Thursday 21 August 2008

The politics of development

How rich countries got rich...and why poor countries stay poor, by Erik Reinert (Constable); Bad Samaritans: Rich Nations, Poor Policies and the Threat to the Developing World, by Ha-Joon Chang (Random House)

Following the end of the Second World War, the Allies – primarily America – poured billions of dollars into Germany in an effort to restructure the devastated economy. The result was to make matters worse. Former president Herbert Hoover was sent to Germany in 1947 to report on the progress of the endeavour, and declared the only way the current policy could be made to work was by ‘exterminating’ or relocating 25 million Germans, such was the dire state of the country.

This is not a description of the teething problems of the Marshall Plan, but one that preceded it. The Morgenthau Plan, named after the US Treasury Secretary at the time, was part of an attempt to neuter Germany, following a decision by the Allies to divide the country in two and deindustrialise it. Hoover’s description of the chaos he found in 1947 was illuminating: Germany had been eliminated as a threat and its people were starving as a result. Only when the destabilising consequences of the Morgenthau Plan became apparent, and the threat of the Soviet Union took precedence over that of a resurgent Germany did Allied policy shift to promoting economic development in West Germany. This was done through the Marshall Plan, which involved supporting the rebuilding of infrastructure and the development of manufacturing industries.

This initial impoverishment of Germany following WWII is a story not often discussed. In debates over foreign aid today, the post war reconstruction of Europe is hailed as a success to emulate – ‘We need a Marshall Plan for Africa!’. Or the success of the Marshall Plan is used as proof that aid simply cannot work in the context of Africa. Aid to Africa has far exceeded the amount committed to by the Marshall Plan, so it is argued that Africans have only themselves to blame if they are still poor.

Destruction in Post-WWII Germany

Ha-Joon Chang and Eric Reinert both use the contrast between the Morgenthau Plan and the Marshall Plan to illustrate a common theme: above all else the development of manufacturing industries is essential to economic growth, no matter how much money may be available through aid, trade or otherwise. Put simply, they argue there is no point crying, as Bob Geldof famously did, ‘Give us your fockin’ money!’ if that money is going to be used to dig bore holes in rural communities rather than to build roads and factories.

But it’s not necessary to agree with Chang or Reinert that the way forward is state-supported industry to welcome their refusal to go along with the idea that we know how to end poverty but merely lack the will to do it. From the moralising of aid campaigners to the rise of economic experts and technocrats, there is a tendency to believe the problem of development has been solved. Aid agencies argue all that is needed is more money from the developed world. Development experts argue their policies would succeed if it weren’t for corruption and incompetence in developing countries. Chang and Reinert argue the problem of development can’t be resolved with more money, or following the advice of self appointed exports, but must be resolved with better ideas.

While they may come in for criticism, the NGOs and aid agencies aren’t the main targets of these two books. Chang and Reinert are arguing against the policies associated with globalisation and those who defend them, neo-classical economists. It is these people who have forgotten why the Marshall Plan worked, they argue.

Today, those who point to the failures of globalisation are more likely to be demonstrating their contempt for economic growth, rather than their concern over the lack of it. To be a radical critic of the Washington Consensus is to draw attention to the problems that economic growth creates – slums, sweatshops, inequality, environmental degradation, the destruction of tradition and communities. It is refreshing then, to read two intelligent critiques of globalisation from a decidedly pro-growth perspective. In How Rich Countries Got Rich…and Why Poor Countries Stay Poor and Bad Samaritans, Eric Reinert and Ha-Joon Chang provide a critique of many aspects of globalisation, and the policies encapsulated in the Washington Consensus, that is at the same time firmly in favour of economic growth.

The publication of these two books last year sparked a great deal of debate among many leading economists. Notably, Martin Wolf, chief economic commentator at the Financial Times reviewed both books; Reinert was reviewed in the pages of Prospect by Paul Collier, a world renowned development economist – the title of Collier’s latest work ‘The Bottom Billion’ has become common parlance among development types.

Much of the discussion that followed these pieces focussed on free trade versus state led development. Defenders of free trade such as Arvind Panagariya were keen to defend themselves against the charge that they are in awe of the market:

Critics of free-trade advocates like to argue that free trade alone is not the answer to the development problem. This is like knocking down a straw man: few free-trade advocates argue that free trade by itself is enough to launch a country into high-growth orbit. My own forthcoming book India: An Emerging Giant (OUP, NY) is 500-pages long precisely because it carefully spells out the reforms needed in various areas to achieve and sustain a double-digit growth in India. If free trade was all that was required, I could have finished the book in less than hundred pages! – FT Forum Online

Chang on the other hand was keen to emphasise that he thought trade was important if not essential to development:

I go to a great length in the book to explain why trade is essential for economic development. I daresay that I am even more pro-trade than those mentioned above.

The debate on the pages of Prospect was perhaps more stilted, which isn’t surprising since Paul Collier had started the debate by dismissing Reinert as a ‘quack’. But the commonality between the two opposing sides was marked, which may explain the absence from this discussion of an important aspect of the wider debate. Pro-globalisation and anti-globalisation perspectives, if it’s fair to characterise them this way, appeared to share the assumption that economic growth is a good thing; it was the way in which growth is to be pursued that was at issue.

A further issue, however, is negative mainstream attitudes to growth: both Paul Collier and Martin Wolf are aware of the attack on the possibility and even desirability of economic growth. Martin Wolf dedicated an entire book – Why Globalisation Works – to refuting arguments from globalisation’s anti-growth critics. Paul Collier in his most recent work emphasises at the outset his distance from those who talk of ‘sustainable’ development and focus on the Millennium Development Goals in place of GDP growth.

In strategy documents the word [growth] is now generally seen only in the context of the phrase “sustainable, pro-poor growth.’  Yet overwhelmingly, the problem of the bottom billion has not been that they have had the wrong type of growth, it is that they have not had any growth.

The thought that the blind pursuit of growth is a problem for the poor cannot easily be dismissed, though Collier’s point that many countries have simply not had any growth is rather strong. There are real problems with the rapid industrialisation of the developing world. The pursuit of high growth rates requires nations to sacrifice current consumption for future gains. Money that could be used now to boost living standards of the poor is instead invested to infrastructure projects in the hope of future benefits. Foreign exchange that could be used to purchase foreign consumer goods is instead used to purchase foreign capital goods that do not, directly at least, raise living standards.

This sacrifice was to a large extent imposed on the population of South Korea by an authoritarian military regime during a period of rapid growth development beginning in the early 1960s. Chang discusses this at some length, showing how the Korean government sought to avoid the prospect of a balance of payments crisis by denying its population access to foreign consumer goods. The South Korean government suppressed sectional interests and legitimate demands for political freedom, along with better living standards, in its pursuit of economic growth. It may be easy to accept that economic growth has temporary economic costs; the economic costs of no growth are much higher. But if the cost of growth is the suppression of progressive political movements, this is not so easy to defend.

This real problem needs to be tackled head on in any firm defence of the social and political benefits resulting from increased national prosperity. Instead it is often hijacked by those who see development itself as a problem. Hence, a positive desire to see that no one is excluded from the benefits of growth in fact produces results that are profoundly damaging for the poor. The promotion of ‘pro-poor’ policies - policies that seek to ameliorate the conditions of the poorest, those who sometimes benefit little from the initial stages of economic growth - can have the affect of stunting growth before it starts. Paul Collier is right to identify such pro-poor sustainable growth policies with those who see growth itself as a problem, and in fact this is a criticism he shares with Reinert.

Reinert’s approach to this issue, based on case studies, should be welcomed. He describes the pro-poor Millennium Development Goals as ‘palliative economics’, and as such an enemy of development. Instead of attempting to transform the productive base of an economy, providing higher wages and general prosperity, Reinert argues that the current policies of development institutions seek to reduce the developing world to a relationship of dependency upon the rich world. Reinert uses examples of aboriginal populations the world over to demonstrate where he sees these policies heading - economic dependency on the good will of the rich, political marginalisation, and continued and worsening poverty. At the same time, the victims of such policies usually find that they are blamed for their own situation. Parallels can be seen in the way under development is now laid at the feet of corrupt or incompetent leaders in the developing world – a theme to which Chang devotes an enlightening chapter.

A worrying aspect of the sidelining of development by ‘palliative economics’, to use Reinert’s phrase, or ‘pro-poor sustainable growth’ to quote Collier, is that economic expertise is increasingly coming to be regarded as the solution to problems of development. Collier, while critical of ‘sustainable growth’, is himself a leading example of this trend. Whereas Reinert and Chang see the attempts to criticise leaders as corrupt or incompetent as a way of blaming them for the failure of development policies pursued by international institutions, Collier is fond of describing African leaders as a bunch of crooks.

The real battle front is actually not between us in the rich world and the people of the bottom billion, the real power struggle is within the bottom billion between reformers and crooks. And to date the crooks have usually won because they’ve got the money and they’ve got the guns. We’ve got to do everything to strengthen the hand of the reformers in these societies.

The flipside of Collier’s attempt to strengthen the hand of reformers is that governments of developing countries are in fact able to gain legitimacy at home by criticising Western experts like him. The ‘advice’ of experts and coercion at the hands of international institutions can be used to disown unpopular policies, thus strengthening the legitimacy of the government implementing them. The effects on democracy are devastating. Collier understands this process and encourages strengthening international bodies to provide a domestic defence for unpopular – but in his expert opinion – necessary policies. Such an antidemocratic instinct is of course objectionable, however noble the pursuit may seem.

This is something that Wolf recognises. For all his disagreements with Chang and Reinert, Wolf ends his review of their books by saying:

Most (developing countries)  should enjoy the benefit of open markets from the rich, but be allowed to pursue their own paths, from laissez-faire to its opposite. They will make many mistakes. So be it. That is what sovereignty means.

Wolf’s defence of sovereignty is perhaps why he is not so quick as Collier to dismiss Reinert and Chang:

Unlike much of the writing produced by opponents of contemporary globalisation, these are serious books by serious people. They deserve to be read.

Economic growth needs to be championed as a part of a wider project of human emancipation, both materially and politically. Development cannot be left in the hands of technocrats, to be pursued without popular involvement. Collier is of course right to argue that any growth is better than no growth. But economic development is a political project and not an economic one. As Chang, who has written an engaging polemic intended for a non-expert audience remarks:

Trade is simply too important for economic development to be left to free trade economists.

And economic development is too important a subject to be left to economists alone.


This piece responds to:
The Growth of Nations, Martin Wolf, Financial Times, 21 July 2007

For Richer and for Poorer, Paul Collier, Prospect, June 2007


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