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Critique of Neoliberalism

How Rich Countries Got Rich ... and Why Poor Countries Stay Poor by Eric S Reinert;

Critique of Neoliberalism

Rajah Rasiah

T
hrough eight chapters in this book Eric Reinert argues persuasively using concrete historical evidence on how rich countries got rich and why poor countries remain poor, in the process dissecting and dismissing the still dominant neoliberal arguments in the process. Central in this book to achieving economic growth and poverty alleviation is the need to enable the engines of increasing returns through a shift from agriculture to manufacturing activities. The highly modest Reinert correctly says that the ideas he is expounding are old but asserts that those are the only set of foundations that drove rapid economic growth of all the successful developers. Yet, the synthesis he provides of the successful latecomers and the rigorous scrutiny he undertakes of the attempts of global organisations such as the United Nations to seek solutions (e g, millennium goals) using adapted versions of neoliberal economic theory are original.

Tracing historically and linking the Ricardian prescription of agriculture for poor countries to the physiocrats and assuming Voltaire’s questioning of Pangloss’ propagation of an unequal and oppressive status quo, Reinert begins his endeavour by asking the questions as to why equally efficient workers in Peru and Nigeria earn a fraction of the incomes of workers in Norway, and why is it that inequalities have only worsened since the time of Voltaire and Ricardo. The key message of the book is that poor countries can free themselves from the chains of poverty only through what Young, Abramowitz and Kaldor had lucidly expounded several decades back, through creating the conditions for the development of the increasing returns activities associated with manufacturing.

Wrong Assumptions

Reinert argues in chapter two that Ricardo and the descendants of the world’s dominant neoliberal economic theory have simply started with the wrong assumptions

Economic & Political Weekly

EPW
april 26, 2008

book review

How Rich Countries Got Rich … and Why Poor Countries Stay Poor by Eric S Reinert; Carroll & Graf Publishers, New York, 2007; pp 365.

and that is why their works have raised the wrong questions and attracted the wrong answers. Instead of theorising the real world directly with imperfect information (especially its asymmetric characteristics) as Voltaire had emphasised, modern day neoliberal economists such as Friedman and Lucas constructed an unreal set of assumptions – either that nearly perfect or that easily correctible information markets existed, thereby blinding policymakers with models detached from the real experiences. The basis for poor countries to formulate policies grounded on increasing returns to engender economic development and poverty alleviation is laid in this chapter. Reinert traces the neoliberal and the other canon’s heterodox approaches explaining economic development to the dominant physics-based and the less dominant biological models, pointing to the latter as the path taken by all developed economies starting with England in 1485. Without dabbling in the laws of physics, which to me are path-dependent and hence closer in their ability to explain latecomer development (though the biological concept advanced by Marshall and Penrose helps highlight the importance of interdependence between economic agents), Reinert manages in this chapter to make a powerful case for manufacturing expansion to distribute greater economic synergies from increasing returns to the people.

Chapters three and four discuss the paths taken by successful developers and the dynamics of their movements. Chapter three provides an incisive account of econo mies moving up the development ladder by demonstrating how specialisation in the increasing returns activities of manufacturing helped raise income levels of the people. Chapter four articulates the Marxist-Schumpeterian logic that the active pursuit of technological change is the key to driving increasing returns. Whereas neoliberal

expositions leave technology as a static variable that is presented as a black box (including the false proposition of total factor productivity), heterodox and evolutionary economists opened it to provide institutional change that is required to quicken growth and structural change. Nelson, Freeman and Lundvall discuss in greater detail the institutional developments that are necessary to drive a successful catch up.

Chapter five discusses how orthodox economics has primitivised the developing economies intentionally by implying that both the colonial and post-colonial policymakers in the developed world intentionally chose neoliberal models to prevent non-white peoples of the world from catching up. While it is likely that developed economies deliberately sought to promote free trade policies for the developing world, in order to stay ahead as is also argued by Chang Ha-Joon in Kicking Away the Ladder, it is contestable that race considerations drove such a conduct. White settler economies such as Mexico, Brazil, Argentina, South Africa and Australia faced policy reversals depending on the ideological anchors of the political parties that ruled them. White settlers introduced import-substitution against the advice of their colonial masters to promote manufacturing in Brazil, Mexico, Argentina and Australia. Apartheid South African industrialisation had “benefited” from econo mic isolation. Only countries that defied neoliberal prescriptions and stimulated increasing returns activities such as Korea and Taiwan followed the path of successful latecomers.

Critique of Price Prescriptions

Chapters six and seven attack prescriptions calling for getting relative prices right. Chapter six provides a convincing account to reject neoliberal attempts to tie economic issues to spontaneity while rejecting history, and in the process lays the foundations for dismissing the palliative economics that global organisations are

BOOK REVIEW

currently pursuing in chapter seven. Indeed, Sach’s millennium goals and the strategies sought to alleviate poverty in Africa simply integrate neoliberal logic to the so-called disadvantaged regions. Again, such attempts merely reflect a disregard for history as if Europe, North America and Japan had faced better geography, climates and security from diseases.

A careful reading of Smith’s Wealth of Nations of 1776 shows that the poor mothers who suffered from the oppressive winter cold in Scotland would be fortunate to see one of 20 of their babies eventually surviving. Indeed Reinert’s interesting discussion in the chapter helps shift the focus away from static given problems as well as symptoms of failed policies – e g, bad geography, climatic catastrophes and diseases – to the real issues of transforming economies. Perhaps the attempt of Nelson to develop the Marxist-Schumpeterian logic of innovation

– to stimulate institutional change could have been added to the rich arguments here. The discussion on institutions in chapter six is confined to its market-defining logic as expounded by the new institutionalist exponents of Coase, North and Williamson rather than the evolutionary expositions by Nelson who gives it an active and dynamic role.

Chapter eight opens with a lucid reciting of statements that point out that economists indeed know very little about real economies and how they grow. It is interesting that Reinert chose to compare two close friends whose works provide contrasting assumptions, analysis and prescriptions to promoting economic growth. As Reinert points out, latecomer students of economics tend to fashion their thinking falsely in line with Friedman’s calls to let markets allocate resources rather than with Abramowitz’s incisive prescription to drive economic growth through the promotion of increasing returns. The chapter calls for an evidenced-based scrutiny of the causes rather than the abstract construct that neoliberal economics has advanced to seek both explanations as well as solutions for world’s problems of poverty – absolute as well as relative.

Overall, this is a wonderful book that all policymakers, teachers and students – especially those sincerely seeking development of the poor economies living in both developed and developing economies

– must read. Although the ideas are old, the book provides a synthesis that is unique and extends it succinctly to dismiss the dominant millennium goals. Strategists advising policymakers should then work out the institutional and micromacro constructs necessary to revive the use of industrial policy frameworks across the developing world, which was the only path of the past and remains the only one for the poor economies to catch up and enjoy similar standards of living as those in the developed world.

Email: rajah@um.edu.my

april 26, 2008

EPW
Economic & Political Weekly

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