In the latest issue of Prospect magazine, Paul Collier reviews two books, Lawrence Harrison’s The Central Liberal Truth: How Politics Can Change A Culture and Save it from Itself and my How Rich Countries Got Rich and Why Poor Countries Stay Poor. Both books represent an alternative thinking to that of the Washington institutions, including the World Bank, where Collier was formerly director of the development research group.
The starting point for this debate is the striking failure of the Washington institutions to create wealth in many countries. To compensate for that failure, the Washington institutions insist on receiving the credit for the successes of China and India. In his article, Paul Collier uses the example of India’s economic success following liberalisation to dismiss the argument for a degree of protectionism in domestic markets. Yet the success of India and China is based on a) protecting their industrial structure for more than 50 years, and b) opening up their economies gradually, not with shock therapy. These two strategies starkly contradict the key recommendations of the Washington institutions.
Yes, India and China had too little competition and they probably protected their economies for too long, but you want to make sure that is the side on which you err. Because 500 years’ history of economic policy show that all nations which have escaped poverty have been through a mandatory passage point of protecting and subsidising an industrial or manufacturing sector in which economies of scale can be accomplished, before successfully opening up for free trade.