Why development economists often give bad advice
And why smart leaders of developing nations ignore them
As I mentioned in a previous article, there are four major schools of thought among Western experts on how poor nations can develop:
Economist school, who advise developing nations to establish good institutions and free markets
Foreign aid school, who urge wealthy nations to spend more on foreign aid to assist developing nations to get out of “poverty traps”.
Right school, who believes that the poor in all nations need the same political freedoms that wealthy nations enjoy. Once the people have those rights, their nations can grow their way out of their poverty.
Sustainable development school that focuses heavily on renewable energy and less resource-intensive agriculture, transportation, and manufacturing.
In this article, I will compare the advice given by the Economist school to what we have learned from how wealthy nations achieved their wealth in the past.
Most of the following is an excerpt from my second book Promoting Progress: A Radical New Agenda to Create Abundance for All. You can order my e-books at a discounted price at my website, or you can purchase full-price ebooks, paperback, or hardcovers on Amazon.
Other books in my “From Poverty to Progress” book series:
You can read other articles on developing nations, including:
Why developing nations are still poor:
What wealthy nations can do to help developing nations:
What developing nations can do to help themselves:
How developing nations can create competitive export industries
Why Developing nations need to create thriving export industries
Economic School
Economists who believe in free-market economies dominate this school of thought. These economists believe that good institutions build the foundations that enable self-interested individuals to solve problems that benefit all of society.
They believe that, if developing nations implement free trade, reduce corruption, establish the rule of law and property rights, eliminate counter-productive government interventions in the economy, and build legal and law enforcement institutions to enforce those principles, free markets will naturally emerge. Those free markets will then usher their nations into prosperity. This school of thought is sometimes called the “Washington Consensus.”
Why Economists Are Wrong
The economists are correct in that lowering corruption, establishing the rule of law, free trade, and property rights, eliminating counter-productive government interventions in the economy, and building legal and law enforcement institutions to enforce those principles are all good things. But I disagree that these are essential factors in triggering long-term economic growth. I see all those factors as many of the benefits of what takes place after a nation initiates progress.
To the best of my knowledge, no nation has established all of the supposed keys proposed by economists before triggering economic growth. Every previous nation that experienced long-term economic growth lacked many or all of these factors before the growth period started.
I would suggest that economists are experts at keeping economic growth going, but they do not have a useful model for getting it started in the first place. This “problem of origins” and confusing cause and effect are endemic to the study of progress.
In response, many economic historians who focus on the origins of the Industrial Revolution and who believe in the important role of institutions point to Britain and the United States as models. They claim that those two nations are examples that illustrate their point.
Their argument implies that they believe that Britain and the United States effectively implemented what Western economists advise developing nations to implement today, and the result was the Industrial Revolution. While there is some truth to these claims, this school of thought seriously misrepresents the reality of Britain and the United States in the 19th Century.
This is not how rich nations actually got rich
Both Britain and the United States in the 19th Century had serious problems with corruption, counter-productive economic policies, tariffs, and legal systems that worked to the benefit of the rich and powerful. Britain and the United States also often went to war to promote trade. Britain built an entire empire. Both nations also had a serious problem of traditional Agrarian elites biasing economic policy to support their self-interest. I will write more on many of these points in future articles, but here is just one example of the endemic problem of ballot fraud in American history.
It was only well into the 20th Century that one can find a model of what modern economists would consider “good government” in both Britain and the United States. So the supposed causes came long after decades or even centuries of economic growth. And later in the 20th Century, both nations built expansive welfare states that the school believes undermine, or at least do not contribute to, economic growth.
So there is no period in either British or American history that this economic school can use as a model. Moreover, most of the policies that this school advocates came after both nations industrialized.
And Britain and the United States are the best cases for these theories. All other nations’ economic histories depart widely from the predictions of this economic school of thought.
This is putting theory before what actually happened
There is an implicit assumption that, if developing nations overhaul their institutions and policies to match those of 20th-century Britain and the United States while not building an expansive welfare state as those two nations did, then developing nations can transition to economic growth without doing anything else. Given that the school cannot point to any nation that fits the pure model, it is hard to get away from the fact that economists seem to be giving advice based on economic theory, not what has actually worked in the past.
As I mentioned in the first book in this series, From Poverty to Progress, Britain and the United States were unusual because they were Commercial Societies long before they industrialized. This was also true of Northern Italy, Belgium, and the Netherlands. While they were Commercial societies and had not yet industrialized, they all made some progress in building what we now call “good government,” but they were far from what experts recommend developing nations should do today.
If the institutions and policies of Britain and the United States were not good enough to fit the model and it took centuries of evolution as Commercial societies to get where they did, what are open-minded reformers in developing nations supposed to do? It is just not realistic to expect developing nations to overhaul all their political, legal, and economic institutions and wait for decades or centuries for economic benefits.
Not a successful track record
And many of the nations that have tried to follow the recommendations of Western economists, particularly in Latin America, have not had impressive results. Given that some of the counter-productive government interventions that the school wants to cut benefit important political constituencies and poor people, it seems like political suicide to follow this advice in the face of evidence that it often (and perhaps always) does not work.
I think that most of the advice given by institutional economists is very helpful for a nation that has already experienced significant periods of economic growth and wants to use some of the political capital that it gains from that growth to implement a reform agenda. But that is very different from what the economists say they propose. The economic school wants to reform institutions first. In politics, the sequencing of policy actions is critical.
What would you do?
But even if the economics school is correct, it is not clear what a dedicated reformer should do. The proposed institutional reform agenda is actually a very long and unprioritized list. Reforming even one institution is very difficult and time-consuming. It is also liable to create serious political enemies within those institutions.
Imagine yourself as a dedicated reformer elected as President of a very poor nation. You have limited political capital, and if you do not show results fast, you might be overthrown by a revolution or coup.
Which reform do you implement first?
How exactly do you reform even one institution that is functioning poorly?
What is the exact sequence of reforms that work best?
How soon will they show results?
What reforms have been implemented by developing nations that are best practices to follow?
It is easy to see why developing nations are increasingly skeptical of advice from this school. Again, I am not arguing that the reform proposals are bad, only that they are unlikely to lead to sustained economic growth. It is only after that primary has been achieved that the Economist school gives some useful advice for how to keep it going.
And this school is the dominant school of development advice in the West. The other schools offer even worse advice.
Most of the above is an excerpt from my second book Promoting Progress: A Radical New Agenda to Create Abundance for All. You can order my e-books at a discounted price at my website, or you can purchase full-price ebooks, paperback, or hardcovers on Amazon.
Other books in my “From Poverty to Progress” book series:
You can read other articles on developing nations, including:
Why developing nations are still poor:
What wealthy nations can do to help developing nations:
What developing nations can do to help themselves:
The commercial societies of Northern Europe which you champion did not excel via their RESTRICTIONS and INTERFERENCES with trade and property rights, nor did they stand out for their capricious rules, top down master planning and privilege. Certainly they weren’t what a modern day liberal would consider an icon, but they were better at property rights, free markets, limited interference and open competition than the alternatives of that time. Commercial societies were simply better at these than the vast majority of societies in history.
You then go on to state that these are all fine and good ideas, just that they are not the initial key steps, and/or that they might be good but need to be placed in the proper order (or something). But since the commercial societies did indeed stand out on these dimensions, then your argument seems weak.
To the extent that they are good ideas and don’t interfere with economic prosperity, and almost certainly help it, then the economic school stressing proper institutions does seem to be barking up the right tree.
And to the extent that these are indeed later/subsequent institutional fixes, then I still don’t get your argument against these. Places like Mexico, Costa Rica, Vietnam, India and Greece have living standards way above what the US and Britain had in the 19thC. If getting these, as you argue, was a later effect, then these are stilled called for, even using your logic.
In summary,
1) These are good ideas
2) They are good regardless of timing
3) They are, if anything, overdue in the developing world
4) They will help promote prosperity and reduce exploitation
Now, I would certainly agree that these institutions are not adequate for prosperity. Places like China even shows that they may not be necessary. But they are essential recommendations for liberal progress.
Developing countries, by definition, are poor. They also tend to have difficulty levying taxes. The simplest kind of tax for these countries to levy are import tariffs, which inhibit, not promote, economic development.
As a consequence, political leadership and government services tend to be underpaid. Underpaid officials, from teachers to police officers, incentivizes kickbacks and a shadow economy, rending laws moot.
It’s a difficult cycle to break out of. It can often be a chicken and egg problem.