Anything Goes?

1.

Professor Gerald Meier’s purpose is set out in the first sentence of his book. He wants to appraise “the efforts by economists to understand the economics of being poor as well as the policy measures they have proposed that will allow the countries of Asia, Africa, and Latin America to emerge from poverty.” According to Meier, “the economists’ primary goal must be the elimination of poverty.” Economists since Adam Smith, he notes, have created theories to try to explain why countries are poor and what can be done to improve their economic performance. In one way or another these theories have become the basis for government policies.

After World War II the rich countries devoted much effort to applying economists’ ideas to the damaged economies of Europe and to the poor countries of Africa and Asia, many of which were just gaining political independence. Prominent economists advised governments to make loans of large amounts of money for poor countries to invest in dams, factories, agricultural improvements, and other projects that were thought necessary for reconstruction and economic recovery. In other cases, the poor countries received credits and other direct aid.

Many of these efforts have been subject to criticism in recent years for being ineffectual, wasteful, and misguided. Meier believes that some of them were successful. For example, he says that after the Korean War, foreign aid helped South Korea to develop from “a subsistence economy with 60 percent of its cultivated land laid waste, most of its limited industrial capacity destroyed.” As the economy grew, foreign aid was replaced by an increase in domestic savings and foreign exchange earnings.

In other countries, he says, government aid policy has been largely responsible for development. For example, when the Ivory Coast became independent from France in 1960, it was among the poorest nations in the world, with a per capita income of about seventy dollars. Shortly after independence, the French government decided to promote agricultural exports and use “foreign capital and know-how.” It encouraged the importation of skilled labor from abroad, mainly from France.

Agriculture was encouraged through public investment in infrastructure [such as roads] and by direct incentives to production, especially the maintenance of relatively high and stable producer prices for the main agricultural products. Continued efforts toward agricultural diversification gave the Ivory Coast a clear advantage in the production of coffee, cocoa, oil palm products, copra, pineapple, and bananas. It has also become economically feasible to produce cotton, groundnuts, rice, and maize.

As a result of these policies, Meier writes, income per person reached $680 in 1976, and “over the period 1960–1975, the real growth in national output averaged a remarkable 7.5 percent per annum.” By 1975, he reports, “its exports of cocoa, coffee, and timber were, respectively, 4, 5, and 30 times the 1950 exports in volume. The Ivory Coast now ranks third among world coffee and cocoa producers.”

But other countries, especially those in sub-Saharan Africa which rely heavily on producing agricultural crops for export, have not progressed despite receiving considerable amounts of foreign aid and loans from other international organizations. “During the last decade,” Meier says, “15 countries actually suffered a negative rate of growth of income per head. Output per person rose more slowly in Sub-Saharan Africa than in any other part of the world, particularly during the 1970s.”

What accounts for such different results? Partly, on Meier’s view, the failure of economic theory to suggest adequate policies. He believes that the conventional theories of most Western economists—whether based on the classical model of the free market or on Keynesian interventionism—contained assumptions that did not work for the very different social systems and conditions of the less developed countries (LDCs). For example, development economists of the 1940s and 1950s “questioned the relevance of the market-price system of neoclassical economics for the poor countries. The price system in the LDCs existed in only a rudimentary form: markets were fragmented and localized; market imperfections were pervasive; and there was little range for the sophisticated exercise of the logic of choice in a well-defined price system.”

Instead of encouraging free markets, these economists proposed to build up poor economies by a “big push” of investment in local industry, a view which owed something to the Keynesian policies of the 1930s. For proponents of this view, “the crucial task of a development plan was to achieve sufficient investment to mobilize the unemployed and under-employed for the purpose of industrialization.” According to many economists who supported a big push of investment, the economy of a poor country is made up of two “sectors”—one modern (containing factories, mines, plantations) and one traditional (with family farms, petty trading activities, and handicraft work). Through large investment in the modern sector, the unemployed find jobs in “the more productive capitalist sector, and the low-productivity traditional sector withers away.” By the 1970s, Meier writes, many economists realized that this “strategy of high growth with a reliance on a trickle-down mechanism to reach the poor did not in reality operate to bring the benefits of growth to the poor. The gains were concentrated in the upper-income groups.” They began instead to recommend policies emphasizing what were called “basic needs”: living conditions, nutrition, health, education, conditions of employment for the poor, such as small farmers, landless laborers, and urban workers.

Other economists, Meier notes, went further and argued that poverty in “underdeveloped” countries would not be surmounted until radical changes were made in the international economy. According to one influential group of economists—the so-called dependency school—the major obstacles to development are not domestic. Rather, “the international economy acts as a mechanism of international inequality, perpetuating or widening the gap between rich and poor countries,” which are said to be “dependent” on overseas economic forces. One important version of this view argued that there is a “center” which consists of the industrialized capitalist countries that became rich through early technical development and now have “organized the system as a whole to serve their own interest”; the countries on the “periphery,” on the other hand, are “linked in common to the center through their production and export of raw materials.” On this view, rich countries impose conditions of trade on poorer countries that adversely affect their “terms of trade.”^* By manipulating the terms of trade, it is argued, rich countries “siphon off income from the periphery to the centers.”

While Meier does not think the theories of the dependency school have much merit, they have, as he shows, great appeal to the poor countries of Africa and Asia. He does not make his own views very clear, but he appeals to economists to pay more attention to the problems of the poor. Although economists have always been “trustees of the poor,” he writes, in the nineteenth century they came to think of themselves differently, as “guardians of rationality,” concerned less with poverty than with “the husbanding of resources” and “the exercise of choice in allocating resources among alternative objectives.” Meier underscores the number of people living in “absolute poverty”—not merely those at the lower end of a nation’s income distribution but those who suffer from what the World Bank calls “a condition of life so degraded by disease, illiteracy, malnutrition and squalor as to deny its victims basic human necessities.” People in such conditions, he writes, have increased to include roughly 40 percent of those living in the poor countries. The development economist should not think of himself as a guardian of rationality alone. He must concentrate upon “the removal of absolute poverty, reduction of unemployment and underemployment, and more equitable distribution of income,” and upon such concrete problems as how to reduce population growth or improve agriculture in poor countries.

He also thinks that “more attention should be given to the international system.” While the radical Marxist-Leninist criticism of the market system found in the dependency school is questionable, he says, the problems of the poor are related to the growing “interdependence” of countries, as shown by international transfers of capital, technology, and resources and by the growth of multinational corporations. Conflicts between countries about free access to markets for exports, or terms of trade, or foreign investment, have increased in recent years. The “management” of these international conflicts, he thinks, requires the creation of “an international public order.”

2.

Professor Meier is well read in classical economics and also in the most influential postwar development literature. He is at home in modern economic theory. He is also well versed in current affairs and has had close contacts with international agencies, with conventional and Marxist development economists, and with third world governments. As the quotations I have cited suggest, his gifts of exposition are exceptional. His book is an excellent concise survey of classical writings on development and also of the most influential academic, official, and neo–Marxist-Leninist views on the subject. It will have a wide readership.

Meier’s consistently clear prose, however, masks major shortcomings of argument. Some of these should be evident to the reflective general reader, while others will escape readers unfamiliar with the less developed countries and development literature. Meier’s discussion, as we have seen, is addressed almost entirely to the currently prominent schools of economic theory, including those favoring the “big push” and those emphasizing “basic needs”—as well as dependency theory. He virtually ignores the contemporary literature that puts central emphasis on the workings of the market, and its fundamental criticisms of the major tenets both of the conventional literature and the dependency school and of neo–Marxist-Leninist writings. Such economists as Herbert Frankel, Gottfried Haberler, Harry Johnson, Melvyn Krauss, Deepak Lal, Douglas Rimmer, Simon Rottenberg, Thomas Sowell, and Dan Usher are not mentioned. The same goes for such authoritative critics of the population scare as Julian Simon and Paul Demeny. Some others, for example Hla Myint, are mentioned only cursorily, a practice reminiscent of the way certain crack German regiments before World War I had a solitary commoner (Konzessionschulze) among their officers.

Indeed, the main problem with Meier’s book is that he blandly summarizes conventional views but often hardly seems aware of the substantial criticisms that have been made of them. For example, he gives much prominence to the view that the LDCs are caught in a “vicious circle” of poverty, a view that was a cornerstone of development economics in the 1950s. He quotes at length from the work of the widely influential economist Ragnar Nurkse, who died in 1959 while a professor at Columbia. According to Nurkse, there is “a circular constellation of forces tending to act and react upon one another in such a way as to keep a poor country in a state of poverty.” He believed that a poor country could not emerge from poverty unless capital could be accumulated and then invested in productive growth in factories, farms, and other sectors of the economy. But where in a poor country is such capital to come from? People in such countries, he wrote, cannot save very much from their earnings, which are already low. Their income, in turn, is low because they are not highly productive, and this reflects their poor health, which itself is a result of their lack of capital. According to Nurkse, escape from poverty is well-nigh impossible without external assistance.

This thesis, which has become central to the discussion of poverty in the world, is demonstrably invalid. If it were true, the world would still be in the Old Stone Age. All the countries that today are economically and technically advanced began as countries that were as poor as some of the LDCs are today. Yet such countries, including all the industrial countries of modern Europe and America, have usually advanced without appreciable outside capital and invariably without external grants. However low the income per head may have been, at one time, part of current income was set aside to create and augment a stock of capital. And in fact many third world countries progressed rapidly long before foreign aid and without drastic domestic policies: Malaysia, Hong Kong, Brazil, and Colombia, for example, made considerable advances before official foreign aid began in the 1950s. In those countries people took advantage of emerging opportunities to produce for markets instead of for subsistence. For example, Malaysia, which in the 1890s was a sparsely populated country of Malay hamlets and fishing villages, was completely transformed by the rise of the rubber industry and developed into a country with populous cities, thriving commerce, and an excellent system of roads. The local population was not forced to plant rubber trees that took five or more years to mature. People did so voluntarily, because the proceeds from the trees enabled them to buy corrugated iron sheets to protect them from the rain, bicycles to go to market, enamel basins in which to keep food, and baskets, hardware, and matches.

Related to the vicious circle of poverty is the purported necessity of the big push of external assistance to poor countries. But is it true that poor countries cannot progress unless substantial resources are raised through foreign aid and domestic taxation (known as the “mobilization of domestic resources”)? We all have seen that resources, including labor, can be comandeered by a government through conscription of labor, taxation of income or goods, or restriction of consumer goods by licensing; but none of these measures by itself will augment resources. More often than not, such a policy demands that the population at large restrict its consumption of wanted goods without producing any greater supply of them later on. For example, the small cocoa farmers in Ghana were heavily taxed during the closing years of the colonial regime and throughout the regime of Nkrumah and since then; the result was not an increase in goods but a fall in living standards as the total output of goods and services in the economy declined.

When a government imposes taxes in order to raise capital for development this also inevitably reduces the supply of goods whose availability acts as an incentive for people to work harder and to invent new goods and services, an important factor behind improved economic performance in poorer countries. Moreover, it makes political considerations pervasive in economic life, provoking tension and conflict, and diverting resources from economic life to political activity. For example, since the 1950s, people in Ghana have become more concerned with the government decisions setting the price of cocoa or allotting licenses to import goods from abroad than with how they could better improve their economic performance.

In any event, a preexisting volume of investable resources such as local savings or foreign investments is not critical for material progress. This is conclusively shown by the history of Western Europe and North America in the eighteenth and nineteenth centuries. These countries received no foreign aid; morever, the amount of foreign or local investment in their economies was not decisive for their economic advance. Finally, should not even academic economists inquire what rights rulers and their acolytes have to force people to undergo the hardships of the big push even if this were to produce some material benefits in the unspecified future? This question is even more pertinent to the big push when such economists as Gunnar Myrdal argue that it should include coercive transformation of societies by forcing people to radically change attitudes and mores uncongenial to economic progress, such as the reluctance to take animal life, belief in the efficacy of occult and supernatural forces, objection to women working outside the home, or acceptance of caste systems.

Recent attempts to carry out a big push in poor countries have certainly failed to raise living standards in many of them. The forced modernization of Iran undertaken by the late Shah, who levied oil royalties and other forms of taxation to create large-scale industries and expropriated the properties of religious groups and landowners, was a notable failure. Meier, however, praises the achievement of the People’s Republic of China for its effort to modernize the country and writes that per capita income there grew at 4 percent per annum between 1952 and 1978, higher than the average for the less developed world. This claim can be doubted, if for no other reason than the uncertainty of the population statistics used in calculating per capita income. For Meier, China’s “most remarkable achievement” has been to make low-income groups far better off than their counterparts in most other poor countries by meeting “basic needs” in nutrition, education, health, shelter, water, and sanitation. In China, he writes, the poor “all have employment. Whether voluntary or not, the labor pool has been mobilized so that both urban and rural populations are hard at work throughout the entire year”; the food supply is guaranteed, he says, “through a mixture of state rationing and collective self-insurance”; “life expectancy—reflecting many other social and economic variables—has risen over the past three decades from 36 years to nearly 69 years, an exceptionally rapid advance to an outstanding figure for a country at China’s low per capita income level,” and “China’s success in reducing mortality is related to its success with population control that has facilitated higher nutritional and environmental health standards.”

Meier says nothing, however, about the famines of the 1960s, in which an estimated 20 to 30 million died. Nor does he make it clear that the ordinary Chinese throughout the 1950s, 1960s, and 1970s had little or no choice in what jobs he could take, where he could live, where he could travel, or what goods he could buy. He refrains as well from comparing the growth rate in mainland China with those of other Chinese-dominated but relatively free Eastern economies, such as Taiwan, Hong Kong, Malaysia, and Singapore. In promulgating economic reforms in China during the last few years, Chinese officials themselves have called into question the effectiveness of the policies Meier credits with success.

The ineffectiveness and inequitable character of international trade for third world development have been major themes of development literature since World War II. By the late 1970s and early 1980s trade with the West came to be regarded by some development economists as positively damaging to LDCs, on the ground that their terms of trade, dictated by the West, have been both unfavorable and deteriorating and thus held to be a cause of third world poverty. Meier gives prominence to these arguments.

The reality of trade relations between the rich and the poor countries is quite different. Throughout the third world the poorest and most backward regions and countries are those with the fewest external commercial contacts—consider for instance the pygmies, aborigines, and tribal societies of Africa and other parts of the world and such countries as Nepal and Afghanistan. Conversely, the most prosperous are those with the most commercial contacts with the West—Hong Kong, Singapore, Malaysia. Throughout the third world economic achievement declines as one moves away from the impact of Western trade.

In recent decades allegations about unfavorable and deteriorating terms of trade in the third world have been familiar in the development literature and in publicity issued by those who agitate for more aid for poor countries. Such claims are also commonly made in third world demands for foreign aid, and feature as well in proposals to restrict third world commercial contacts with the richer countries or (as advocated by the late Raúl Prebisch and other third world economists) to “delink” third world trade from international trade and stress “collective self-reliance” through customs unions or other forms of economic integration.

According to these views, a number of factors have contributed to the deterioration in third world terms of trade. For one thing, technical advances in agriculture and population growth in poor countries have created an increase in the volume of primary products like rubber; at the same time, however, there has been a relatively stagnant demand for these products in the rich countries, partly because their own technical progress has led to the development of substitutes for these products, such as plastics.

But such generalized allegations about terms of trade are unfounded. It is, to begin with, misleading to draw conclusions from the average terms of trade of the “third world”—a global aggregate of more than two thirds of mankind which comprises countries importing and exporting the most diverse products of agriculture, mining, and manufacturing and service industries. To take a simple example, the recent fall in the price of oil works to the disadvantage of Mexico, Venezuela, and Nigeria, oil-producing countries, but it benefits Brazil, India, and Ghana. It is therefore hardly sensible to talk of “the terms of trade” for oil in “the third world.” One can always select particular countries, or particular commodities exported or imported by countries, to illustrate a deterioration in terms of trade, but as this example shows, one cannot infer from this that the third world as a whole has been damaged by such declining terms of trade.

Even if we consider the terms of trade globally, moreover, by historical standards the terms of trade in commodities for the third world countries have been very favorable practically throughout the postwar period. They certainly have not persistently deteriorated: between 1960 and 1980, for example, the terms of trade of the third world as a whole improved by over 100 percent. Even if the terms of trade of the poorer countries were unfavorable for a period of time, the causes of such a decline may vary greatly. An apparent shift in the terms of trade may reflect no more than a shift in the composition of imports to more expensive varieties of goods; for example, in the early part of the century, West African countries imported only a few staples—textiles, sugar, tobacco, flour—whereas by the 1950s when the terms of trade of these products declined (because they grew more expensive) these same countries began to import large quantities of sophisticated equipment such as electrical goods, chemicals, and motorcars, whose price had declined relative to that of the displaced imports.

In other cases, a decline in terms of trade may be induced by government policy. For example, in 1967 transistor radios imported into Nigeria from Japan could be sold at a price about 15 percent below that of European sets. However, imports from Japan came to be restricted by the Nigerian government as a result of pressure by African importers whose business contacts did not extend to Japan, and this restriction made the terms of trade for Nigeria worse than they would otherwise have been. At most, unfavorable terms of trade of poor countries mean only that these countries do not benefit as much from commercial contacts as they would if the terms were more favorable. It cannot be inferred, however, that they do not benefit greatly from international trade.

Would the people of LDCs be better off if they had no trade or no access to Western-produced supplies, as is the lot of most of the backward groups and countries? To suggest that people in the third world are “damaged” by international trade as such is to treat them with condescension—as if they did not know what to produce or to buy on the market, or what is in their own best interest to produce for export. A Malaysian rubber smallholder is not harmed by international trade as such; the price on the world market for rubber varies from time to time, and there are periods in which his product will bring him less income. But even if this occurs, he is still better off than he would be without his trade, and if the price of rubber falls too low, he will switch to the production of rice or palm oil or other commodities and thereby try to improve his economic position.

3.

Meier quotes uncritically and at length some of the most patently insubstantial allegations and perverse policy proposals for remedying the condition of the poor countries, including some of the crudest arguments of the “dependency” school. He cites, for example, the view of André Gunder Frank, a Marxist analyst of Latin America, that “it is capitalism, world and national, which produced underdevelopment in the past and still generates underdevelopment in the present.” According to some economists who hold this view, Meier writes, “there can be no development unless there is transformation at the world level to an international socialist system.” He adds that such ideas and proposals must still be regarded as controversial. This may be so with regard to their political appeal. But Meier fails to take account of the devastating criticisms that have been made of such views by Deepak Lal, Harry Johnson, and other economists. For example, if the dependency theory were right, it is unclear how countries on the periphery like China or Brazil or India could have moved, as they have, to become prominent industrial nations. Nor is it clear that, as the dependency theory would seem to imply, the capitalist world acts as a concerted entity to bring advantage to itself; this overlooks the amount of competition among capitalist exporters.

Following conventional notions, Meier regards rapid population growth in the third world as a major cause of poverty and an obstacle to economic improvement. He welcomes government activities to promote birth control and urges even greater efforts to do so in the third world. This approach assumes that economic achievement depends on resources per person, so that if there are more people and therefore fewer resources per head there is less opportunity for economic advancement. It also assumes that conventionally measured income is a measure of economic well-being; that third world people do not know about birth control and procreation regardless of consequences; and that third world governments and their Western advisers are entitled to force people to change their habits of reproduction.

All this, in my view, goes counter to simple evidence or offends basic moral principles. Many of the poorest and most backward people in the third world live amid plentiful natural resources (especially land), for example in Sumatra and Borneo and in much of Africa and Latin America. Conversely, many of the most prosperous live in densely populated areas with practically no natural resources, such as Taiwan, Hong Kong, and Singapore. In recent decades many third world countries have combined rapid, even spectacular, population growth with substantial rise in incomes, especially so in the East and in Latin America. To equate income per person with economic well-being ignores the experience of having a family. The birth of a child immediately reduces income per person both within the family and in the country as a whole. But would the parents be happier if they could have no children, or if some of them died young? To equate income per person with wellbeing in this way suggests that the birth of a child to a farmer is a deterioration in welfare but that of a calf on his farm is an improvement. As this example shows, income is an accounting conception and welfare is a psychic one; the two are often incommensurable.

People in the third world often know about contraception and they are not at the mercy of uncontrollable sexual drives. Even in poor countries women have far fewer children than they are biologically capable of bearing. Past societies that were less developed than the countries of today with high fertility freely practiced traditional forms of birth control: there are references to contraceptive herbs and potions in the Hippocratic writings; tampons made of lint, and sponges and douches, were used in ancient Egypt and are mentioned in papyri from the nineteenth century BC; birth control was practiced widely in England before the Industrial Revolution. And cheap Western-style goods are conspicuous and ubiquitous in third world countries, where the use of Western-style contraceptives has spread only very slowly even when heavily subsidized and promoted by government health ministries. This situation suggests that many people at present either do not want to restrict their families or prefer traditional ways for this purpose.

Finally, in third world conditions official persuasion is often indistinguishable from coercion. Compulsory sterilization in India in the 1970s and the brutal methods that have recently been used in China are only extreme cases. Serious moral and political issues are raised by attempts to coerce people to change their reproductive conduct rapidly and radically. To voluntarily practice birth control in order to improve material welfare for oneself and one’s family is an entirely different matter. A reduction in population growth by itself is in any case unlikely to raise living standards appreciably, since the main determinants of the level of income and the rate of economic progress in a country are not physical or other resources per person but personal, social, and political factors.

Meier’s book is refreshingly free from statistical tables. Unfortunately, he still often uses statistics without informing readers of their limitations or meaning. For example, he quotes official figures of economic growth rates in LDCs to the nearest percentage point or even fraction of a percentage point, when in fact they can be subject to margins of error of several hundred percent. That such errors occur was noted by the economist Professor Dan Usher, who wrote that in Thailand he saw people not prosperous by European standards but enjoying a standard of living well above the requirements of subsistence, even though conventional statistics of Thailand’s national income per head showed them to be desperately poor. Usher concluded that there are fundamental biases in the way income statistics are conventionally compiled; as he wrote in 1963,

the conventional comparison shows that the per capita national income of the United Kingdom is about fourteen times that of Thailand. Recomputations made by the author to allow for various biases in the comparison suggest that the effective ratio of living standards is about three to one.

Meier does not mention in his book the doubts that such considerations may raise about the statistics he cites. For example, he quotes educational and literacy figures in LDCs without noting either the unreliability of the population statistics on which such figures are based or the dubious standards of educational accomplishment in many poor countries. Similar criticisms could be made of Meier’s treatment of other issues in his book, including balance of payments problems, inequality of incomes, foreign aid, and the part played by governments in economic development.

Reading the development literature so conveniently summarized by Meier is depressing, even embarrassing. How can prominent practitioners, full professors at major universities, even Nobel laureates, express opinions which go counter to simple observations and basic propositions of economics? The opinions recited by Meier, and his own ambivalent, though generally favorable, attitude to them suggest that conventional development economics is floundering. We can only conjecture how this has come about. The extremely rapid expansion of the subject and failure to clarify economic methods may be partly responsible. So may the subordination of knowledge to political purposes or personal advantage. On three separate occasions—once in Finland, once in Spain, and once in Britain—after I had exposed in lectures the hollowness of the idea that poverty as such is self-perpetuating, members of the audience said that whatever the validity of my criticisms, the idea of the vicious circle was nevertheless invaluable in promoting foreign aid.

In Meier’s opinion, economists should offer advice to governments in order to improve material conditions, especially those of the poorest countries. How far are they qualified for this task? Economic achievement is affected by personal, cultural, social, and political factors that are to a large extent outside the purview of standard economic analysis. This does not mean that there is not much for economists to do. They can, to take just one example, study the relationship of familiar variables of economic theory to factors not usually examined by economists, such as the effects of different forms of import control on political life. Some of these—such as specific licenses on imports—can confer windfalls on their recipients, and this has political effects. These are readily observed by economists, since there is both a clamor for such licenses and frequent charges of bias in granting them, as happens in Africa and South Asia, where ethnic minorities and other politically disadvantaged groups have been denied import licenses. Nevertheless, many of the claims of development economists are exaggerated and even unfounded. As I have suggested, examples abound in Meier’s book. If the economics that matters is the development economics summarized here, then the less economists have to do with advising governments, the better it is both for the health of the discipline and, more important, for the well-being of millions of people.