Reclaiming Development: An Alternative Economic Policy Manual (Global Issues) ebook

Ha-Joon Chang, now Reader in the Political Economy of Development at Cambridge University, and Ilene Grabel, of the University of Denver, have produced a brilliant, superbly-organised book. They aim to reclaim development from the neoliberal orthodoxy that has failed developing countries and yet has dominated policy and debate for the last 25 years.

Part 1 considers and rejects six key myths about development. Part 2 provides development policy options that are better than their neoliberal counterparts.

Chapter 1 refutes the myth that developed countries succeeded because they embraced the free market. Post-1945 Japan and France, for example, subordinated their financial sectors to industry's needs and grew far more rapidly than Britain and the USA, which let finance dominate industry.

Chapter 2 refutes the myth that neoliberalism works. In 1960-80, with active, interventionist policies, GDP per head grew by 75% in Latin America and the Caribbean, and by 34% in sub-Saharan Africa. In 1980-2000, under neoliberal policies, it grew by just 7% in the former and fell by 15% in the latter. 1980-2000's best-performing countries were India and China - hardly neoliberal models!

Chapter 3 refutes the myth that neoliberal globalisation is unstoppable. China, India, Sweden, Austria, Netherlands, France and Germany all have very different policies and institutions from Britain and the USA.

Chapter 4 refutes the myth that the USA is the model for all. Despite its 1990s `boom', 10% of US families were poor in 2000, as in 1989. It grew no faster between 1980 and 2000 than between 1960 and 1979.

Chapter 5 refutes the myth that Anglo-American history is the norm. The British and US experiences were abnormal - slavery and empire, for instance. During their own development, both used East Asian-style trade and industry policies.

Chapter 6 refutes the myth that developing countries need the international financial institutions and independent central banks. Neoliberals denigrate the public sector as self-interested, but it seems this doesn't apply to the staff of the World Bank, the IMF, the WTO and the central banks. They all represent global finance, not national democracy.

In Part 2, each chapter presents the neoliberal case, counter-arguments, and a range of alternative policies.

Chapter 7 examines trade and industry policies. The neoliberals promote free trade as the supreme good. But countries like India and China have grown using infant industry protection and interventionist trading policies. Industry gains with subsidies, licences, managed credit and investment, R&D and training, all tied to meeting performance guidelines. Firm capital controls and financial regulation promote long-term, stable investment.

Chapter 8 looks at privatisation and intellectual property rights (IPRs). Austria, France, Finland, Norway and Singapore all have dynamic state sectors. IPRs are neither necessary nor sufficient to create new knowledge. They reduce technology transfer and innovation, and increase companies' powers at the public's expense. Education and government support for R&D are more important to innovation than protection of IPRs.

Chapter 9 studies international capital flows. Since 1980, the liberalised financial environment has encouraged portfolio investment in developing countries (buying stocks, bonds, derivatives, etc.) - zero in 1980, $9.4 billion in 2002, and foreign direct investment (buying controlling interests in foreign firms) - $4.4 billion in 1980, $143 billion in 2002. This financial liberalisation increased the opportunities and incentives to speculate. Bank loans financed speculative real estate development and stock trading, and mergers and privatisations that did not make economic sense.

Policy can discourage, not ban, the use of foreign loans as a source of finance and ensure their use for productive developments. Restrictions on capital flight, on currency speculation and on access to foreign currency and loans protected India and China during the Asian financial crisis.

Chapter 10 examines domestic financial regulation. Financial liberalisation does not bring investment for development, but speculation, currency and banking crises, and recessions. Financial systems should provide long-term finance for investment in infrastructure and infant industries. But large banks are less willing than small banks to lend to small businesses.

Chapter 11 looks at macroeconomic policy. Restricting currency convertibility reduces the risks of currency depreciation and collapse, of capital flight and financial instability. Post-1945, European countries' managed exchange rates and capital controls supported growth and kept currencies stable.

In the neoliberal view, inflation is the only danger, and government spending (especially when deficit-financed) is always inflationary. Yet a World Bank study of 127 countries from 1960 to 1992 found that inflation rates of up to 20% did no harm to economic growth. Public spending on transport, education and health care reduces poverty and promotes economic growth.

The evidence is that independent central banks like the European Central Bank and the Bank of England bring not economic growth or more jobs or financial stability. Instead, they bring excess credit growth and inflated stock and real estate prices.

These kinds of policies for equitable and stable development, growth and jobs, are good not just for developing countries but also for any country that wants to survive the present crisis.

The author has put out another book demonstrating the uesfulness of an industrial structure policy ,in a number of areas relating to economic development, based on a historical comparison -contrast of the actual policies that lead to successful economic development and substantial improvements in the quality of life and the standard of living in those countries that have incorporated an important role for government spending on necessary and needed public infrastructure.The government has a very important role to play whereever there is market failure,externalities,spillover effects,or the need to provide education and health care.Government provision of needed public goods can't be privatized.Privatization and deregulation, in countries where there are no developed social norms of conduct or functioning institutions except the government, simply leads to a drastic fall in the provision of the good.This has happened all too often in countries in Africa,South America,and Asian that have sought the economic aid, help and direction of the World Bank or the International Monetary Fund.

I would suggest that the author buy a copy of the Wealth of Nations,written by Adam Smith in 1776 and read it carefully.It is obvious that the author is simply ignorant of the fact that Smith's policies would support and buttress many of the arguments put forth by the author.For instance,Smith was a supporter of revenue tariffs,retaliatory tariffs,interest rate control ,credit restriction ,public goods,etc.