The political economy of the new developmentalism agenda: strategic choices and short- and long-term issues

The political economy of New Developmentalism faces a range of challenges. Many criticisms concerning the difficulties in implementing the New Developmentalist programme stem from misunderstandings about the distinction between short- and medium-to-long-term development strategies. A central issue within this framework is the appropriate level of the exchange rate. Indeed, in the short term, exchange rate depreciation tends to generate inflationary pressures and may negatively affect economic growth. However, if the strategy succeeds, the expansion of the industrial sector – particularly its more technologically advanced segments – can foster productivity gains that, à la Kaldor, may translate into real wage increases in a more sustainable manner. Another controversial element is the notion of “fiscal populism,” as proposed by Bresser-Pereira. In this context, beyond the temporal dimension – where an initial stimulus may prove unsustainable over the medium term – other factors also warrant attention. Initial macroeconomic conditions appear to be critical: whether the economy is operating below or above potential output; whether the current account is balanced or facing adverse pressures; and whether inflation is above or below the central bank’s target. Furthermore, the composition of public expenditures is highly relevant, depending on the size of the fiscal multiplier on GDP. This article seeks to examine the political economy of the policy prescriptions associated with New Developmentalism, particularly in light of current macroeconomic conditions. The analysis focuses on the short- versus medium-term distinction, which appears crucial for the formulation of a coherent and sustainable development strategy.