The Washington folly

Paul Collier's review of my book failed to take into account the disastrous effect on developing countries of following the advice of the IMF and World Bank
June 29, 2007

In the latest issue of Prospect, Paul Collier reviews two books, Lawrence E Harrison's "The Central Liberal Truth: How Politics Can Change A Culture and Save It From Itself" (OUP) and my "How Rich Countries Got Rich and Why Poor Countries Stay Poor" (Constable & Robinson). Both books represent an alternative thinking to that of the Washington institutions, including the World Bank, where Collier was director of the development research group.

The starting point for this debate is the striking failure of the IMF and World Bank to create wealth in many countries. In fact, their advice has led to real wages being halved in a number of countries, from Mongolia to Peru, over the last 20 years. To compensate, the Washington institutions insist on receiving the credit for the successes of China and India. Yet the success of these two countries 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 strategies contradict the key recommendations of the Washington institutions. Yes, these countries had too little competition and they probably protected their economies for too long, but that is the side on which you want to err.

Mainstream analysis often concerns itself with symptoms of economic growth rather than its causes. My approach has been to study the strategies successful nations have employed when making the crucial step from poor to rich, from England under the Tudors in 1485 to Japan in the 20th century and Ireland and Korea in the electronic age. The surprising element of 500 years' history of economic policy is the consistency over time. All nations which have escaped poverty have protected and subsidised an industrial or manufacturing sector in which economies of scale can be accomplished, before successfully opening up for free trade. England protected her manufacturing sector for some 350 years, the US for more than 100, and Korea only for 40, but they all protected an initially "artificial" comparative advantage outside raw material production. With a comparative advantage in activities that delivered increasing returns—manufacturing and advanced services—free trade works to the benefit of both trading partners. Alternatively, nations with a considerable manufacturing sector geared towards the domestic market can follow the example of Canada and Australia, and make a good living exporting from the primary sector (raw materials).

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 three historical periods, economics has degenerated to a profession where "free trade," regardless of context, has been advanced as policy: in France during the 1770s and 1780s; in Europe in the 1840s; and throughout the world in the 1990s. In all three cases, social havoc ensued.

The triumphalism following the 1989 fall of the Berlin wall brought back the simplistic Ricardian view in which the world economy is conceived of as the bartering of labour hours that are void of any qualities. From Latin America to the Arab world to Russia, people are right when they accuse the west of having given them the wrong policy advice.

During periods of ideological transition away from these simplistic theories, people often see the mistakes of the former period clearly. 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." When economists admit—as Collier implicitly does—that some comparative advantages lead nations into specialising in being poor, then we can return to a framework that was once accepted by the members of the UN: 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.