[OPE-L] Reinert's new book (How Rich Countries Got Rich... and Why Poor Countries Stay Poor,

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Thu Jun 21 2007 - 20:14:40 EDT

Vol:24 Iss:12 URL:


Worldly philosopher


Erik S. Reinert shatters prevailing myths about the process of development
and what societies must do to achieve that goal of "developed country"

Erik S. Reinert. He asks the most fundamental questions about economic
development and proceeds to answer them with clear logic.

Erik Steenfeldt Reinert's new book asks crucial development questions and
lucidly provides a vast historical sweep that critiques mainstream wisdom
and posits plausible alternative explanations.

The virtues of realism have always been underplayed by most in the
economics profession. This is a greater issue of concern than it would be
for most professions simply because economists - often the most
unrealistic of them - tend to exercise a disproportionate influence on
policies that affect the lives of many millions of people.

This is only one of the reasons why Reinert's new book (How Rich Countries
Got Rich... and Why Poor Countries Stay Poor, Constable & Robinson,
London, 2007) is so important. As evident from his title, Reinert asks the
most fundamental questions about economic development, and proceeds to
answer them with clear logic, a sweeping grasp of history and an immensely
readable style. In the process, he comprehensively shatters a number of
prevailing myths within the profession of mainstream economics about the
process of economic development and what societies must do to achieve that
elusive goal of "developed country" status.

Reinert begins with an acute assessment of what is wrong, methodologically
and axiomatically, with the long stream of economic thinking that traces
its origins to David Ricardo's work. He argues that Ricardo's theory of
comparative advantage, which is the lynchpin of much economic thinking,
was deeply unreal in its assumptions. It even provided a foundation for
colonialism by making it morally defensible to keep some countries as
producers of raw materials only.

The large number of simplifying assumptions that make standard theories
less relevant to the actual world are probably well known. But Reinert
hones in on some of the most crucial, such as "the equality assumption",
which effectively assumes away all differences between human beings,
between economic activities and between nations. One classic example is
the concept of the "representative firm", which equates the giant firm
Microsoft with a 12-year-old self-employed shoeshine boy in a Lima slum.

Other assumptions, such as that of "perfect information" are equally
suspect, while the totality of assumptions leads to the theoretical loss
of both time (history) and space (geography). This in turn means that,
despite some recent attempts to partially incorporate these elements,
there is a tendency to downplay the importance of increasing returns,
technological change and synergies.

In consequence, four important economic concepts that are key to
understanding the process of economic development were lost to economics,
despite the fact that early thinkers emphasised all of these. The first is
the concept of innovation (the key focus of policymakers in China today).
The second is the insight that economic development results from
synergistic effects, and that people sharing a job market with innovative
industries will have higher wages than others. The third is that different
economic activities can be qualitatively different carriers of economic
development, so that it matters which specialisation is chosen. Reinert's
final concern is that the labour theory of value posits a system of
exchange whereby labour hours are void of any other qualities which,
according to him, disregards the important connections between mode of
production, technology and institutions that underlie the labour embodied
in commodities.

The main problem is that the ahistorical theorising generated by all this
has replaced a far richer tradition of social and economic thought, which
Reinert characterises as "The Other Canon". As he puts it, "Before Adam
Smith it was often understood that economic development was based on
collective rent-seeking, originating in synergies of increasing returns,
innovations and division of labour that were found clustered only in the
cities" (page 79). Thus, the origins of the concept of increasing returns
are not to be found in Adam Smith's all-too-famous example of the division
of labour in a pin factory, but in the writings of Xenophon, whose book
Oeconomicus in the 4th century BC in Greece gave economics its name. In
1613 the Italian Antonio Serra described the positive effects of
increasing returns with greater clarity than Smith, while the 18th century
German economist Ernst Ludwig Carl used the same pin factory example
first. In the same vein, Reinert shows that many of the so-called
novelties of modern economic modelling are more than the partial
resurrection of earlier insights of The Other Canon, dusted off to be
displayed in spangling new colours to a profession that has lost its own

So how does The Other Canon provide an answer to the basic question posed
in this book? Reinert argues that the key concept is not comparative
advantage or free trade, but rather what Enlightenment economists called
"emulation". The toolbox of emulation contains a number of instruments,
and there is a useful listing of the main ones (pages 82-83). They

* recognition of wealth synergies around increasing returns activities and
conscious targeting, support and protection to these activities, including
temporary monopolies and patenting, tax breaks, export bounties and cheap

* maximising the division of labour through a diversified manufacturing
sector; relative suppression of landed nobility and other groups with
vested interests based in the production of raw materials;

* strong support for the agricultural sector, combined with restraints on
export of raw materials;

* emphasis on learning and education and * attracting foreigners to work
in targeted activities.

* All this was understood by several people other than the thinkers of The
Other Canon. Indeed, according to Reinert, history's first deliberate
large-scale industrial policy - the promotion of wool production in 15th
century England - was based on an observation of what made the richer
areas of Europe rich: that technological development in one field in one
geographic area could extend wealth to an entire nation. Subsequently,
there have been systematic attempts to suppress this basic insight:
"Wealthy nations keep poor countries poor based on theories postulating
the non-existence of the very factors that created their own wealth" (page

* The book provides numerous examples of how success was achieved, along
with more depressing examples of how the opposite has been foisted on too
many countries that remain poor. In fact, the process is not simple
marginalisation or exclusion from the benefits of development. Rather, in
many countries what has happened is the opposite of progress, that is
retrogression and primitivisation, because of policies that have not only
prevented the virtuous cycle resulting from emulation but actually
destroyed existing economic production activities. Mongolia, Rwanda and
Peru are chilling examples of diminishing returns at work, created by
external economic forces that destroyed the capacity for diversification,
innovation and technical change within these societies. *

This, in turn, leads to a comprehensive critique of the "Washington
Consensus" policies and their slightly modified offshoots. * Reinert
demolishes each of these maxims that are now so routinely recited to
developing country policymakers, such as getting prices right, getting
property rights right, getting institutions right, getting governance
right and getting competitiveness right.

* In another powerful chapter, he shows how the arguments in favour of
globalisation - especially those of economies of scale, technical change
and synergies - are also the arguments against globalisation when the
process prevents some economies from achieving these. This leads to a
critique of what Reinert calls "palliative economics" as exemplified in
the Millennium Development Goals, which are aimed at easing the pains of
poverty rather than making the fundamental structural changes that result
in true economic development.

* The real aim, according to Reinert, should be to focus on the lost art
of creating middle-income countries, where all inhabitants have a purpose
and claim on the necessities of life and at least some of its pleasures.
This requires "getting the economic activities right", since the only way
that vicious circles of low development can be broken is by first changing
the productive structure itself. * Reviving these old but crucial insights
in a contemporary context and in an effective and stimulating way is no
mean task. Reinert's intellectual lineage has been described as

* But in this book he shows that his work extends beyond such simplifying
categories to be in the best tradition of heterodox economics:
historically informed, conceptually powerful and compelling on policy

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