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How Developing Countries Can ‘Beat the Odds’

Rahul A Sirohi (rahul.sirohi84@gmail.com) teaches at the Department of Humanities and Social Sciences, Indian Institute of Technology, Tirupati.

Beating the Odds: Jump-Starting Developing Countries by Justin Yifu Lin and Célestin Monga, Princeton and Oxford: Princeton University Press, 2017;pp viii + 393, $35.

 

Since the early 2000s several attempts have been made by economists to explain the disastrous record of neo-liberal reforms and to chart out future alternatives. Beating the Odds: Jump-Starting Developing Countries by Justin Yifu Lin and Célestin Monga is a welcome addition to this pool of literature. Passionately written and rigorous in its exposition, this book provides an excellent summary of what is wrong with contemporary development literature, even as it skilfully highlights the changes that development thinking has undergone over the years. Though not without its flaws, the sheer empirical evidence that the authors put together and the wonderful insights that they provide through their case studies make this a must-read for students of development economics.

The book consists of nine chapters but thematically speaking one can think of the book as consisting of two broad sections. The initial four chapters provide a critical assessment of “standard” development theories and point to the disastrous policies that they have inspired in the developing world. This pessimism gives way to a brighter message in the three chapters that follow, where the authors lay out an alternative, “neo-structuralist” recipe for developing countries to “beat the odds” that have been stacked up against them for far too long. In doing so, they make a case for a third way in development thinking; one that distances itself both from the market fundamentalism inspired by the Washington Consensus as well as the old-school structuralist analysis.

Against Market Fundamentalism

At the heart of the book are a series of ideas that were developed by economists like Alexander Gerschenkron, but especially Albert Hirschman in the 1950s and 1960s. Unlike many of his contemporaries, Hirschman (1968, 1973) viewed the process of development not as a series of sharp ruptures, but one that involved gradual, incremental changes. On this journey it was all but obvious that poor economies would begin in environments marked by sharp shortages, institutional failures and imbalances of various kinds. But, rather than viewing these hostile conditions as obstacles that were in need to be overcome before countries could embark on their journey of economic development, Hirschman saw in them, sparks that would ignite development. From this perspective it made little sense for students of development to go around searching for magical prerequisites that would make poor countries ripe for development; rather, the trick was to find ways to ignite development given existing resources and existing institutional set-ups.

This incremental view to economic development, argue Lin and Monga, has been completely ignored by the proponents of the Washington Consensus. Instead of heeding the advice of the older generation of development economists, market fundamentalists have based their policies on a “false economics of preconditions,” according to which developing countries must begin by creating an ideal institutional environment before embarking on the quest for economic development (p 18). The problem with this idea, however, is that it fails to understand that the institutional environment which a country finds itself in is endogenous to its state of economic development and that, as a result, artificially implanting institutions that are not in congruence with local realities is only likely to cause severe dislocations and adjustment costs. Lin and Monga use the first four chapters of their book to challenge this neo-liberal common sense by highlighting the possibility that “economic transformation can be engineered even in countries with a suboptimal institutional environment and weak overall physical and human capital” (p 6).

If not the Washington Consensus way, how then is development to be kick-started? To begin with, claim Lin and Monga, policymakers must recognise that industrialisation holds the key to transforming poor countries. The immense technological spillovers that this sector is associated with, its potential to provide employment to millions and its ability to generate backward and forward linkages all suggest that industries must be made the centrepiece of development policy. But, if so, for Lin and Monga, it is very important that countries avoid the older structuralist style of inward-looking industrialisation.

In place of these traditional recipes, the authors argue that developing countries ought to adopt an extroverted, export-oriented strategy of industrialisation. Doing so would obviously require that these countries only encourage those industries which are in line with their respective comparative advantage (as reflected by their existing endowment structure). Only by following this line of specialisation, can domestic firms become competitive world markets and it is only then that a country could truly get on to a path of self-sustaining growth and structural transformation according to the authors. Unlike the market fundamentalists, however, the authors recognise that this process is likely to be associated with all kinds of market failures and thus they stress that the state would have to play a central role if industrialisation is to succeed. They list out several key industrial policies that would need to be implemented to help the private sector achieve these goals. But, what differentiates Lin and Monga’s recipes from the older version of developmentalism is that whereas for the latter the state’s role was to defy comparative advantage, for Lin and Monga what is needed in a globalised world is a state that proactively promotes only those sectors that are in agreement with a country’s comparative advantage.

Some Unanswered Questions

For all the fascinating insights that this book gives into the development process and all the emphasis it places on inductive reasoning, the analysis is actually pretty weak when it comes to deriving lessons from history. To begin with, the authors’ reliance on a comparative advantage framework is deeply problematic in light of the experiences of “late late developers.” South Korea and a number of other “miracle” economies that the 1960s and 1970s produced consciously developed industries that these countries, at their level of development, had no business of encouraging at least according to the comparative advantage logic (Amsden 1992; Chang 2008). And, despite this seeming handicap, the record of industrialisation in these economies was spectacular.

More generally, the post-World War II period saw a number of countries in the global South adopt similar policies. The fact that they all sought to defy their comparative advantage was not because these countries became swayed by misguided theories as the authors would have us believe but it was because they recognised that the global division of labour in which they were caught up was not a reflection of their natural endowments alone, but a reflection of the military and political dominance of the West. For several centuries before that, Western nations adopted highly protectionist policies for their own industries while unleashing their armies on Southern nations to batter down whatever little proto-industrial development that was taking place there (Davis 2002; Patnaik 1999, 2006). Given this history, it only made sense for newly independent countries to try and escape the shackles of comparative advantage imposed on them by the powerful Northern economies. It was this yearning for economic independence that gave birth to inward-looking import substitution industrialisation type strategies across the developing world. This was also the context in which an entire generation of structuralist and dependency scholars openly called into question the benefits of free trade and brought to attention the sharp power asymmetries that marked the global landscape. Unfortunately, the framework adopted by the authors makes them blind to these issues. The grave theoretical lacuna in comparative advantage style of thinking is that it views the world economy as an arena where rational agents transact with each other on an equal footing. But, historical evidence suggests that the world economy is not some harmonious happy family where everyone gains from trade, but an arena divided up into the powerful and the weak and, in such an arena, comparative advantage is not only a reflection of natural endowments, but also an indicator of international power differentials.1 To put it differently, in spite of all its achievements, the book fails to provide a nuanced perspective on globalisation. Global markets, for the authors, are arenas of opportunity and what poor nations need to do is find their niche within this global system and rewards are sure to follow. However, the reality is that such policy prescriptions are far too simplistic given the complex history of developing countries.

Finally, a short comment on the authors’ views on the state deserves mention here. It is refreshing to see that a book written by leading economists has paid sufficient attention to the roles that states play in economic development. The authors note that successful development requires the state to correct market failures and “play a proactive, facilitating role” in the economy (p 136). This role, above all, requires that the state guide domestic capital into areas of comparative advantage, while at the same time easing any and all constraints that could hold back the private sector. This is what the authors summarise in their “growth identification and facilitation framework” or GIFF in chapter six of the book. Now apart from the fact that this entire conceptualisation of development is politically repugnant in that it completely ignores labour other than looking at it as a passive cog in the development process, there is a more functional problem with the authors’ views.2 More specifically, the authors seem to be reducing the state to a neutral and politically dis-embedded actor, which is capable of regulating and directing capital into areas of its choosing. The past experiences of developing countries, however, suggest that the state is not some autonomous actor that can free itself from class constraints. Its
capacity to direct development is ultimately limited by the interests of dominant classes which are not always in line with larger development goals (Chibber 2005). This then means that the state, even when it is informed by correct policies, cannot actually be expected to implement them because of the constraints around it. There may be varying degrees of relative autonomy that the state enjoys from time to time, but to assume that the state has unbounded capacity to direct capital, is pure voluntarism. All this is not to suggest that the authors are wrong in underlining the importance of the state. Rather, what is missing is a serious theoretical reading of the state. If nothing else, the analysis would certainly have been enriched had it taken up a serious conversation with the rich literature that has been emerging on alternative patterns of state intervention and on alternative forms of state embeddedness (Evans 2004, 2012; Isaac and Franke 2002; Azzellini 2016; Harnecker 2015).

Notes

1 It is worth noting here that even David Ricardo—the father of the comparative advantage concept—in his famous Portugal–England example, failed to mention the unequal trade relations that existed between the two nations (Bagchi 2013).

2 This is what Selwyn (2016) refers to as “elite-led development.”

References

Azzellini, D (2016): “Constituent and Constituted Power: Reading Social Transformation in Latin America,” Popular Sovereignty and Constituent Power in Latin America, E Betances and C Figueroa Ibarra (eds), New York: Palgrave Macmillan, pp 15–39.

Amsden, A H (1992): Asia’s Next Giant: South Korea and Late Industrialization, New York: Oxford University Press.

Bagchi, A K (2013): “Contextual Political Economy, Not Whig Economics,” Cambridge Journal of Economics, Vol 38, No 3, pp 545–62.

Chang, H J (2008): Bad Samaritans: The Guilty Secrets of Rich Nations and the Threat to Global Prosperity, London: Random House.

Chibber, V (2005): “Reviving the Developmental State? The Myth of the ‘National Bourgeoisie,’” Socialist Register, Vol 41, pp 44–165.

Davis, Mike (2002): Late Victorian Holocausts: El Nino Famines and the Making of the Third World, London: Verso.

Evans, P (2004): “Development as Institutional Change: The Pitfalls of Monocropping and the Potentials of Deliberation,” Studies in Comparative International Development, Vol 38, No 4, pp 30–52.

Evans, P B (2012): Embedded Autonomy: States and Industrial Transformation, New Jersey: Princeton University Press.

Harnecker, Marta (2015): A World to Build: New Paths toward Twenty-first Century Socialism, New York: New York University Press.

Hirschman, A O (1968): The Strategy of Economic Development, New Haven: Yale University Press.

— (1973): Journeys toward Progress: Studies of Economic Policy-making in Latin America, New York: W W Norton.

Isaac, T T and R W Franke (2002): Local Democracy and Development: The Kerala People’s Campaign for Decentralized Planning, United States: Rowman & Littlefield.

Patnaik, U (1999): “The Cost of Free Trade: The WTO Regime and the Indian Economy,” Social Scientist, Vol 27, Nos 11/12, pp 3–26.

— (2006): “The Free Lunch: Transfers from the Tropical Colonies and Their Role in Capital Formation in Britain during the Industrial Revolution,” Globalization under Hegemony: The Changing World Economy, Jomo K S (ed), New Delhi: Oxford University Press, pp 30–70.

Selwyn, B (2016): “Theory and Practice of Labour-centred Development,” Third World Quarterly, Vol 37, No 6, pp 1,035–52.

Updated On : 30th Oct, 2019

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