How Rich Countries Got Rich and Why Poor Countries Stay Poor

224 Pages·2007·4.43 MB·English

by  Erik S. Reinert

ERIK S. REINERT, is the editor of Globalization, Economic Development and
Inequality: An Alternative Perspective (2004) and co-editor of The Origins of
Development Economics, How Schools of Economic Thought have Addressed
Development (2005). Dr Reinert, a Norwegian, did his undergraduate work at the
University of St. Gallen, Switzerland, and holds an MBA from Harvard University and
a PhD in economics from Cornell University. He is Professor of Technology
Governance and Development Strategies at Tallinn University of Technology, Estonia,
and president of The Other Canon foundation in Norway. He is one of the world's
leading heterodox development economists and in 2008 won the prestigious Myrdal
Prize for How Rich Countries Got Rich ... And Why Poor Countries Stay Poor.
For further information see www.othercanon.org
Since anyone who criticizes the entire systems of others has a duty to replace them with
an alternative of his own, containing principles that provide a more felicitous support
for the totality of effects to be explained, we shall extend our meditation further in order
to fulfil this duty.
Giambattista Vico, La Scienza Nuova, 1725
Erik S. Reinert

Foreword by Jomo K. S., UN Assistant Secretary-General for Economic Development
Acknowledgements
List of Figures
Introduction
1 Discovering Types of Economic Theories
2 The Evolution of the Two Different Approaches
3 Emulation: How Rich Countries Got Rich
4 Globalization: the Arguments in Favour are also the Arguments Against
5 Globalization and Primitivization: How the Poor Get Even Poorer
6 Explaining Away Failure: Red Herrings at the End of History
7 Palliative Economics: Why the Millennium Goals are a Bad Idea
8 `Get the economic activities right', or, the Lost Art of Creating Middle-Income
Countries
Appendices
I David Ricardo's Theory of Comparative Advantage in International Trade
II Two Different Ways of Understanding the Economic World and the Wealth and
Poverty of Nations
III Frank Graham's Theory of Uneven Development
IV Two Ideal Types of Protectionism Compared
V Philipp von Hornigk's Nine Points on How to Emulate the Rich Countries (1684)
VI The Quality Index of Economic Activities
Notes
Bibliography
Index
When demonstrators took to the streets of Seattle in 1999, and on numerous occasions
subsequently, in protest against the World Trade Organization and related international
financial institutions, their protests were implicitly directed at conventional wisdom -
the economic orthodoxy which has legitimized and provided the analytical scaffolding
for much of their policy conditionalities and advice. At the risk of caricature, over the
last two decades this theory has claimed that self-regulating markets would produce
growth for all, if only the role of government was kept to the bare minimum of the
`night watchman'.
This orthodoxy had gained popularity with the advent of `stagflation'"` in the 1970s
and the intellectual assault on Keynesian and development economics. The fiscal crises
of welfare states from the 1970s and the later demise of centrally planned economies
provided additional succour for the new orthodoxy, despite the evident failure of
monetarist experiments in the early 1980s. Today, only fundamentalists at the extremes
argue for either a completely self-regulating economy on the one hand or for a totally
state-run economy on the other.
This book by Erik Reinert identifies the key economic and technological forces
which need to be harnessed by economic policy in order to generate economic
development. His development analysis also recognizes that the `development of
underdevelopment' is a result of the failure to promote and develop economic activities
involving greater returns to scale and enhanced human capabilities, as well as
productive capacities. Reinert creatively applies old economic lessons in new contexts.
How Rich Countries Got Rich... argues that important economic lessons can be
learned from setting the historical record straight. Reinert suggests that the history of
the United States has the greatest economic relevance to today's poor countries.
Seventeen seventy-six was not only the year of the first publication of Adam Smith's
Wealth of Nations, but also saw the beginning of the first modern war of national
liberation against British imperialism. The Boston Tea Party was after all a mercantilist
action. The economic theorist of the American Revolution was none other than its first
Secretary of the Treasury, Alexander Hamilton - now recognized as the pioneer of what
is often termed `industrial policy'.
Consider what the US economy would look like today if the Southern Confederacy
had triumphed over the Northern Unionists - the last third of the nineteenth century
would not have seen the US economy rapidly industrialize. As the curators of the
Smithsonian Museum of American History note, the huge technological gap,
recognized by American participants at the Great Exhibition at Crystal Palace in 1851,
would not have been bridged, and the US might not have become the world's leading
economy so early in the twentieth century.
As Reinert shows us, after the Second World War the Morgenthau Plan sought to
pastoralize Germany, then seen as the source of two world wars. Instead, General
George Marshall contributed to the post-war Keynesian `Golden Age' with his plan to
accelerate economic recovery and reindustrialization in Western Europe and Northeast
Asia to ensure a cordon sanitaire of economic growth around the expanding Soviet bloc.
The generous American contribution to post-war recovery stands in sharp contrast to its
current aid contribution, not only quantitatively, but also in terms of `financing
government budgets' and ensuring `policy space'.
Economic development involves profound qualitative change, not only of the
economy, but also of society. Reducing economic development to little more than
capital accumulation and more efficient resource allocation has become a formula for
perpetuating economic backwardness in many poor countries. By deepening our
understanding of uneven development by drawing from his rich knowledge of the
history of economic policy, Reinert's book provides both important lessons and
stimulating reading.
Jomo K. S., UN Assistant Secretary-General for Economic Development and
Founder Chair, International Development Economic Associates (IDEAs)
Most ideas in this book are very old, and my biggest debt is to a large number of
economic thinkers and policymakers who over the last 500 years successfully created
wealth rather than reallocated it. I first came in contact with this distinguished group in
1974-6 when my wife worked as a librarian at the Kress Library at Harvard Business
School. This library specialized in economic theory before 1850, thus maintaining an
accessible gene-bank of their ideas. My economics professor at the Hochschule St
Gallen, Switzerland, Walter Adolf Johr (1910-87) retained some old continental
European ideas, and at Kress I met Fritz Redlich (1892-1978), a surviving member of
the German Historical School, who introduced me to Werner Sombart.
What is original in this book was embryonically there in my Ph.D. thesis written in
1978-9. Other than from the ancients, inspiration at the time came from Tom Davis,
who taught economic history and development, and inspired the idea of differentiating
economic activities, from Boston Consulting Group and their approach to measuring
human learning and experience, and from Jaroslav Vanek, formerly of the Heckscher-
Ohlin-Vanek theorem in international trade, who had come to understand how
welfaredestroying international trade could be under given circumstances. His thorough
deconstruction of conventional international trade theory confirmed why I had always
found it counter-intuitive. Also at Cornell, John Murra opened my world to pre-
capitalist societies. Classical development economics, with Myrdal's `cumulative
causations', always formed a theoretical backdrop.
Since I came back to research and academics in 1991, five economists and economic
historians of a generation or less before mine - sometimes knowingly and sometimes
unknowingly - generously advised and sustained my conviction that many old ideas, in
their context, were more unfashionable than inappropriate: Moses Abramovitz, Robert
Heilbroner, and David Landes in the United States; Christopher Freeman and Patrick
O'Brien in the United Kingdom. To them this book is dedicated. They kept alive the
long reality-based economics tradition that almost died out in the Cold War crossfire
between two utopias: that of planned harmony and that of automatic market harmony.
Carlota Perez' vision of how technological change takes place has been very
influential and I am also very grateful for her willingness to be my most active sparring
partner in ideas. In this category my Tallinn University of Technology colleagues
Wolfgang Drechsler and Rainer Kattel have also been of great help. By 1991 modern
evolutionary economics had been established, and Richard Nelson's `appreciative
theorizing' helped in shaping mine. So did the postKeynesian economics of Jan Kregel,
the institutional economics of Geoffrey Hodgson, the development economics of Jomo
KS, and the GLOBELICS movement initiated by Bengt-Ake Lundvall. Thanks also to