The Path for the Poor

Book Review: ‘How Rich Countries Got Rich and Why Poor Countries Stay Poor’
Erik S. Reinert

People, especially from developing countries, will be interesting to read this book by simply seeing its title. The title of this book, How Rich Countries Got Rich and Why Poor Countries Stay Poor, is presenting an imagination of several answers which relate to the problems of poverty they face every day in their countries. Indeed, not only the title which is interesting, the whole book is built by a clear logic and simple-popular language while at the same time rooted deeply in the author discipline of economics.

Erik S. Reinert, the author, deliberately dedicated his book for three different audiences: his fellow economists, lay people who are interested in development issues and, importantly, people who are struggling to fight poverty, hunger and backward in poor countries. For economists the main message of the book is warning of the failure of the current established economic theory that based on Ricardian perspective to create economic prosperity in developing countries. For non-economists reader, the book gives a clear explanation why rich countries got rich was because for decades economic policy makers developed their economic growth through protections, interventions and subsidies.  They did not do what their economics theorists said. Last but not least, for people who are struggling to address poverty, this book gives a map of mechanisms how to create wealth and provides a framework to deal with poverty and development issues in general. Erik says to his reader who live in poor countries that if the poor countries want to know how European and American prosperity was created they have to know what were the policies that have created the wealth instead of following the advices of European countries and America give to them today. ‘Do what they did; do not do what they said’.

Erik eloquently explains that the established neo-liberal economic theory have dominated economic policies in developing countries through a persuasive enforcement of the Washington institutions. This policy has put developing countries on the wrong path to achieve growth and wealth. Thus, the author is standing for refuting this mainstream economic theory by giving an alternative that he calls as Other Canon, a much older economic tradition that seen as a better path to achieve prosperity. This messianic mission is described as retracing the steps of 17th century French Philosopher Voltaire who had shaken European intellectuals through his book Candid.  Voltaire attacked a perfect universal and optimistic theory that claimed as solution to achieve ‘the best of all possible worlds’ as only exist in book not in realities.  Like Voltaire, Erik urges that we must move away from a perfect economic theory that has created a ‘brutal economic reality’ and aware that economic growth is an outcome of conscious-imperfect policy.

Using a historical examination Erik begins his book by showing his position within intellectual economic traditions. He emphasizes that his book is in the same line with the Schumpeterian economic tradition which believes that growth could be achieved gradually by conscious policy of government through innovations and industrializations. This economics approach is much forgotten since the current economic theory is dominated by David Ricardo trade theory that spreads worldwide through the IMF and the World Bank. Erik sees that while the latter economic perspective is built upon an abstract a priori assumption, the former is a type of economic theory which based on empirical unique experiences; the latter is commerce-based economic theory while the former is production-based economic theory; the latter emphasizes on trade liberalization, deregulation and privatization while the former sees that manufacturing, protections and subsidies are needed for infant industries and that free trade will beneficial only if it happen among countries that have reached the same stage of development; last but not least, the latter promotes ‘comparative advantage’ while the former emphasize on the important of emulation.
If someone asks me to describe what the main idea of the book is, I will answer, no doubt, that is ‘emulation’. Emulation is understood as a desire to equal or excel. This book repeatedly states the important of emulation or innovation as ‘the hearth of successful development’ for every country. It was the secret recipe of the strategic policy of King Henry VII of England to build wool industry instead of became a supplier of raw materials for textile industries in the Continent. To protect this infant manufacture from collapse, Henry VII brought about ‘heavy-handed economic interventions’ such as monopoly of raw materials, tax exemption for manufacturers for a period and high tariff for import commodities. England opened his market and shipped its goods overseas only after solidly industrialized. Since then, this type of policy has been ‘mandatory ingredients’ in every country that have achieved prosperity: from America and Europe in 17th to Korea and Japan in 21th century. In addition, under the umbrella of emulation spirit, there is a key principle that it is better to have inefficient industries than not to have one at all.     

The failure of globalization and free trade to create wealth for poor countries as preached by the IMF and the World Bank is because those institutions forget this history. They cut historical process and push every country, poor and rich, strong and weak, old and new, to plug into the same cage: free trade. This approach, which inherited from David Ricardo and Adam Smith, tends to equate countries with advance industries like the US and Europe with countries which only have nothing except rattan and logs to sell.   Poor countries should stay as raw material supplier because that is the comparative advantage which is not possessed by industrialized countries.  By doing this, natural mechanism of factor-price equalization of the market will brings poor countries into prosperity. Contrary to this rhetoric promise, now we see that poor countries stay poor, even poorer, while rich countries become richer than before. Free trade and globalization are no more than ‘primitivization’ and neo-colonialism.

Is it possible for poor countries to implement what Erik says in his book? Emulation and innovation will not arise from nothing. Poor countries might too poor to begin innovations and start manufacturing. On the other hand, developed and rich countries might have no willing to help poor countries by transferring their technology to start industrialization. We hard to imagine that America will do the same thing to Africa, Latin America or Asia as they did to the Western Europe in 1940s through the Marshall Plan. The Marshall Plan is recognized as the most successful program to lift out poverty and also the most successful development project in human history. Western Europe was helped not because America was very kind and hero, but because America knew that if the Europe was not helped, the crisis would, sooner or later, reach his land. The US had to save his economy by saving his fellow Europe. In this case, classical lesson from Adam Smith is useful to understand why America or Europe is not truly willing to help developing countries. Thus, at the end poor countries must understand that they can become richer only by themselves.    

Erik’s book, as he said, is only the other picture of the same reality. It is useful to guide poor countries to know that wealth is not achieved through a perfect competition of free trade as preached by the IMF and World Bank but through evolutionary heavy-handed policy of state. ‘Capitalism is about getting away from perfect competition’. To do that, poor countries will so hard to step over the path. Erik, unfortunately, does not describe the dark side of emulation which also will be an important lesson for poor countries. Erik also does not touch political effect that will rise if poor countries implement economic intervention policy. We worry that such policy is going to be a justification for autocratic regimes for their exploitation. Intervention and protection may be good for a nation if it is carried out by a good interventionist leader, but will be a catastrophe if it performed by a bad and corrupt leader.          


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