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.
I don’t blame trade liberalisation for poverty as Collier states. I blame premature trade liberalisation on the one hand (the right) and I blame protection without competition on the other hand (the left). Squeezed between the free marketeers and the planning paradigm, the historically successful European and North American blend of protection and competition was often unlearned during the 20th century.
Collier measures success as increased trade. I measure success as an increase in real wages. Collier fails to address the problem I point to, that his success criteria often conflict with mine. My book shows how increased trade often leads to lower real wages if trade is opened too early and too abruptly.
In his 1848 Principles of Political Economy, John Stuart Mill observes: “It often happens that the universal belief of one age of mankind… becomes to a subsequent age so palpable an absurdity, that the only difficulty then is to imagine how such a thing can ever have appeared credible. It looks like one of the crude fantasies of childhood.” When economists admit that some comparative advantages lead nations into specialising in being poor, as Collier implicitly does in his review, then we can return to a framework that was once accepted by the members of the United Nations: the 1948 Havana Charter which counted full employment, economic and social progress and development among its objectives. Let’s try to agree on what we are in favour of, not haggle to save face over past mistakes. Read an extended version of this reply here.
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