BOOK REVIEW
Fine-tuning neo-liberalism
Reclaiming Development: An Alternative Economic Policy Manual by Ha-Joon Chang and Ilene Grabel

Reviewed by Chee Yoke Heong

If empowering is the goal, a new book on development has achieved it. In a cogent, concise and clear manner, Reclaiming Development: An Alternative Economic Policy Manual by Ha-Joon Chang (Cambridge University) and Ilene Grabel (University of Denver) takes to task neo-liberal economics by dispelling the myths surrounding what has become the dominant development strategy in the world today. Instead, countries should explore other options, it stresses, and put forward forcefully feasible alternatives to neo-liberalism.

The book defines "neo-liberalism" as the adoption of free-market doctrines associated with the classical "liberal" economists of the 18th and 19th centuries such as Adam Smith and David Ricardo. The term is embodied in what is commonly known as the Washington Consensus because of its steadfast adoption by the US government, the World Bank and the International Monetary Fund (IMF). Neo-liberalism is also embraced by the World Trade Organization (WTO), donor governments, private international lenders and the investment community.

Neo-liberalism has three chief components. It elevates the role of markets (over government) in economic governance and in mediating flows of goods and capital (through the elimination of price supports and ceilings, free trade, market-determined exchange rates, etc); it enhances the role and scope of the private sector and private property (through privatization, deregulation, etc); and it promotes a particular notion of "sound economic policy" (through balanced budgets, labor-market flexibility, low inflation, etc).

The book argues that neo-liberalism should not be an end in itself, as many of its proponents suggest, and that history and empirical records show there are practical and attainable policies that can be applied and have worked well for countries that implement them. This book should not be regarded as anti-globalization per se but as against wholesale neo-liberal globalization, which, according to the authors, may not be in the best interests of developing countries. It rejects the "one-size-fits-all" approach of neo-liberals and instead advocates that neo-liberal policies can be adopted where necessary but should be complemented with other policy approaches as well.

One of the popular notions about neo-liberalism is that free trade and free financial flows bring success to countries that adopt them. According to this book, today's industrialized countries did not become rich because they adopted free-market policies. Historical records show these countries relied upon myriad interventionist, industrial, trade and financial policies in the early, and often later stages of their own development. With respect to trade, the United Kingdom and the United States - the most strident free-trade missionaries in the world today - actively utilized protectionist policies during the early years of their development. The US had the most protected economy in the world between the mid-19th century and World War II. It was also the intellectual home of infant industry protection, a strategy later adopted so successfully by Germany and Japan. Industrialized countries have, in different stages of their development, embraced state-owned enterprises, implemented capital controls and intervened in financial markets to avert crisis and/or protect national (or sectoral) interests, measures that are frowned upon today.

In fact, the vast majority of developing countries performed far better in the post-World War II era of interventionism than in the post-1980s era of free-market policies. While recognizing that state intervention also has its pitfalls, the book believes that where dramatic success stories are concerned, records clearly show that development success is strongly related to myriad types of interventionism. Except for Hong Kong, the East Asian "miracle" was engineered by activist "developmental states" that aggressively promoted economic development and financial stability. China and India have also developed successfully via strong state direction of economic affairs.

The book strongly rejects the notion that neo-liberalism has worked in the two decades since its adoption. In industrialized countries, the annual growth rate of per capita income has fallen from about 3% during the interventionist era of 1960-80 to 2% during the neo-liberal era of 1980-2000. For developing countries, it has been even worse. Their average annual per capita income growth slowed from 3% during 1960-80 to 1.5% during 1980-2000, and the latter largely is attributed to economic growth in just two countries - China and India - countries that pursue non-neo-liberal policies. This suggests that for most developing countries, growth has been dismal during the neo-liberal era.

The book also shows that private capital flows tend to concentrate in those countries that have already inaugurated a virtuous cycle of growth, investment and rising productivity. Therefore, contrary to neo-liberal claims, foreign private capital flows follow, rather than create, rapid growth. Taiwan, South Korea and China are examples of this process. Developing countries, hence, should institute policies that promote a sustainable growth path, rather than neo-liberal policies per se, as a precondition for private capital flows.

Proponents of neo-liberalism also tend to promote US capitalism (and put down the East Asian model) as an example of the success of neo-liberalism that should be emulated by other countries. But as the book points out, the economic performance of the US in the 1990s was unimpressive. The US economy actually grew slower during this period than in preceding periods. The wealth generated during the 1990s went to a small group while the poor suffered. Also, countries that do try to follow the US path often encounter failures, as in the case of the former Soviet republics.

In fact, empirical studies suggest that the East Asian model has played a far more important role in promoting economic development around the world than the American model has. In particular, the US and UK, during their own development stages, maintained policies toward trade, industry and intellectual property rights that were akin to those used later in East Asia.

However, the authors stop short of denouncing globalization outright, saying they are critical, not of globalization itself, but of the neo-liberal form of globalization that is being promoted so aggressively today - and that is chiefly responsible for the poor economic performance and deterioration of living standards in so many countries. They believe that different policy choices can create a form of globalization that would not be noxious to living standards and growth prospects in developing countries. For this, they have devoted about two-thirds of the book to exploring the various policy options that countries could adopt based on their appropriateness to the political, cultural and institutional characteristics of the particular developing countries in trade and industrial policy, privatization, intellectual property rights, external borrowing, portfolio and foreign direct investment, domestic financial regulation, management of exchange rates, central banking, monetary policy and government revenue and expenditure.

As neo-liberalism seems to gain a stronger and stronger hold on countries around the world, it is enlightening to have a book that lays out in full the theoretical underpinnings of the concept and its weaknesses so that those involved in policy-making are aware of their options and are able to make choices that can help their countries develop and move forward.

Reclaiming Development: An Alternative Economic Policy Manual, by Ha-Joon Chang and Ilene Grabel. Zed Books, London and New York, August 2004. ISBN: 1842772015. Price: US$14, 224 pages.

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