How Rich Countries Got Rich and Why Poor Countries Stay Poor [Paperback]

This book was a great eye opener for me. As a non economist, I was able to follow the argument quite easily. Until I read this book, I wasn't aware of the economic history of the rich countries. The book taught me a number of lessons.

Lesson 1. Sustainable wealth is created by manufacturing industry. This was realised by the Tudor monarchs of England in the 16th century. They set about to create an enabling environment to foster manufacturing.

Countries which base their economies on agriculture and the exploitation of minerals do not become rich. They may attain the status of middle income countries if they are lucky.

Lesson 2. All rich countries, without exception, got rich by practising activist and interventionist policies. They put up barriers to the importation of foreign manufactured goods. They banned the export of raw materials needed by their own manufacturers. They made the import of foreign raw materials as easy as possible. They banned the export of technologically advanced machinery.

The state would invest in areas of the economy which were either too risky or too difficult for the private sector. In some cases the state would co-invest with the private sector.

In the 19th century, the leading nations of the West forced the weak independent nations of the world, such as China, Japan, Siam (Thailand) and the South American nations, to open their markets. These nations were forced to lower or even to remove their tarriffs against the West's manufactured goods. The Western nations, of course, kept their barriers up against foreign manufactures.

During the colonial period, the colonial powers banned their colonies from engaging in manufacturing. The purpose of the colonies was to produce raw materials for manufacturing industry in the colonists home country. The colonies also provided a captive market for the colonists manufactures.

The ban on colonial manufacturing was the main reason why the English colonies of North America decided to break away from the English crown.

Lesson 3. All countries, once they become industrialised, put all kinds of obstacles in the path of less developed countries to stop them from becoming industrialised. They don't like the competition that would arise. Thus, almost all industrialised countries champion free trade. They know that the nascent industries of the less developed countries cannot compete with their industries on a level playing field.

Today, the West uses its aid programmes to force poor nations to adopt policies that lead to the decimation of poor countries' industries. These countries are forced to rely more and more on agriculture and the extraction of minerals. They are forced into a "comparative advantage" of supplying commodities to the rich world.

Today, poor countries are forced to sign unequal treaties by donor pressure. In the 19th century weak nations were forced to sign unequal treaties at the point of the gun.

Lesson 4. Corruption is nothing new. In the 18th and 19th centuries, today's rich countries were as corrupt as today's most corrupt countries. With increasing wealth, corruption steadily declined in the rich countries. Corruption did not stop rich countries from becoming rich.

Lesson 5. Institutions arise to answer a need. Western institutions arose to answer particular needs in each particular country. The USA did not have a central bank until 1913. Presumably, before 1913 there was no need for a central bank.

Today, Western institutions are transplanted to poor countries without adaptation to local conditions. The World Bank, the IMF and the WTO force poor countries to adopt institutions and policies which are inimical to their national interests. These policies are favourable to the donors.

Lesson 6. If the West is genuine in its efforts to help the poor, then it must allow the poor to use the same tools it used to get rich. The poor must be allowed to protect their nascent industry with all the tools today's rich countries used to get rich.

Erik Reinert, Professor of Technology, Governance and Development Strategies at Tallinn University of Technology in Estonia, has written a most remarkable book. He has shown that the free trade creed - the free movement of capital, deregulation and privatisation - doesn't work. As Keynes wrote, "the worse the situation, the less laissez-faire works."

The American economist Paul Samuelson won a Nobel Prize for `proving' that under free trade prices paid to capital and labour tend to be the same across the world. But in the real world, free trade has led, not to the levelling up of world wages and the end of poverty, but to growing inequality and poverty. Half the world lives on less than $2 a day. In many countries, real wages peaked 30 years ago.

Reinert proves that the mode of production determines social forms, and that the technology and mass production of industry are the key to economic growth, not capital, property rights and the rule of law. Industry also has good economic, social and political effects. As he writes, "Creating and protecting industry is creating and protecting democracy."

But how can countries build industry? They need to protect their infant industries and to subsidise their industries.

Countries need to have an industrial policy that provides work for their educated people. Otherwise Western countries, outsourcing their education costs, will take them away - education for migration.

For example, 82% of Jamaica's doctors practise abroad and 70% of university-educated Guyanans work abroad. Their remittances fund consumption and dependence, not investment and industry.

It is better to have an inefficient industry than no industry at all. Reinert points out that the Soviet countries were better off before the 1990s counter-revolutions which deindustrialised and then depopulated them. In 1991-95 Mongolia pastoralised, cutting 90% of its production; wages fell, but the finance, insurance and real estate sector grew.

The old empires all banned manufacturing industry in their colonies. Now the World Bank and the IMF ban industrial policy. They lie to third world countries -open up to imports of goods and capital, be competitive, make your labour markets flexible and you'll grow. The European Central Bank tells EU members the same story.

Welfare colonialism, with $2.3 trillions in aid since 1950, has failed. The Millennium Development Goals will fail too. Aid is a means of control, not of growth, keeping the third world dependent. Palliative economics, which is supposed to ease poverty's symptoms while ignoring its causes, does neither.

Of course, the true market faithful believe that the economics are right, but then the question arises, why are the poor still poor? If the theory is right, there must be something wrong with the people. So some say that it must be race - Keynes was, shamefully, a vice-president of the English Eugenics Society.

Reinert writes, "a major financial crisis is increasingly likely." But the true market faithful are still in power and are making the workers of the world pay for their failed system. How much longer will we allow this?

In this book Erich Reinert questions the current Anglo-American consensus of free-market economics.

He looks at the line of economic thinking from Adam Smith, David Ricardo to Keynes as adopted by neo-classical thinkers such as Paul Samuelson, suggesting their thinking bear little relationship to reality. In particular he questions the theory of comparative advantages which states that countries should concentrate on what they produce best. In advising this, he argues, institutions like the IMF are in fact suggesting that poorer countries concentrate on on producing poverty.

His solution is a more flexible approach based on ideas on an alternative tradition of economics which he describes as reality based. This includes figures such as the great German economist, Friedrich List, Joseph Schumpeter and again Keynes (who fits into both traditions).

The book makes an interesting comparison with Joseph Stiglitz's Globalization and Its Discontents. A fascinating glimpse of an alternative view of economics to the one in current textbooks. One that could well change assumptions.