BOOK REVIEW: Dr Dan McLaughlin reviews Bad Samaritans: Rich nations, poor policies and the threat to the Developing WorldBy Ha-Joon ChangRandom House Business Books. £18.99 (€28)
The past 15 years has seen unprecedented progress on the reduction of global poverty: one-third of people in the developing world lived on less than a dollar a day in 1990, but by 2004, this had fallen to under one-fifth, with the UN projecting a decline to 16 per cent over the next 10 years. Yet the part played in this improvement by the rich countries of the western world is more often than not criticised rather than praised, particularly agencies such as the IMF and the World Bank, the conduits through which some funds are transferred from the developed to the developing world.
This criticism can come from the right, with some, mainly in the US, accusing these organisations of wasting taxpayers' money, but more often than not it comes from the left. Former insiders have also joined in this chorus of complaint, notably Joseph Stiglitz, a Nobel Prize winner and former chief economist of the World Bank, who claimed that the policies imposed by the IMF to cope with financial crisis in developing countries made the situation worse rather than better, and that the standard economic packages advocated by Washington-based institutions like the IMF and the World Bank (often called the "Washington consensus") need reform.
This book ploughs a similar furrow (indeed, it is warmly praised by Stiglitz as well as carrying a recommendation by Bob Geldof), although the author prefers the term "unholy trinity" to describe these international economic agencies and adds the World Trade Organisation (WTO) to the mix. This alliance, funded and largely controlled by rich countries, induces developing countries to adopt "neo-liberal" economic policies, including a belief in the supremacy of free markets and free trade, policies that the author believes hurt developing countries and hamper development rather than nurture it.
The rich countries are therefore "bad Samaritans", to extend the religious metaphor, who take advantage of others who are in trouble to capture a larger share of the latter's markets and to pre-empt the emergence of possible competitors. Although some may be offering these policies in the direct if mistaken belief that they will help poorer countries become richer.
To support his view, Chang examines the development of his native South Korea, which in 1990 had an income per head of $82, then less than one-half of Ghana's, but has now risen to over $14,000 (€10,000) on a par with Portugal. This impressive growth performance owes little to neo-liberal economics, in Chang's view, as the government provided state support for selected industries and directly controlled others, imposed tariffs to protect domestic firms, maintained foreign exchange controls and was very selective in the type of foreign direct investment (FDI) allowed in to South Korea.
The fact that South Korea succeeded with a mixture of market incentives and state direction does not prove that the adoption of more overt free market policies would have yielded inferior results of course, and the author goes on to present a potted history of the development of countries such as the UK and the US, arguing that they used a panoply of nationalistic policies to promote indigenous growth and only then advocated freer trade for the rest of the world. He therefore believes that the rich countries have "gradually, if often sub-consciously, rewritten their own histories to make them more consistent with how they see themselves today rather than as they really were".
The other chapters in the book use a mixture of economic theory, history and contemporary events to question much of what he deems to be the conventional wisdom about development. He argues that free trade, for example, or at least its premature adoption by developing countries, can decimate swathes of indigenous industry, and that it may be appropriate to protect local industries for a time. This is hardly a new argument, it has to be said, as any textbook on economics quotes the "infant industry" case for protectionism.
Chang also questions the benefit of unfettered FDI inflows, arguing that in certain cases, it may be better for a country to restrict such investment to nurture indigenous firms. Similarly, he argues that privatisation of public-sector entities is not a panacea, that the rules protecting the West's intellectual property rights may be too onerous, that too much weight can be given to the need for developing countries to keep inflation low and to be fiscally prudent, and that corruption may not be as significant an impediment to development as portrayed by critics in the West.
Overall, the book makes the case against a "one size fits all" model of development, but one wonders if the commitment to the alternative - a checklist of policies that have to be adopted in all cases - is quite as dominant as portrayed by the author. The IMF and the World Bank would argue that they have learned from past mistakes and do take account of local conditions, cultures and beliefs. Too often too, governments use these agencies as convenient whipping boys, blaming them for imposing policies which they would have had to impose anyway - no country ever got rich printing money.
Dr Dan McLaughlin is Bank of Ireland's group chief economist
