Of course, the fact that the use of activist ITT policies is necessary does not imply that all countries that use such policies are guaranteed economic success. As we know from the experiences of a range of developing countries during the postwar period, the success of these policies is critically determined one the one hand by the detailed forms of these policies, and on the other by the ability and the willingness of the state to implement these policies.[4]
The picture that emerges from our historical survey seems clear enough. In trying to catch-up with the frontier economies, the NDCs used interventionist industrial, trade and technology policies in order to promote their infant industries. The forms and emphases of these policies may have been varied according to different countries, but there is no denying that they actively used such policies. In relative terms (that is, taking into account the productivity gap with the more advanced countries), many of them actually protected their industries far more strongly than the currently developing countries have done.
If this is the case, the currently recommended package of ‘good policies’, which emphasizes the benefits of free trade and other laissez-faire ITT policies, seems at odds with historical experience. With one or two exceptions (e.g., the Netherlands and Switzerland), the NDCs did not succeed on the basis of such a policy package. The policies they had used in order to get where they are now – that is, activist ITT policies – are precisely those that the NDCs say the developing countries should not use because of their negative effects on economic development.
So are the developed countries, and the international development policy establishment (IDPE) that they control, recommending policies that they find beneficial for themselves, rather than those beneficial for the developing countries? Is there any parallel between this and the nineteenth-century British push for free trade against the protectionist policies of the USA and other NDCs which were trying to catch up with it? Is it fair to say that the WTO agreement that puts restrictions on the ability of the developing countries to pursue activist ITT policies is only a modern, multilateral version of the ‘unequal treaties’ that Britain and other NDCs used to impose on semi-independent countries? In other words, are the developed countries ‘kicking away the ladder’ by which they climbed up to the top beyond the reach of the developing countries? The answer to all these questions, unfortunately, is yes.
The only possible way for the developed countries to counter the accusation that they are ‘kicking away the ladder’ would be to argue that the activist ITT policies which they had previously pursued used to be beneficial for economic development but are not so any more, because ‘times have changed’. In other words, it may be argued, the ‘good policies’ of yesterday may not be ‘good policies’ of today.
Apart from the paucity of convincing reasons as to why this may be the case,[5] the poor growth records of the developing countries over the last two decades suggest that this line of defence is simply untenable. During this period, most developing countries have gone through ‘policy reforms’ and implemented ‘good’ – or at least ‘better’ – policies, which were supposed to promote growth. Put simply, the result has been very disappointing.
The plain fact is that the Neo-Liberal ‘policy reforms’ have not been able to deliver their central promise – namely, economic growth. When they were implemented, we were told that, while these ‘reforms’ might increase inequality in the short term and possibly in the long run as well, they would generate faster growth and eventually lift everyone up more effectively than the interventionist policies of the early postwar years had done. The records of the last two decades show that only the negative part of this prediction has been met. Income inequality did increase as predicted, but the acceleration in growth that had been promised never arrived. In fact, growth has markedly decelerated during the last two decades, especially in the developing countries, when compared to the 1960-1980 period when ‘bad’ policies prevailed.
According to the data provided by Weisbrot et al. in the 116 (developed and developing) countries for which they had data, GDP per capita grew at the rate of 3.1 per cent p.a. between 1960 and 1980, while it grew at the rate of only 1.4 per cent p.a. between 1980 and 2000. In only 15 of the 116 countries in the sample – 13 of the 88 developing countries[6] – did the growth rate rise by more than 0.1 percentage points p.a. between these two periods.[7]
More specifically, according to Weisbrot et al., GDP per capita grew at 2.8 per cent p.a. in Latin American countries during the period 1960-1980, whereas it was stagnant between 1980 and 1998, growing at 0.3 per cent p.a. GDP per capita fell in Sub-Saharan Africa by 15 per cent (or grew at the rate of -0.8 per cent p.a.) between 1980 and 1998, whereas it had risen by 36 per cent between the period 1960-1980 (or at the rate of 1.6 per cent p.a.). The records in the former Communist economies (the ‘transition economies’) – except China and Vietnam, which did not follow Neo-Liberal recommendations – are even more dismal. Stiglitz points out that, of the 19 transition economies of Eastern Europe and the former Soviet Union,[8] only Poland’s 1997 GDP exceeded that of 1989, the year when the transition began. Of the remaining 18 countries, GDP per capita in 1997 was less than 40 per cent that of 1989 in four countries (Georgia, Azerbaijan, Moldova and Ukraine). In only five of them was GDP per capita in 1997 more than 80 per cent of the 1989 level (Romania, Uzbekistan, Czech Republic, Hungary and Slovakia).
So we have an apparent ‘paradox’ here – at least if you are a Neo-Liberal economist. All countries, but especially developing countries, grew much faster when they used ‘bad’ policies during the 1960-1980 period than when they used ‘good’ ones during the following two decades. The obvious answer to this paradox is to accept that the supposedly ‘good’ policies are in fact not beneficial for the developing countries, but rather that the ‘bad’ policies are actually likely to do them good if effectively implemented.
Now, the interesting thing is that these ‘bad’ policies are basically those that the NDCs had pursued when they were developing countries themselves. Given this, we can only conclude that, in recommending the allegedly ‘good’ policies, the NDCs are in effect ‘kicking away the ladder’ by which they have climbed to the top.
4.3 Rethinking Institutional Development
The process of institutional development, and the role that it plays in overall economic development, is still a poorly understood subject. While we need further research on the role of institutions in economic development in order to arrive at more definite conclusions – something beyond the scope of this book – the following points emerge from our discussion in Chapter 3.
Most of the institutions that are currently recommended to the developing countries as parts of the ‘good governance’ package were in fact the results, rather than the causes, of economic development of the NDCs. In this sense, it is not clear how many of them are indeed ‘necessary’ for today’s developing countries – are they so necessary that; according to the view of the IDPE, they have to be imposed on these countries through strong bilateral and multilateral external pressures?
5
One plausible argument is provided by O’Rourke 2000, pp. 474-5. He cites some studies by Jeffrey Williamson and his associates which argue that, in the nineteenth century, tariff protection raised investment by reducing the relative price of capital goods, given that capital goods were rarely traded at the time. Then he goes on to argue that in the twentieth century, capital goods are more widely traded, and that there is evidence that protection increases the relative price of capital goods and thus slows down investment. However, he admits that the result for the nineteenth century is very sensitive to the sample and is associated with a completely implausible correlation that investment share is negatively related to growth in an augmented Solow model. The argument, he admits, remains at best inconclusive.
6
Weisbrot et al. 2000 do not define ‘developing countries’ as a category, but I (somewhat arbitrarily) define them as countries with less than $10,000 per capita income in 1999 US dollars. This means that countries like Cyprus, Taiwan, Greece, Portugal and Malta (rankings 24th to 28th) are included in the developed countries category, while countries like Barbados, Korea, Argentina, Seychelles, and Saudi Arabia (rankings 29th to 33rd) are classified as developing countries.
7
The only two developed countries where growth accelerated between the two periods are Luxembourg and Ireland. The 13 developing countries where growth accelerated were Chile, Mauritius, Thailand, Sri Lanka, China, India, Bangladesh, Mauritania, Uganda, Mozambique, Chad, Burkina Faso, and Burundi. However, in the case of Burundi, what happened was a deceleration in income shrinkage rather than any real growth acceleration (25 per cent shrinkage vs. 7 per cent shrinkage). Also, growth acceleration in at least three countries – Uganda, Mozambique, and Chad – can be largely explained by the end to (or at least a significant scaling-down of) a civil war, rather than by policy changes. In this context, there were really only nine developing countries where there was a growth acceleration that can in theory be attributed to a shift to ‘good policies’. Of course, even then, we should not forget that improved performance in the two biggest of these nine economies, that is, China (from 2.7 per cent p.a. to 8.2 per cent p.a.) and India (from 0.7 per cent p.a. to 3.7 per cent p.a.) cannot be attributed to ‘good policies’ as defined by the Washington Consensus.
8
Stiglitz 2001b. In the ascending order in terms of growth rate (or rather the rate of contraction, in all cases but Poland), they are Georgia, Azerbaijan, Moldova, Ukraine, Latvia, Kazakhstan, Russia, Kyrgyzstan, Bulgaria,Lithuania, Belarus, Estonia, Albania, Romania, Uzbekistan, Czech Republic, Hungary, Slovakia, and Poland.