dependent upon public subsidies, public investment, et cetera.

And when these opportunities are really cut off because of the EU's fiscal rules, this means that this region is just going to kind of suffer from persistent stagnation that's going to make it really difficult for Italy to generate the kind of growth that is seen within its neighbors.

And so, again, this notion that economies are structural, the advantages and the specializations that economies develop are typically ones that evolve over decades. And so for the EU to come in and try to impose a different set of rules expecting these economies to adapt, there's a lot of geographical characteristics that go not only into the Italian economy but in many economies. We think about rural, dynamic urban centers, rural centers, rural areas that are being harmed by being quote unquote "left behind", and those things can't change immediately overnight.

MARK BLYTH: So here's my big macro question then. To what extent is this story about Europe and Germany pushing everyone around really a story about what happens when you have a common currency? Lucio Baccaro, one of the editors and our comrade in arms in this project, tends to think that the euro itself is partly to blame for Italy, but want to take it in a slightly different direction.

If you could imagine the whole euro area as an economy, forget the national economies, imagine it's one country so to speak, and one part of the country does exports and one part of the country does something else et cetera. Is it fair to say that what you've got is the exporters are running an external surplus against the rest of the world?

And what the consumption economies are there for is to essentially run the internal deficit that matches it. And that works in some weird way. And the worst thing you could do then is to enforce fiscal rules and fiscal rigor. And yet that seems to be exactly what they're trying to do at this point. Does that make sense? And if so, is it bonkers, or am I misreading this?

ALISON JOHNSTON No, I think this is absolutely the case. And so in the chapter, Matthias and I argued that the bulk of this growth regime story is being driven by the euro, and particularly rules within the eurozone. It's absolutely the case that essentially the eurozone has a home bias so to speak.

And so current account surpluses that were generated in Northern creditor countries like Germany were only possible because you had countries in the South within the euro area essentially become destinations for those surpluses. So they generated current account deficits. They were very important and vital part of external demand for these countries.

And then when you have the crisis set in, essentially these northern creditor countries had to look elsewhere for foreign demand generation because these southern countries they imposed pretty stark fiscal austerity and just austerity more broadly. So they couldn't rely on those markets anymore.

And one of the things we document in the chapter is how the current account surplus that the euro area generated vis-a-vis the rest of the world grew quite substantially once the capacity for those imbalances to manifest in the euro area declined because you had those countries that held current account deficits essentially demand collapsed. And they couldn't demand the goods that were being exported from the North within a new era of potentially contentious trade politics not only with the rise of China, but also with the rise of Trump.

And I think there's a bit of continuity with the Biden administration generating current account surpluses via beggar-thy-neighbor approaches is becoming very political, and other countries don't like it. So, yes, I would say that definitely this held quite well until the euro crisis. But then with the collapse of demand within debtor countries really those northern countries had to look elsewhere. And they essentially have looked to the rest of the world.

MARK BLYTH: So before going to Jazmin and starting to talk about Latin America, the geopolitics of the moment have disabled or is in the process of disabling this "you should all be a bit more German model" because, in fact, the Germans probably need a new model themselves, is it an advantage or is it a disadvantage when finding a new growth model to be part of a bigger regional configuration like the EU? What do you think, a handicap or a benefit?

ALISON JOHNSTON Again, I think different growth models get different things out of the European Union. I think when the European Union and, again, thinking about euro area politics, when they privilege a certain growth model, obviously the growth models that they privilege they're going to witness the greatest advantage whereas those that aren't won't.

Now, admittedly, one thing we don't talk about in the chapter because this is all unfolding is, how has the COVID pandemic, and how has the war in Ukraine, and how has the climate crisis impacted the EU's demand that its countries become quote unquote "more German" because when we think about a health crisis, when we think about a crisis that involves defense, when we think about a crisis that involves an energy transition, these are all things that aren't export-led. They predominantly require a strong public sector.

And so I would say some promising developments within Europe is in response to these threats, they've really backed off strict enforcement of fiscal rules. They're thinking about green fiscal rules where green investment spending would be kept out of public balances for the stability and growth pact. They're allowing countries to spend more. They're generating funding, EU funding towards the health sector, towards improving digital infrastructure, et cetera.

So now that the EU has really backed off of that strong German promotion of export-led growth fiscal austerity in the twenty-tens, we might be seeing a more balanced approach to growth that can accommodate these domestic consumption centered economies in the South that were really quite disadvantaged during the twenty-tens.

MARK BLYTH: Jazmin, let's talk about Latin America. Now it's not an economic community to the same institutional depth. It doesn't share a common currency. But in many ways, it's a continental growth model in the sense that Latin America was basically conquered and incorporated into the world economy to be a primary product producer and exporter. And that legacy has colored almost if not all of the countries, almost all of the countries in the entire region.

In your chapter, you do this lovely pair comparison of Brazil and Argentina and make the argument that given the dominance of commodity exports historically and contemporaneously, when you look at the politics in these countries, it's really about the politics of trying to change the growth model. Can you give us an overview of that.

JAZMIN SIERRA: Sure. If we think about Latin America's development trajectory, I think it's defined by attempts to switch away from a growth model based on production and export of commodities. And the question is, why have governments tried to do so? And governments that have been extremely varied from populist governments coming out of the Great Depression to the bureaucratic authoritarian regimes of the nineteen-sixties and seventies to the ones that you just mentioned, the new left governments that were governing during the commodity boom, they all wanted to search for a more balanced growth.

And the basic answer for this is because commodity-driven growth does not produce good development outcomes. So we are now thinking of development in terms of structural transformation. And that basically means diversifying the economy towards industry and services. And if we look at the successful developers, many of which are in the EU, no country has been able to improve its income status without that structural transformation.

And in fact, even the great episodes of commodity booms when supposedly Latin America has faced a relaxation of external constraints, and we're supposed to be doing better, these are episodes where inequality has actually increased in the most unequal region in the world. So basically these governments are aware of this no matter their ideology when historically they have been situated and yet they have had incredible difficulties in carrying out this transformation.

So the chapter, as you describe, is trying to figure out why is switching away from a commodity-driven growth model so hard. And what I try to do is really emphasize the domestic politics of switching away growth models. And lots of what Alison has talked about is really about this too. Why is there such difficulties into switching growth models? What are the domestic constraints that you run into?

And so in general terms, basically governments when they switch growth models are trying to navigate the tension between the policies that sustain the current growth model, which in some ways you need to sustain it in order to have a certain baseline level of growth and the policies that allow for structural transformation.

And in commodity-driven growth models, that basically means a redistributive conflict between rural and urban sectors. The rural sector basically benefiting from the current commodity-driven growth model and the urban sector potentially benefiting from that structural transformation.

MARK BLYTH: So people who are not so familiar with the politics of these countries but nonetheless pay attention to the news might have a reading of recent Brazilian politics which goes something like this. There was this dude called Lula. He was in the left wing party. Things seemed to be going well, then they started to go badly.

He got lobbed out by Bolsonaro, famously the Trump of the South. And beneath this are two very different coalitions. And agribusiness is behind Bolsonaro and, if you will, the urban poor is behind Lula, and they're facing each other off.

But what your chapter does allows us to see that that's kind of correct, but really incomplete. There's a lot more going on because in a sense everybody depends on commodities even the people who are trying to change the model away from commodities. Right?

JAZMIN SIERRA: Yeah.

MARK BLYTH: Walk us through one of the stories. Pick either Brazil or Argentina and just give us a flavor of what was happening at a certain moment, why they tried to change it, who was trying to change it, why they couldn't change it, why the pendulum went back because that's to and fro in the chapter, which is so powerful.

JAZMIN SIERRA: What's really interesting is actually comparing a little bit both of them, if I can do a little bit of cheating with the answer, which is that they were both the new left governments, and they were basically elected with a mandate to change the growth model, to redistribute towards the urban sector, to pursue industrialization.

And they both originally were really committed to it, and there were many reasons to think that actually the Workers' Party was going to be the one that was going to have the strongest commitment to it. It had the Landless Movement within its coalition. It had historically pushed for land reform. It had really strong ties with urban unions.

And yet what we see is that the Workers' Party under Lula and under Dilma Rousseff actually did very little to try to change the growth model by affecting rural interests. So, for example, at the height of the commodity boom, the Workers' Party didn't even try to increase taxes on agricultural exports and actually provided subsidies to the rural sector through its state-owned banks.

And to the degree that it was carrying out redistribution, it was basically redistribution based on regressive consumption and production taxes, so basically the ones that actually affected its coalition, and taxes on imports of products that its coalition actually consumed.

And you're absolutely right that part of what explains this is that the agrarian caucus in Congress was so strong. So even if the Workers' Party might have had a historical ideological commitment to carry out a different set of policies, its growth model had political implications, and those political implications meant that the Workers' Party could only do some kinds of redistribution, the easier ones, the ones that didn't affect the landed interest.

Whereas in Argentina, what you have is a left party that's equally committed to redistribution and actually takes it as far as any contemporary Latin American government has taken it. So the government of Cristina Fernandez de Kirchner in Two Thousand Eight introduced a variable export tax on soy, which could reach up to 60% of soy export profits.

And so you have the president of the Argentine Rural Society saying that a cow must not only be milked; it must also be fed. It was clearly a strong distributional conflict between the landed elite and the left Peronist government. And the Peronist government really went after rural interests, but it also paid a political price for doing so.

So this generated a lot of tensions within the Peronist coalition and particularly Peronist governors that were governing provinces where soy producers were very strong. And there was a strong anti-backlash against the left-leaning Peronist government that led to the election of a right wing Macri government that follow it and the stagnation of these attempts at switching the growth models.

MARK BLYTH: So that's a contemporary example as to how hard it's to change and why it's hard to change. But, again, what's striking, if we go back to the nineteen-thirties and look at the cases of both Brazil and Argentina, the agrarian interests ran everything back up to that point. And at that point in time, the world economy shuts down. So there's nowhere for the exports to go.

Both of these governments or these societies, if you will, say we probably have to really think about changing the growth model. They never use that language, of course, but that's basically what they did. But even within the confines of the Great Depression, the collapse of multilateral trade into World War II, that's a big period.

You then get with that into the '50s in Argentina, the Peronist movement, et cetera, that you've mentioned. And that's the high point and even then they still can't change it. It's so hard to change these things.

Do you think when you reflect upon the other chapters in the volume, particularly Alison's, that maybe Latin America is just the extreme case of this that it might be in principle easy to change model in other parts of the world, China for example, but maybe it's just Latin America that something about makes it incredibly difficult?

JAZMIN SIERRA: Well, I think you are right that there's something that sets Latin America apart, which is basically that these attempts at industrialization that you describe and the aftermath of the Great Depression went hand in hand with labor activation.

So Latin America was trying to make these very strong attempts at redistributing resources from a rural sector that was very powerful, that was empowered by the historical insertion of the region into the global economy and transfer resources into a labor sector that had already the political organization and ability to make demands upon the state.

So when you look at, for example, successful developers like Germany and Japan they were able to generate domestic savings and investments that were required for industrialization basically by repressing social and political demands of the working class and that kind of strategy was not available to Latin American governments. So the political balance that Latin American governments have to carry out is a much more difficult one to undertake.

MARK BLYTH: So in a way then perhaps Latin America is more of a model for the future, and I want to bring this back into the conversation about Europe at this point, it's increasingly difficult to change growth models in the Latin American case as you just said because of labor incorporation.

I wonder if there's an analog going on just now in the EU in the sense that it's a fully democratized, active, vibrant civil society. You have centrist parties essentially defending growth models that are running into trouble. You have fringe parties that are now no longer fringe parties essentially arguing in some instances very clearly that we need to change the growth model. But is democracy a constraint on this, or is it an advantage? What do you think Alison?

ALISON JOHNSTON So, yeah, I think there are some very unique cases where countries within the EU were able to switch their growth model quite drastically. So I'm thinking particularly post-communist countries in Eastern Europe. That was a massive shock where these countries were transitioning away from planned economies to market economies.

And the EU was able to get in there and have a massive influence on the types of economies that arose. And Dora Boyle, who also is in this volume, has written a lot about how FDI, particularly from Germany and Austria essentially set up shop and set up global supply chains to take advantage of cheap Eastern European labor.

But another thing that this does is it increases inequality. It creates losers so to speak. Not everybody can be employed for a German foreign multinational corporation. And these people vote, and so, of course, you're going to get a rise in populist parties much to the same way as you do in the UK when Thatcher really doubled down on basically centering the UK's economy around finance and was not too concerned with de-industrialization in the North.

Well, you create losers in the North that are resentful towards the South. And these really fuel things like populism, like polarization, and like backlash to the EU itself through Brexit. So I would say that really drastic changes to growth models because they can really upset society economically and create large segments of society that does not benefit from those growth models that can be particularly ripe for anti-establishment politics.

MARK BLYTH: Doesn't really bode well for the green transition, does it, because in many ways that's the biggest growth model change of all. And yet what we're suggesting is that the more politicized this becomes, the harder it is to do it.

Jazmin, something that you've written about in a different context is how the Brazilian government under Lula, under the Workers' Party actually helped the biggest businesses in Brazil go multinational. Would it be fair to say that's another way of changing the growth model?

JAZMIN SIERRA: It was certainly a way that the Workers' Party viewed as a way of changing the growth model. They perceived that by having internationalized capital, they would be better able to compete with foreign capital coming into Brazil and also to help their firms compete globally. But it didn't generate a change in the growth model, which goes back to how sticky and hard these growth models are.

MARK BLYTH: So that's what you've said so far, if with the benefit of hindsight, you could do your chapters again, is there anything that you would add to them, or anything you'd want to change in the light of the past couple of years, for example?

ALISON JOHNSTON I think one silver lining from the EU is that because of these triple crises that again really require strong public investment that there is the potential for the EU to potentially promote balanced growth. And the EU implemented the general escape clause from the Stability and Growth Pact, NextGenEU, and the Resilience Facility.

This it a lot to allocate grants particularly to countries that suffered quite substantially from the European debt crisis and countries that really rested quite heavily on domestic demand. So I think those were promising. It's going to be interesting to see whether these are temporary.

And I think that's really the thing that we're going to potentially see with climate change that Daniela Gabor has written a lot of work on, how she's very skeptical about private firms and banks, et cetera, being able to facilitate the renewable energy transformation that's needed to address climate change that you're really going to need a big green state.

And I think that's one thing that Europe and the EU really needs to grapple with. It's been a polity based upon strong fiscal rules. Well, what happens when you encounter existential crises? That really need substantial public investment. And so I think they're trying to square that circle with coming up with exceptions to big green investments. So I would say I'm much more optimistic about the EU promoting balanced growth now than I was in the twenty-tens, but we'll see what unfolds.

MARK BLYTH: Jazmin, what about Latin America plus a change, or is there actually some change on the horizon?

JAZMIN SIERRA: If we look historically the moments where Latin America has gone closest to being able to switch its growth models, there have been two factors at play. One has been a really permissive international environment and the other has been domestic projects of state-led development that were willing to pay the political cost of the switch.

And so I think Alison summarized really nicely how the international environment has changed. And in particular for Latin America, the fact that there are now geopolitical tensions between the United States and China and part of "Bidenomics" is based on friend-shoring and trying to find alternatives to Chinese supply chains, that has really a beneficial side for Latin America. But it also takes domestic politics to take advantage of that international opportunity.

And so a clear example from this comes actually from the Workers' Party in Brazil. So what is the latest project of the Workers' Party in terms of industrial policy? Trying to set up a semiconductor industry in Brazil. So trying to get the United States to actually provide loans which the Biden government has shown its openness to and to use domestic funding to be a partner to that foreign funding.

So those are the interesting opportunities that might be available, but it doesn't depend just on a permissive international environment. We really need to think about what's happening domestically.

MARK BLYTH: In conclusion, I would put it this way then see if you agree. Growth models are inherently domestic, but if you stop there, then you really don't get how they grow. And if you really don't get how they grow, you're not going to really understand how they change. And that's why we need always put them into a bigger context. Fair enough?

ALISON JOHNSTON Fair enough. I think that growth models are inherently political, and that's what I really like about this project. To me, it's not so much a project about studying growth but about studying models and the different variations in these models and to what extent they provide sustainable growth but also to what extent there are different winners and losers of these models. And so that's what really attracted me to this project, understanding that something that might seem apolitical such as growth is actually inherently distributional and political.

ALISON JOHNSTON I would add to that. There's also spillovers from growth models. I think with earlier works on the varieties of capitalism, it assumed this simple dynamic where countries trade with each other, et cetera. But it didn't think about domestic banks going abroad into other countries or multinational firms opening up subsidiaries in other countries.

And that essentially means that you're bringing foreign interests into domestic growth models. So domestic growth models aren't really domestic anymore. There are external actors that are vested and have clear interests within countries domestic growth models that will potentially change or slightly alter what those growth models look like. And so that's the emerging theme of intensified globalization and financial deregulation, financial liberalization. Economies are becoming much more dependent upon each other because domestic actors are becoming international.

MARK BLYTH: I think that's an excellent place to leave it. Thank you very much for being on the podcast.

ALISON JOHNSTON Thank you.

JAZMIN SIERRA: Thank you.

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MARK BLYTH: This episode of the Rhodes Center Podcast was produced by Dan Richards and Zach Hirsch. If you like the show, leave us a rating and review on Apple, Spotify, or wherever you listen to podcasts. And if you haven't subscribed to the show already, please do that too.

You can learn more about what we covered in this episode and the other podcasts from the Watson Institute at Brown University by following the links in our show notes. We'll be back soon with another episode of the Rhodes Center Podcast. Thanks.