ECONOMIC DEVELOPMENT: by Colin TeeseNews Weekly
How to help countries to prosper
, July 30, 2005
To tackle world poverty, we should not restrict ourselves to neo-classical (economic rationalist) "one size fits all" economic theory, but should study closely how various countries have been developed successfully since the end of World War II, argues Colin Teese, former deputy secretary of the Department of Trade.World poverty has been in the news again, this time in the context of a meeting of the world's eight richest countries - the G8. These eight countries are supposed to have qualities besides wealth - notably democracy. Which makes it hard to explain why undemocratic Russia is a member.
Australia - both rich and democratic - is not; though, from time to time, certain prime ministers have pushed for our inclusion.
As usual, world poverty was on the agenda this year. Once again, the US reminded the developed world of its obligation to do something about the one billion, born into poor countries and destined never to move beyond poverty.
Even before the G8 met, cynics were predicting that the meeting would deliver no concrete result.Not easy
They were right; but, then again, fixing world poverty isn't easy. And the fact that, these days, politics, and economic ideology muddy the waters, doesn't help. Indeed, ideology and political pressures, separately or in concert, seem to have done more to create dissention than to help poor countries.
There are two main schools of thought vying for control of the issue:
One school, idealistically motivated, believes that the best way to help is through untied capital transfers from rich countries. Another, largely guided by the US and some others, seems to believe that the answer lies in pushing the underdeveloped world into wholeheartedly embracing neo-classical economic principles, or what we call economic rationalism.
There is no simple "one size fits all" solution. What is needed is what neither side has done, and that is to examine how various countries have been developed since the end of World War II.
As it happens, they turn out to be a mixed bunch. Germany, Japan, India, Taiwan, South Korea, the various South East Asian countries, Russia and China seem the obvious ones to start with. Latin American countries should fit in somewhere, but their circumstances are so much more complicated that space makes it impossible to give them more than passing attention.
The first thing to be said is that there is very little similarity in the manner in which these countries' developed. Germany and Japan had a better start. Both were advanced economies devastated by the consequences of unsuccessful military adventures. Each was started along the development path by former enemies for reasons less concerned with altruism than the geo-politics of the Cold War. Neither was an example of economic construction; rather they represented successful economic (and social) reconstructions. Each was re-developed by significantly different methods.
Germany's economy was helped by massive capital transfers from the United States government (through the Marshall Plan). Given the times, whichever way the US looked at it, the plan made sense. A new stronger Germany, firmly in the Western camp, was a crucially important part of the strategy to contain the Soviet Empire.
As well, initially, US exporters would benefit as suppliers of capital equipment to German industries. Marshall Plan funds were not, strictly speaking tied to specific projects, though they were closely monitored, to ensure that the money was appropriately spent. An agency, the Organisation for European Economic Cooperation (OEEC) was set up to oversee Marshall Plan spending. Ultimately, this agency switched roles and became, and remains, the OECD.
Although spending was monitored, there was no attempt made by the US to control Germany's economic philosophy so long as the country followed a democratic path. And, as German output was regenerated and expanded, the US market was opened to provide a destination for German exports. With this advantage, in a very short time, the new Germany became a major economic power.
In addition, its economic prosperity became a clear demonstration of how the application of the German brand of capitalism, inside the Western system, could generate and distribute wealth and prosperity. It became an example to the Soviet-occupied populations of Eastern Europe, and helped make them more difficult to govern.
Japan was to benefit from no Marshall Plan. Essentially, the redevelopment of Japan's economy was financed from within. But it was helped, and, indeed, its economic re-birth could not have been possible, without an especially privileged access to the US markets for its exports. It too, like Germany, was given these benefits in order to keep it firmly inside the Western camp. And, again like Germany, Japan was left free to develop its own economic model so long as it was broadly capitalist and accompanied by political democracy.
Taiwan developed differently from these models. It was a political construct resulting from the rise to full power of Chinese communism. For a time it was the means the US used to ensure mainland China did not take its place on the UN Security Council, so it too, was an instrument in Cold War politics.
Taiwan was developed with US money, mostly in the form of foreign direct private investment. Taiwan, too, was allowed to develop in accordance with its own political system, gradually developing onto a democracy and with an ever-increasing independent and prosperous people.
Until recently it had been understood that the US stood ready to protect it from aggressive incursions from China. That is less certain today. Taiwan, now flourishing, is yet another example of a nation built on the foundation of privileged access to the US market.Industrial development
South Korea was different again: its security against any Chinese or Soviet-backed invasion from the communist north was guaranteed by the US. Its economic development was assisted with foreign direct private investment, some from the US but much more from Japan, and all invested in industrial development. Most of the companies involved were substantially Korean-owned but with significant US and Japanese partnerships.
India and China are stand-alones. India followed a socialist path of development until recently. Curiously, it was quite successful in achieving respectable growth rates, but population growth tended to negate its output gains. By choice, Indian growth was mostly funded internally, from savings - at least until recently. The question arises whether closer involvement with the capitalist West much earlier, would have allowed India to grow more rapidly.
China is a special case. Chinese officials never cease telling us that China observed the Soviet collapse and was determined to avoid repeating it. Somehow, it has managed to accommodate communism to capitalism - at least to the satisfaction of the United States - and, at the same time, generate and maintain phenomenal growth rates, based upon exports, not merely to the US, but to the rest of the rich developed world.
China is by far the best success story of the developing world. It is no democracy, and apparently is in no hurry to become one. Yet, coming from a low base, it is already one of the world's powerful economies.
Finally, there is Russia - no democracy and no success story either.
The timing of the implosion of the Soviet empire could not have been worse. It meant the country was ripe for an ideologically-based economic experiment of the worst possible kind.
Under US pressure, and virtually overnight, Russia was transformed into a full-blown market economy along the lines of IMF economic fundamentalism, with disastrous results.
The Russian economy was decimated. Employment collapsed, living standards halved, and a speculative epidemic, controlled by gangsters, took hold of the economy. Russia's productive capacity was the major casualty. More recently, there has been some rejection of the IMF-type economic prescriptions, but full recovery will be a long and painful process.
Of all the post-war development experiments, Russia has been the most clear-cut and disastrous failure. And yet the IMF, and those who support its economic fundamentalism, continue to urge on the least developed world as a solution to their problems of poverty, those same policies which have failed Russia.
The same IMF recipes have failed with almost equally bad outcomes in many Latin America countries, and are being abandoned there.
Perhaps in desperation, and as a reaction against the failed Russian experiment, other straws are being grasped.
Our Prime Minister has been among those voices asserting that huge gains can flow to poverty-stricken Africa if agricultural protection in rich countries is wound back. It is a fond hope, if only because the most of that relates to temperate-zone agricultural produce, which Africa does not produce.
And, even if it were able to produce temperate-zone products and could export enough of them, would this be enough to lift it out of poverty?
So far there is no evidence of any country lifting itself out of poverty on the back of agricultural exports. Since the Industrial Revolution, prosperity has always followed industrial development, based on protection at home and the chance to export to the markets of others.
Is Africa - no matter what kind of assistance is on offer, and in what measure, including market access for its products - in any position to capitalise on such opportunities? Does it have the essential infrastructure backup in transport, education, health and machinery of government - to name but a few - to match what we have seen in Asia and are seeing in Latin America? And without those underpinnings, can it hope to develop industries of the kind Korea, or the South East Asian economies have been able to develop?Pathway out of poverty
All the evidence suggests otherwise. And if that is so, then, at least for the time being, Africa's pathway out of poverty cannot be industrial development.
If we want to deal with poverty in that region, we will, in the short term, have to find other ways of doing it. Most likely, that will entail regular handouts of very large sums merely to keep people from starving, while, at the same time, providing even larger sums to help build the necessary infrastructure to make industrial development a possibility.
It won't be easy finding the money; and making sure it is wisely spent will be even more difficult.
Perhaps, it might not be a bad idea to follow the idea of the Marshall Plan and set up an Organisation of African Economic Cooperation - OEAC. No doubt African countries will not be easily persuaded to accept that kind of discipline; but if they don't, then the present roadblock to dealing with their poverty might well remain firmly in place.
- Colin Teese is former deputy secretary of the Department of Trade.