Tuesday, November 15, 2005

Neoliberalism and Development

This is Brad DeLong on Easterly's book, The Elusive Quest for Growth:

Today the industrialized world as a whole is embarked--half-heartedly, I admit--on yet another crusade to try to make the poorer parts of the world rich. The ideology behind this crusade--an ideology that I believe in--is called "neoliberalism." It has two guiding principles. The first is that close economic contact between the industrial core and the developing periphery is the best way to accelerate the transfer of technology which is the sine qua non for making poor economies rich (hence all barriers to international trade should be eliminated as fast as possible). The second is that governments in general lack the capacity to run large industrial and commercial enterprises (hence save for core missions of income distribution, public-good infrastructure, administration of justice, and a few others, governments should shrink and privatize).

However, this neoliberal crusade is not the first such crusade for economic development. Since World War II there have been at least six such crusades: the "building socialism" crusade, the "financing gap" crusade, the "import substitution" crusade, the "aid for education" crusade, the "oil money recycling" crusade, and the "population boom" crusade. All of them failed to spark rapid economic development. Does what went wrong then have any lessons to tell us about the future of the crusade we are undertaking now? Yes--and now is a good time to take a look back at the history of crusades-for-development since World War II, for World Bank economist Bill Easterly has just written The Elusive Quest for Growth (published by MIT Press), his own take on the largely dismal history of government-led programs to spark development.


In Easterly's view, there are a few big lessons from the history: "Prosperity happens when all the players in the development game have the right incentives. It happens when government incentives induce technological adaptation, high-quality investment in machines, and high-quality schooling. It happens when donors face incentives that induce them to give aid to countries with good policies where aid will have high payoffs, not to countries with poor policies where aid is wasted. It happens when the poor get good opportunities and incentives... It happens when politics is not polarized between antagonistic interest groups, but there is a common consensus to invest in the future. Broad and deep development happens when a government that is held accountable for its actions energetically takes up the task of investing in collective goods like health, education, and the rule of law..."

It is clear that the neoliberal policy prescriptions--try to make government honest and smaller (so it doesn't have its fingers in as many economic decisions), try to keep the macroeconomy stable, and boost world trade and thus cross-border economic links as much as possible--affect only a small proportion of these requirements for successful economic development. Neoliberal policy prescriptions have little ability to create governments that energetically invest in collective goods, a political system that enforces accountability, a national consensus for growth, and a commitment by donors to reward success only.

Thus there is a sense in which neoliberalism as we know it is a counsel of despair. Most of what is needed is beyond its reach. The hope is that privatization and world economic integration will in the long run help create the rest of the preconditions for successful development. But we are playing this card not because we think it is a winner, but because it is the last one in our hand.

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