Blog o’ Burns

Laidler, David. “Monetarism: An Interpretation and an Assessment,” Economic Journal, 1981.

Laidler begins by defining four key characteristics of monetarism: 1) it employs the quantity theory to macroeconomic analysis in two senses– Friedman’s theory of the demand for money and the traditional theory of money supply and price level; 2) it rules out any long-run trade-off between price level and real income, using the expectations augmented Phillips Curve; 3) it presents a monetary approach to balance of payments and exchange rate theory; and 4) it discourages activist stabilization policy and price controls, while favoring monetary policy aimed at long term price stability.

The Quantity Theory of Money

Often viewed a “development” of Keynes’s capital theoretic approach to monetary theory, Friedman’s theory of the demand for money highlighted some key differences between the two schools of thought. While Keynes had treated money as simply a financial asset, Friedman conceptualized money as a durable good to which the permanent income hypothesis of consumption could be applied. He also recognized inflation as a distinct rate of return on money and proposed a well-determined functional relationship between expected inflation and the demand for money– a relationship which Keynes had denied. Finally, perhaps the most widely debated element of Friedman’s argument was his assertion that the demand for money and the velocity of money were relatively stable. This assertion is one of the differentiating arguments separating monetarists from classical and neoclassical economists. Though debate continues, empirical evidence has shown that demand for money function has shifted as institutional frameworks have evolved.

Another factor that distinguishes monetarists from their classical predecessors is their strong emphasis on the role of the quantity of money in determining prices. Employing quantity theory, monetarists have more clearly declared the money supply to be the main cause of income fluctuations, partly due to their strong belief in a stable velocity of money. Classical economists had often questioned the constancy of this variable.

With respect to the IS-LM model, there are two ways this model can demonstrate monetarist results. In the underemployment form, if the demand for money is insensitive to interest rates then the quantity of money is the key determinant of real income. In the full employment form, the quantity of money must be the key determinant of money wages because the economy is at maximum output and the velocity of money is held constant.

The Expectations Augmented Phillips Curve

Monetarists have long doubted the trade-off between inflation and unemployment, believing instead in the stability of the private sector which tends to operate near full employment. For a while the Phillips Curve was seen as providing an alternative explanation of inflation, but in actuality, the expectations-augmented Phillips Curve was declared the missing equation in the monetarist model.

In the early 1970s, two extreme views of this expectations-augmented curve existed. At one extreme, it was believed that monetary policies only impacted real income and prices were determined by external factors. At the other extreme, most monetarists believed that inflation was low in a depressed economy and high in an expanded one. However, this trade-off between inflation and deviations of output from that of full employment were only temporary and vanished in the long-run. Keynesians criticized the equation for failing to explicitly define other factors that impact inflation, all of which were represented by the variable v.

Since then, there has been general agreement that no significant trade-off exists between output and inflation in the long-run. However, how long it takes for an economy to converge at long-run equilibrium is still highly disputed. In addition, greater consensus has been reached on the importance of external factors on inflation in the short-run, while Keynesians now recognize long-run inflation as a monetary phenomenon. However, debate continues over the theoretical basis for the Phillips Curve.

Phelps presented one theoretical approach, defining the expectations augmented Phillips Curve as an aggregate supply curve. To say this implies that the voluntary choices of individuals determine fluctuations in output and employment in response to prices. As we all know, choices are based on inaccurate expectations, indicating that unemployment is caused by incomplete information. Thus, the way that expectations are formed play an important role in economic well-being. If we apply the “rational expectations” hypothesis to supplement the aggregate supply curve interpretation, a person will obtain information until the marginal cost of doing so equals the marginal benefit. Over time, expectations will not be wrong systematically, thus causing their distribution to reflect the correct expectations model.

The Monetary Approach to Balance of Payment and Exchange Rate Analysis

Until 1971, the world operated on a fixed exchange rate regime against the U.S. dollar. The monetary approach to the balance of payments suggest two reasons why an inverse relationship existed between inflation and unemployment in Britain. Firstly, as long as fixed exchange rates were maintained, prices of tradeable goods sold domestically were determined by world markets, thus the long run behavior of prices depended on that of world prices. When this gets incorporated into inflation expectations, if world prices are stable, so will expectations. Secondly, high levels of demand are associated with high rates of domestic credit expansion, which generate balance of payments problems. If exchange rates were allowed to float, the country’s balance of payments deficit would likely be replaced with inflationary pressure. This second point became less valid after most of the world switched to floating exchange rates after 1971. However even before the switch to floating exchange rates, monetarists agreed that flexible exchange rate regimes were a pre-requisite for achieving monetarist goals of price stability.

Policy Issues

Just like the monetarists of the 1950s, contemporary monetarists seek monetary policy that adheres to some simple rule under which monetary aggregates do not react to short-run fluctuations. They also feel that fiscal policy should focus on resource allocation and distribution of income rather than on activist stabilization. Many argue that it is one thing to say that policy can systematically influence output and employment in the short-run, but it is another to say that policymakers know how to use their tools to do this. While we can always count on markets to clear and expectations to be rational, we cannot count on our own knowledge of the economy to make safe stabilization policy.

Monetarists also fervently oppose wage and price controls which have failed to be an effective alternative to monetary policy in curbing inflation. In an open economy, such controls cannot have a long term impact on the price level under either fixed or floating exchange rates. Under fixed exchange rates, prices cannot be controlled by domestic policy, while under floating rates, exchange rates and world prices cannot be regulated separately.

Questions

What are the determinants of the velocity of money? (The article mentioned inflation as one, but what are the others?)

Can someone explain how the Phillips Curve can act as an aggregate supply function?

The article implied that one big difference between monetarists and the classicals was the belief that the velocity of money was constant. Aren’t their viewpoints the same? Or did the classicals believe that velocity is constant, while monetarists believe that it is stable? If so, what exactly is the difference between “constant” and “stable”? (I know this is kind of a weird question, but it confused me a ton!)

Gonçalo L. Fonseca, “Inflation and the Phillips Curve,”The History of Economic Thought Website.

Demand-Pull and Cost-Push Inflation

The Keynesian model as it stood could not explain falling money wages in the 1950s. It was not until Alban W. Phillips demonstrated the relationship between wage growth and unemployment that Neo-Keynesians (Lipsey, Samuelson, and Solow) had the empirical foundation to integrate an explanation of inflation in the model. Two competing theories existed to explain rising price levels: 1) demand-pull inflation; and 2) cost-push inflation.

According to demand-pull theory, inflation was generated by excess demand as an economy approaches or exceeds potential output at full employment. If demand rises beyond this point, supply cannot follow and conduct the multiplier effect. As a result, equilibrium prices rise. However, prices only need to rise once in order for equilibrium to be established, so what explains continuous inflation? Keynes argued that this phenomenon occurred due to wages lagging behind rising prices. When this occurs, the distribution of income shifts away from workers and goes to profit-earners. Since workers have a higher marginal propensity to consume, a fall in real income flattens the aggregate demand curve and causes it to fall, thereby lowering prices and curbing inflation. But since wages will eventually rise to catch up with prices, the inflation gap returns, starting the cycle all over again and causing inflation to recur.

According to cost-push theory, firms set the price of output. As the economy reaches full employment, workers have more clout in negotiating higher wages due to lack of competition from unemployed labor. To maintain the same level of profits, firms respond to the increase in wages by increasing the price of their products. This in turn causes real wages to stay the same, which workers eventually recognize and thus continue to demand higher wages. As such, inflation recurs. Lerner recognized that spiraling inflation need not be the fault of labor—he argued that employers have much clout during times of high unemployment, and their quest for higher profits could cause them to raise prices. Thus, the possibility of stagflation exists.

Adopting the demand-pull theory, Neo-Keynesians incorporated the findings of the Phillips Curve into their model by graphing a capacity constraint to the left of the IS-LM equilibrium point, calling the difference the “inflationary gap.” Thus, inflation was caused by excess demand. Keynes had argued that this gap would be closed by shifting income distribution; however, Neo-Keynesians thought that inflation itself would close the gap by lowering the money supply and thus increasing interest rates, ultimately reducing investment and demand. Once again, this model could not account for recurring inflation and lacked an understanding of the relationship between the market for labor and the market for goods.

The Phillips Curve

The Phillips Curve demonstrates the non-linear relationship between inflation and unemployment. A trade-off appears as low unemployment is associated with high inflation and vice versa. Neo-Keynesian economist Richard Lipsey argued if labor markets for a particular industry were in disequilibrium, then how quickly wages adjusted depended on the how big the gap between labor supply and labor demand was relative to labor supply. The more excess demand for labor existed, the faster wages would rise.

The non-linear shape of the Phillips Curve is attributed to frictional unemployment and institutional constraints. To derive the aggregate Phillips Curve, the Neo-Keynesians averaged the industry Phillips Curves described by Lipsey. Due to the non-linearity of the curve, even if each industry curve were identical, the aggregate Phillips Curve would appear to the right of the industry curves. So economy-wide, unemployment at zero inflation would be higher than in any particular industry, implying that inflation is not only a function of unemployment but also of the distribution of that unemployment across industries. This helps explain why wages rise when an economy is at full employment. Though in the aggregate it is impossible for firms to attract additional workers with higher wages, individual industries may try to attract workers from other industries by raising their wages. Thus, to prevent workers from being lured away, each industry will raise its wages.

Inflation and Interest Rates

What impact does inflation have on the rest of the Keynesian model? Keynes’s theory of liquidity preference had indicated that money demand is inversely related to the return on other types of assets. Mundell argued that the nominal interest rate is a function of inflation expectations and the real interest rate. If inflationary expectations rise, then for any amount of money supply the real interest rate will fall since holders of money will expect a negative return on their holdings in the future. They will attempt to get rid of their money by purchasing equity, causing demand for money to fall and the price of equity to rise.

However, nominal interest rates do not rise in exact proportion to inflationary expectations due to the fact that shifting away from holdings of money to holdings of equity decreases the return on equity (due to the now higher price). Unlike money, the supply of capital cannot increase, forcing its price to rise.

Through this reasoning, Mundell demonstrated that inflation or even the anticipation of inflation could have a real effect on the economy by shifting holdings of money to holdings of capital.

The Expectations-Augmented Phillips Curve

The stagflation of the 1970s - presence of both high unemployment and high inflation- caused doubt over the reasoning of the Phillips Curve. Many Keynesians argued that the curve was simply shifting up and to the right, as unemployment gradually became associated with higher and higher levels of inflation. However, this “migration” indicated that the relationship between unemployment and inflation was not truly negative. More importantly, if the curve could shift, policymakers could no longer rely on it to make manipulate unemployment or inflation.

Milton Friedman and Edmund Phelps proposed an expectations-augmented Phillips Curve to explain the phenomenon of stagflation. They essentially demonstrated that inflationary expectations not only shifted asset holdings but they also could shift the entire Phillips Curve outward. Since not all expectations occur, there is a specific short-run Phillips Curve, with each curve representing a certain level of inflationary expectations—higher inflationary expectations yield higher curves. So in the short run, a fall in unemployment due to an increase in nominal demand will be accompanied by increased inflation like previously understood. However, long run inflation is trickier. In the long run, expected inflation equals current inflation. Like in the short-run, a drop in unemployment in the long run will also see a rise in inflation, but this inflation is augmented by expected inflation, making the tradeoff much steeper.

Lekachman, Robert. The Age of Keynes. New York: Random House, 1966.

“Supply creates its own demand,” or so says Say’s Law which encompassed the reasoning of classical economists prior to Keynes’s General Theory. Since sellers are also buyers, supply and demand in an economy should always equal. Marshall clarified this logic slightly by indicating that all income is used to “consume” in that some of it was spent on goods/services while the rest was saved and thereby reinvested into the economy. As such, there could be no such thing as involuntary unemployment. Workers simply needed to accept lower wages for their labor in order to have full employment. Unemployment arose as a result of monopoly interference, sticky wages caused by labor unions, immobility of labor/capital, or inappropriate government policy. In the long run, these factors would no longer be consequential. However, such lack of policy recommendations and assumption of long run equilibrium dissatisfied Keynes, who wrote, “In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”

In a 1924 work entitled Banking Policy and the Price Level, Keynes helped his good friend and colleague D.H. Robertson investigate the relationship between savings (S) and investment (I). Classical economists had previously concluded that interest rates adjusted so S = I. However, Robertson argued that savings, which are voluntarily made by individuals, need not apply to new investment and that excess savings do not necessarily translate into higher consumption. Keynes would later recognize the phenomenon of oversaving as adverse to employment and output during times of economic recession. During depressions, if S > I, S represented potential production which never materialized due to lack of investment and consumption, thereby exacerbating unemployment. In Keynes’s Treatise on Money, he concludes that investment is more important than saving.

While teaching at Cambridge, Keynes was also highly influenced by R.F. Kahn, who developed the concept of the multiplier in 1931. Keynes described the function of the multiplier in his series of articles entitled Means to Prosperity (1933), composing a scenario in which the government employs one man for a public works project. That man would spend part of his income on goods/services, thereby increasing demand and requiring more people to be hired to make and sell these items. In turn, these newly employed people would use their income to buy more goods and so on. This process is not infinite, since at each stage a proportion of new income is saved, spent on imports, or taxed. Keynes conservatively estimated that in his contemporary England the multiplier would equal at least 1.5.

R.F. Kahn’s findings gave Keynes the theoretical foundation for an argument promoting economic policy to pull an economy out of recession. In his General Theory of Employment, Interest, and Money (1936), he first defines involuntary unemployment as a condition in which both the aggregate supply of labor willing to work at current wages and demand for work at that wage exceeded the employment available. Thus, it was not that workers were unwilling to work for lower wages; it was firms who were unwilling to hire additional labor, because they did not desire to produce more output. Keynes argued that if all firms cut all wages to induce full employment, this fall in income would cause aggregate demand for consumer goods to also fall. This in turn causes prices to fall, lowering marginal revenue and the value of a worker’s marginal product, thus requiring another cut in wages. Through this analysis, Keynes derived the theory of aggregate demand.

Keynes’s aggregate demand function measures the volume of sales which corresponds to each possible level of income and output. The actual level of employment will be where aggregate demand and aggregate supply intersect. However, equilibrium is possible at any level of employment, and no theoretical reason exists to assume that full employment is inevitable. Ultimately, aggregate demand for goods/services determines employment. As such, Keynes defined three influences on consumption: 1) disposable income; 2) objective factors- changes in cost of living, interest rates, etc.; and 3) subjective factors. He determined that disposable income was the most important determinant of short-run consumption, and that as a rule, people increase their consumption as their income increases but not by as much as their increase in income (marginal propensity to consume).

Keynes’s consumption function could not explain the size of national income and employment, since aggregate demand also relied on investment. He identified three investment characteristics: 1) investments are made by businessmen, not consumers; 2) all investments are risky; and 3) investments are postponable. What determines the level of investment? Expectations. The expected return on an investment must exceed the interest charges on the money borrowed to make the investment (marginal efficiency of capital).

Knowing that the marginal efficiency of capital must be greater than the interest rate in order to invest, what determines the rate of interest? As opposed to classical economists, Keynes argued that the rate of interest did not depend on the time preferences of savers or on the marginal productivities of capital assumed by investors. Interest rates were a function of preferences for perfectly liquid assets over less liquid assets. As such, expectations play a large role in the direction of interest rates. Speculators buy stocks in the expectation that they will rise. This drives up stock prices, causing interest rates to fall since the dividend is a smaller percentage of the now higher-priced stock. The implications of this are enormous, considering that changes in the interest rate can drive up stock prices and investment. If this is the case, Keynes argued that central banks can engage in open market operations to manipulate interest rates, which in turn can induce greater investment. This increase in investment can trigger the multiplier effect, increasing the nation’s income by a greater amount than the initial amount of the new investment. From this analysis, Keynes emphasized the ability of both fiscal and monetary policy to increase both output and employment.

Blaug, Mark. Economic Theory in Retrospect, 5^th Edition, Chapter 15, “The Neo-Classical theory of Money, Interest and Prices,”613-628.

An Introduction to the Quantity Theory of Money

Until the 1930s, the dominant theory used by economists to explain shifts in price levels was the quantity theory of money: MV = PT

M = quantity of money in circulation; V = velocity that a unit of money is transacted; P = price level; T = real value of aggregate transactions

For this equation to hold true, three assumptions are made: 1) MV must cause PT rather than the opposite; 2) changes in V and T cannot be due to monetary factors; and 3) the nominal stock of money must be determined by an exogenous force (such as a central bank) as opposed to public demand for money.

The theory assumes a stable value for V, which means that price levels (P) vary in exact proportion to changes in the money supply (M). If they are in disequilibrium, two transmission mechanisms exist to balance them: 1) the direct mechanism- people use additional money to buy more goods, which drives up prices; and 2) the indirect mechanism- an increase in the money supply drives down interest rates, which increases consumption, which in turn drives up prices until interest rates return to equilibrium.

Though every classical economist (Malthus, Thornton, Bentham, McCulloch, John Stuart Mill, and Torrens) except for Ricardo and James Mill acknowledged that changes in the money supply could impact economies in the short-run, classical economists emphasized the “neutrality of money,” implying that changes in the money supply have no influence on real economic variables (output, employment, etc.) in the long-run. This is what ultimately distinguished classical economists from neoclassical economists in terms of quantity theory. By the mid-20th century, the strict long-run neutrality of money had all but disappeared. Quantity theory would transform from an explanation of changes in purchasing power to a theory of how the money supply influenced aggregate demand (represented by MV), prices, and output.

The Evolution of Quantity Theory

Fisher and Marshall– In Fisher’s Purchasing Power of Money, he acknowledged that the equation of exchange only held in long-run equilibrium and that transition periods occurred in which the value of V would change. However, he argued that such changes were due to frictions in the economic system. Ultimately, he over-emphasized the concept of money to spend (motion theory) rather than to hold (rest theory).

Marshall moved the theory of money demand more toward ordinary demand analysis rather than treating it only as a unit of exchange. Money related to national income rather than to the value of goods transacted. Marshall also shifted focus from money’s annual rate of turnover to the proportion of income that people hold in the form of money.

Wicksell– Wicksell carefully restated the indirect mechanism which had only been touched upon by Marshall. He intended to account for the Gibson Paradox while also defending quantity theory. The Gibson Paradox was first observed by Thomas Tooke between 1838 to 1857, indicating that price levels and interest rates moved in the same direction which contradicted monetary theory. Wicksell approaches the issue by first conceptualizing a pure cash system in which only coins and paper currency are used. In such a regime, a fall in interest rates would raise the volume of investment per unit of time and prices of capital would rise. In the economy were fully employed, the entire wage-price level would rise and this inflationary upsurge would cause a drain in the circulation of money. Since banks cannot issue more loans due to reserve requirements, they must raise interest rates to cut off inflation. Wicksell next conceptualizes a pure credit system in which there are no limits to bank reserves. Under such a regime, monetary authorities would be free to determine price levels at will.

He argued that if interest rates were lower than the expected yield of investments, this would create a disequilibrium that would be inflationary unless this money were saved and not used for consumption. He developed three criteria of monetary equilibria: 1) loan rates must equal the expected yield of newly created capital; 2) demand for loans must equal the supply of savings; and 3) the general level of commodity prices must be stable.

There were several shortcomings to Wicksell’s model. Firstly, he did not consider how economic growth involves increased productivity, which impacts price levels. For stable prices, the money supply must increase with the rate of increase in productivity, because higher output causes prices to fall. He also did not incorporate changing expectations into his model. In static equilibrium, producers would assume that increases in the price of capital are only temporary and will come back down. As such, they would wait until prices fell to invest, causing investment to sink below normal levels. Wicksell also failed to include cost or yield variables in his money demand function, and he only considered an economy at full employment without considering monetary impacts on employment and output.

Keynes– In criticism of Wicksell, Keynes argued that when there are unused resources in an economy, changes in spending are more likely to impact employment and output rather than prices. In addition, he reversed the assumptions of quantity theory, by making prices fixed and output flexible while also denying the stability of V. He demonstrated that an increase in the money supply could be offset by a fall in V, causing spending and income to stay the same. He also separated demand for money into active cash balances and inactive cash balances, which for the first time included the opportunity cost of holding cash. Replacing the direct mechanism with the multiplier, Keynes’s main policy implication promoted fiscal policy as a superior tool to monetary policy in fighting economic downturn.

Friedman– Milton Friedman countered Keynes’s analysis with a complete specification of relevant constraints and opportunity cost variables for his money demand function. His independent variables included a broad definition of wealth which consisted of the present value of expected future receipts from all sources. He considered all types of wealth as possible substitutes for cash holdings.

Questions and Comments

I am having trouble fully understanding the cumulative process described by Wicksell.

How did Wicksell ultimately explain the Gibson Paradox?  Was the positive correlation between inflation and interest rates due to the fact that Tooke only looked at nominal interest rates?

If we lump together classical and neoclassical economists and compare them with Keynesian economists, I suppose two main differences are demonstrated in this article: 1) classical economists tend to favor monetary policy while Keynesian economists favor fiscal policy; and 2) classical economists focus on long term equilibria while Keynesian economists emphasize short term equilibria.

(I’ll keep updating my notes as I write them)

“FROM EARLY WARNING AND RESPONSE TO ETHNO-DEVELOPMENT: A STRATEGIC APPROACH FOR ETHNIC CONFLICT REASEARCH AND ACTION”

BY OTTO FEINSTEIN AND ANTHONY PERRY

• The authors argue that “…violent ethno-cultural conflict… is the direct result of the way the modern nation-state was created and its frequent inability to resolve in a non-violent manner the ethnic conflicts which are inherent to its existence”
• The non-violent resolution/management of these conflicts depends on a change in the behavior of the state and the norms of the international system rather than the “de-tribalization of ethnic populations”
• No modern nation-state exists that does not have a multi-ethnic population
• No modern nation-state had universal suffrage at the time of its constitutional origins
• Thus, states did not create an ethno-development infrastructure at their founding
• Ethno-development begins with education; adult educators are involved in activities where the state meet the public; they could be the first hand observers of ethnic conflict, the users of Early Warning information and actual providers of such information and the means of dealing with it
• Adult educators able to analyze the impact of changes brought about intervening variables upon their communities and thus help evaluate conflict resolution strategies
• Volunteer organizations, which include ethnic organizations, humanitarian associations, and community groups, can articulate the needs of their memberships and obtain appropriate state responses; they are the demand mechanisms citizens use when normal political avenues break down
• When volunteer organizations are seen as posing a threat to the state apparatus and not seen as a legitimate form of participation, this can aggravate conflict since these groups are often the fist signal and mediator of an escalating crisis
• An ethnodevelopment strategy requires information from around the world on numerous aspects of ethnicity, culture, conflict, dispute resolution and democratic participation
• Often data sources get duplicated by active researchers of ethno-political conflict; often these data-sets are repetitive, incapable of being reproduced and biased in numerous ways; for effective early warning models to be developed and tested we must gather the best data possible

“THE QUEST AND PRACTICE OF INDIGENOUS DEVELOPMENT”

BY JORGE E. UQUILLAS AND MELANIE A. ELTZ

• This article reviews the main lessons learned from the practice of indigenous development both at the community level and at the national level; it also highlights the significance of the World Bank’s Indigenous Peoples Policy (9)
• The Quest for Indigenous Development
• Political boundaries established by former colonial powers did not adequately recognize ethnic differences; conflicts emerged between ethnic groups attempting to reassert their differences (9)
• The Declaration of Barbados in January 1971 marked the formal beginning of the transnational indigenous rights movement; it criticized indigenist policies for failing to improve the economic well-being of indigenous peoples while also causing assimilation, acculturation, and sometimes ethnocide; from this declaration came the conceptual framework of ethnodevelopment as an alternative to assimilation (11)
• Ethnodevelopment is essentially the autonomous capacity of culturally-differentiated societies to control their own processes of change; basic conditions for ethnodevelopment are that indigenous peoples: 1) strengthen their own cultures; 2) assert their ethnic identities; 3) obtain recognition of their lands for local autonomy, governance, and self-determination; and 4) self-manage their own processes of economic and social development (11)
• Today ethnodevelopment builds upon the positive qualities of indigenous cultures to promote employment and growth; these qualities include a strong sense of ethnic identity, close attachments to ancestral land, and the capacity to mobilize labor, capital, and other resources to achieve shared goals (11)
• In 1987, the World Commission on Environment and Development redefined sustainable development as development that meets the needs of the present without compromising the ability of future generations to meet their own needs (13)
• Development with identity was considered synonymous with ethnodevelopment in recent past; some basic elements of development with identity (as defined by the Indigenous Leadership Training Program in the Andean Region) are: 1) focus on quality of life rather than economic growth; 2) primacy of common or collective rather that individual interests; 3) emphasis on solidarity, social cohesion, and collaboration; 4) redistribution rather that accumulation of wealth; and 5) forms of collective action (13)

• The Practice of Indigenous Development
• The World Bank and the University of Pittsburgh published a report in 1997 citing 42 specific cases of indigenous development in Latin America; of the 42 cases, 28 were considered successful, 8 unsuccessful, and 6 unclear (14)
• Problems related to the legal framework necessary for development contributed to the failure of 75% of unsuccessful projects; security over land and natural resources contributed to the failure of 63% of unsuccessful projects (14)
• The most common feature of successful projects was the presence or creation of indigenous organizations both at the local level and multi-community level as a mechanism for representing indigenous peoples in the development process (14)
• Development is more likely to occur when indigenous peoples have: 1) access to basic resources such as food security and basic health; 2) a high degree of social organization and political mobilization; 3) the ability to preserve their cultural identities (particularly language); 4) strong links with outside institutions; and 5) production patterns that allow both subsistence and the earning of cash incomes (14)
• The World Bank’s Indigenous Peoples Policy (OD 4.20) incorporates three elements: 1) capacity building by strengthening self-managed sustainable development of indigenous leaders and their organizations; 2) creating a learning partnership among indigenous organizations, national governments, and international donor agencies to share experiences and best practices; and 3) financing specific operations in the areas of education, health, rural development, natural resource management, biodiversity conservation, and cultural heritage (15)
• Main goal of World Bank’s Indigenous Capacity Building Program in Lain America is to strengthen indigenous organizations and willing governments to help indigenous peoples build their own capacity for identifying needs, selecting development priorities, and formulating strategies and proposals (15)
• PRODEPINE I was the World Bank’s first stand-alone investment operation that focused exclusively on indigenous peoples and Afro-descendant populations; helped encourage the democratic inclusion of Afro-Ecuadoran and indigenous peoples in the state; this participatory approach has proven important for decentralization and social empowerment (16)
• In January 2003, the World Bank’s Operational Evaluation Department published a review of OD 4.20, which was applied in 55 of 89 World Bank projects between 1992 and 2001 that could have affected indigenous peoples; the report found that the program has positively influenced Bank assistance in many countries in focusing on the marginalized poor (16)
• The report also highlighted the fact that the program hasn’t been applied in a consistent manner; it also found no clear understanding of the term “project that affects indigenous peoples” (which triggers OD 4.20), whether that effect is direct or indirect, negative or positive (16)
• Confusion remains in understanding OD 4.20 and its requirements and some task team leaders stated that they lack adequate resources to implement it (16)
• Non-World Bank Donor Agencies
• The International Fund for Agricultural Development (FAD) funded the Regional Program in Support of Indigenous Peoples of the Amazon Basin (PRAIA); lessons from Phase I and Phase II of PRAIA: need to support economic initiatives with cultural components, recognize traditional cultural knowledge, recognize indigenous peoples as beneficiaries and partners, strengthen technical and budget management capacities, acknowledge capacity building as a key element for indigenous people to interact directly among themselves and with international agencies, government authorities, private institutions, and national/international market agents (17)
• Need to strengthen ability of national and local government to enforce laws and develop appropriate legislation for indigenous peoples (17)
• Cooperation demands greater flexibility from donors in their implementation conditions; all indigenous communities are different and projects vary, making flexibility necessary for success (17)
• The Inter-American Development Bank (IDB) developed a strategy to address the concerns of indigenous peoples in the face of globalization; addresses challenges such as integration and globalization of markets and reduction of their poverty levels, while also maintaining ethnic and cultural identities (17)
• The IDB’s model is based on 3 reinforcing elements: 1) strengthening the traditional subsistence economy—protect land and natural resources while improving productivity in order to have food security and provide space for cultural reproduction; 2) reducing segregation and discrimination in labor markets and in the sale of products—increase capacity to compete under equal conditions with other groups through improved access to education, financial services, labor regulations, and reduced discrimination; and 3) using the comparative advantages of the heritage of indigenous peoples—coordinate indigenous knowledge and ancestral practices with a focus on business, marketing, and production technologies and seek niches in highly demanded goods/services such as ethno-tourism, medicinal plants, management of protected areas, craftsmanship, and forestry (18)
• Elements of a Revised Conceptual Framework for Indigenous Development
• Economic indicators have historically measured development but many factors cannot be quantified with respect to indigenous communities; poverty cannot be defined only by modern economic criteria, such as the value of a basket of goods or monetary income (18)
• When working with indigenous peoples, new criteria must account for the fact that: 1) the concept of reciprocity exists among indigenous communities; 2) indigenous peoples work communally when placing value on goods; 3) indigenous peoples often refrain from accumulating goods; and 4) indigenous peoples are often in harmony with the environment (18)
• Preconditions before multilateral institutions can fully support the development of indigenous communities
  • National policy frameworks that recognize the collective land rights, human rights policies, and linguistic/cultural characteristics of indigenous peoples (19)
  • National and international policy frameworks that give indigenous communities some autonomy in terms of development planning and implementation (19)
  • when secure tenure to communal territories exists, development is easier to achieve (19)
  • multilateral institutions must invest heavily in strengthening the capacity of indigenous organization and communities to plan and manage their own development initiatives (19)
  • social capital refers to institutions, relationships, networks, and norms that shape the quality and quantity of a society’s interactions; key to improve this is participation; local participation in project design, implementation, and evaluation ensures that projects and policies make sense within the local context, helping to sustain the project once development workers have left (19)

“ETHNODEVELOPMENT: SOCIAL MOVEMENTS, CREATING EXPERTS AND PROFESSIONALISING INDIGENOUS KNOWLEDGE IN ECUADOR”

BY NINA LAURIE, ROBERT ANDOLINA, AND SARAH RADCLIFFE

• This article analyzes struggles over knowledge production and established cultures and traditions in new forms of governance
• Emphasis on how notions of self-regulating citizenship, combined with increased national and international recognition of indigenous collective rights, is opening opportunities to influence ways that political decision making and development are managed (471)
• Neoliberal measures to open markets in land, water, and new commodities have huge impact on rural well-being; indigenous response to these pressures include alternative law proposals, nationwide protests, coalition building with other social actors, and creating a unified identity in order to achieve common goals (472)
• Indigenous movements have been involved with transnational development networks in Ecuador for over a decade; these networks provide influential arenas for debate over the meaning and tools of “development with identity” (472)
• Neoliberal social development policies include strengthening institutions and civil society organizations, including previously marginalized groups, recognizing social diversity, and gaining the participation from all stakeholders in project decision-making and execution (473)
• The authors argue that “…while neoliberalism is increasingly setting the social development agenda, in some contexts this occurs in ways that open up spaces for indigenous challenges to, and participation in, local and regional policy implementation.” (473)
• Social capital is defined as the norms and social relations within the structures of society that allow people to coordinate action and achieve goals (474)
• Ethnodevelopment interprets culture and indigenous identity in ways that make it compatible with neoliberal social policy, but this can limit the perception of indigenous culture as simply as a means of allocating resources and recognizing beneficiary groups of development projects (474)
• This article highlights the power relations involved in knowledge production, specifically in the contests over emerging notion of ethnodevelopment (474)
• Deborah Yashar—“neoliberalism… has become synonymous with the culpable state, and has enable the indigenous movement to target the state for retribution, justice and guarantees” (475)
• To what extent are governable spaces of indigeneity being established in Ecuador through multiple scales and overlapping geographies via ethnodevelopment professionalization? (476)
• Ethnodevelopment: Changing Development Experts and Expertise
• Development experts fail to deliver results that lessen inequality and improve living standards; experts are part of these failures, because the knowledge that allow people to create and implement their own programs get devalued as experts are created (476)
• “In contrast to a development industry populated by expatriate consultants, in recent years, the shift towards neoliberal social development models has placed more emphasis on stakeholder participation and developing human and social capital that is ‘indigenous’ to a particular area.” (477)
• Contemporary development workers are generalists, valued for the generic tools they can apply anywhere; thus, local specialist knowledge detracts from development expertise (477)
• Indigenous movements have long demanded culturally appropriate education that reflects indigenous realities and needs; culturally appropriate professionalization recognizes indigenous values and knowledge, seeking to strengthen their political structures, organization, and leadership; this type of professionalization equips communities with the tools to produce their own development projects without relying on outside experts and technicians (478)
• Andean Popular Education and Indigenous Movements
• No longer the case in Ecuador that popular education is more informal than university courses
• The ECUARUNARI training school for women (3-year program) awards a diploma, has exams, requires coursework and participation; it comprises distance learning, workshops, seminars and short residential courses (479)
• As opposed to highly structured university programs, flexible training programs are often more appealing to women due the burdens of doing both domestic and paid work (479)
• Their curricula are shaped by the agendas of indigenous movements; they involve engaging with the latest development thinking, strengthening indigenous identity, and empowerment (480)
• Instead of focusing on technical training in agriculture and production, new indigenous training courses try to strengthen civil society by promoting strong citizenship and leadership training, as well as fortifying the role of poor and indigenous communities in decentralized development planning (480)
• The first seminar at ECUARUNARI comprised traditional topics such as local sustainable development, but this was with a focus on participation, gender, culture, and ecology (480)
• The teaching methods were interactive, problem-solving, and focused on debating the historical genealogies of indigenous movements; use life histories of great historical leaders and aboriginal peoples to recoup oral traditions an the role played by women in indigenous uprisings (480)
• An intimate relationship exists between professionalization and indigenous agency through re-working authoritative histories and knowledge (481)
• Courses link professionalization with activism by incorporating the experiences of indigenous political action into the curricula; for example, featuring indigenous leaders and advocates as guest speakers to inform students of everyday struggles of indigenous movements (481)
• At a university indigenous professionalization program in Bolivia, one of the session focused on analyzing the success of protest tactics such as marches and road blocks in indigenous and peasant mass mobilization (482)
• Professionalization: Spatializing and Scaling Indigenous Knowledge
• Advances in international human rights, the recognition of indigenous people in international law and greater interest from donor agencies, NGOs, and the corporate world have given indigenous knowledge a new level of importance with respect to development (483)
• Respect for indigenous knowledge is essential for fulfilling development-with-identity agendas, but there is disagreement as to how this knowledge should be represented (483)
• Most definitions of indigenous knowledge refer to natural resource management, knowledge about a specific territory and/or knowledge held by a particular group who are assumed to reside in a particular geographical area (483)
• Indigenous movements emphasize indigenous knowledge as diverse modes of thinking/processes of learning (483)
• This focus on logic, frameworks, and epistemology have led to programs such as Ecuador’s Program of Bilingual Intercultural Education which critiques the Spanish model of education through promoting Andean ancestral forms of thinking and learning (483)
• Donor organizations scale indigenous knowledge at the local level through large-scale programs that disseminate specific indigenous knowledge; some examples include the World Bank’s “Indigenous Knowledge for Development” program, UNESCO’s “Best Practice of Indigenous Knowledge” and UNDP’s “Indigenous Knowledge Program,” which seek to transfer indigenous knowledge for adaptation in other contexts (484)
• Large-scale transnational initiatives attempt to professionalize indigenous knowledge so that it can be circulated and shared; representations of indigenous knowledge as inherently oral and local motivate this professionalization in fear that its full commercial potential may not be tapped or that it may get taken out of the hands of indigenous communities (484)
• Donor organizations (such as the World Bank) fund spaces of dialogue between community members, local authorities and national/international development partners and also facilitate local communities in forming research agendas and establishing networks that help practitioners and communities exchange information about local practices (484)
• Increasing systemization and professionalization of information flows in transnational development networks do not necessarily empower indigenous network members; international funding usually requires monitoring based on burdensome report writing; monitoring and evaluation processes can produce contests over the control of governable space by becoming conduits for the introduction of new paradigms, whether or not they are wanted by local and national organizations (484)
• To control how their knowledge is represented and valued in development, indigenous leaders emphasize how indigenous knowledge has been downgraded by colonization; indigenous leaders (like Luis Macas of the Ecuadorian indigenous confederation CONAIE) are attempting to redefine indigenous knowledge to a concept that is universal rather than simply unique to a given culture or society (485)
• By redefining indigenous knowledge, indigenous people are being repositioned as not only actors and agents in ethnodevelopment but also experts (485)
• Institutionalizing Professionalization: Hybrid Development Institutions in Ecuador
• NGO sector of fused grassroots and academic interests operating transnationally helps set the agenda of new courses designed to meet the training needs of indigenous leaders, activists, and advocates (486)
• New decentralization laws and land reform have opened up opportunities for recognizing indigenous rights, including collective rights to resources and decision making power (486)
  • Governable Space and By-Passing the State
  • PRODEPINE, which is funded by transnational donors, the state, and indigenous groups, provides over 700 scholarships for indigenous Ecuadorians to study in established university programs; though the program has been successful, the have been instances of intolerance on the part of both indigenous students and white mestizos in the universities (487)
  • Mainstreaming indigenous students into existing university programs can create division which leaves students untouched by the intercultural experience (488)
  • A similar group called CODENPE heavily supports indigenous movement initiatives to establish training outside the established university system in Ecuador via CONAIE’s proposal for an Indigenous University (first discussed in 1988, resurrected in 1994, rejected by Congress in 1996) (488)
  • This university would emphasize decentralized and flexible forms of teaching, with courses comprising part-study based on distance learning, practical sessions and occasional workshops, with an academic calendar organized around the agricultural calendar (489)
  • This proposal calls into question the state’s jurisdiction over higher education by creating a semi-autonomous university and also explicitly seeks to systemize the experience of indigenous movements’ struggles against state reform in order to strengthen indigenous organization; given these circumstances, not surprising that the state was unwilling to grant approval (489)
  • CODENPE receives funding from the government which allows it to engage the state in policy advocacy, but it also has a direct link with transnational funders which gives it some autonomy that allows it to be critical of state practices and institutions that intrude on indigenous development (490)
  • Though CODENPE facilitates open communication between the state and indigenous movements, this role may also help the state monitor indigenous projects; this dilemma characterizes the struggle for control over indigenous development (490)