in addressing problems related to particular industries. Second, establishing new institutions can take a long time, as we argued in Chapter 3, and this is therefore likely to limit the ability of countries to respond quickly to new challenges. As a result, a more focused and quick-footed policy intervention may in many cases be preferable to institutional solutions.
However, the fact that direct state intervention, especially in the form of ITT policies, is often necessary for socializing the risks involved in the development of infant industries, does not mean that there is only one way of doing it – that is to say, by means of tariff protection.[3] As my discussion in Chapter 2 shows, there were many different policy tools used for the purpose across different countries, as a result of the differences in their relative technological backwardness, international conditions, human resource availability and so on. Needless to say, even within the same country the focus of promotion can – indeed has to – evolve over time with changing domestic and international conditions. Typically, the successful countries have been those that were able skilfully to adapt their policy focus to changing conditions.
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
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?
Moreover, even when we agree that certain institutions are ‘good’ or even ‘necessary’, we have to be careful in specifying their exact shapes. In Chapter 3, I have shown that for just about every institution, there is a debate on what exact form it should take. What type of bureaucracy is good for development? How strongly should property rights regimes protect existing property rights? How debtor-friendly should a bankruptcy law be? How independent should the central bank be? The questions could go on. Deciding exactly which variety of which
