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on 8 January 2009
This is a most important book. Ha-Joon Chang, Assistant Director of Development Studies at Cambridge University, has edited this collection of 23 essays exploring development strategies. There are 19 contributors, mostly from Britain, but also from the USA, Norway, India, Holland and Italy.

Part 1 presents overviews of economic development; Part 2 looks at different development experiences in Asia, Latin America, Africa and the former socialist countries. Part 3 studies structural and sectoral issues, Part 4 trade, industry and technology, Part 5 financial markets and corporate governance, Part 6 poverty and inequality and Part 7 institutions and governance.

In the `golden age' of 1950-73, the world economy grew by 3% a year. By contrast, it did worse in the periods when neoliberalism held sway: between 1870 and 1914 it grew by 1-1.5%, and since 1980 it has grown by 1.5%. Neoliberalism has not brought the promised economic growth, but it has brought vast wealth for the few and falling living standards for the majority - arguably, what it was designed to do.

Following liberalisation of finance and trade, capital inflows surge, there is massive speculation, a credit boom, asset bubbles and current account deficits, resulting in financial crises. 89 countries were worse off in 1996 than in 1986 (UN figure). Russia, for instance, suffered falling living standards, fewer jobs, more inequality, corruption and crime, capital flight and state collapse. The number of poor people rose from 2.2 million in 1988 to 57.8 million in 1995. By 2000, the economy was worse-equipped than at the end of the Soviet period. As Erik Reinert sums up, "Where industry is closed down, poverty enters."

The problem is not `government failure' or `failed states' but a failed system. The capitalist model - Thatcherism - is now shattered.

In a brilliant essay, Ilene Grabel, Associate Professor of International Finance at the University of Denver, advocates well-designed controls over international private capital flows [IPCFs], "Numerous recent cross-country and historical studies demonstrate conclusively that there is no reliable empirical relationship between the liberalisation of IPCFs in developing countries and performance in regards to inflation, economic growth or investment. More damaging to the neo-classical case is the fact that there is now a large body of unambiguous empirical evidence which shows that the liberalisation of IPCFs introduces and/or aggravates important problems in developing countries. For example, numerous studies find that liberalisation is strongly associated with banking, currency and generalised financial crisis. Other studies show that liberalisation is associated with an increase in poverty and inequality."

She writes, "First, capital controls can promote financial stability and thereby prevent the economic and social devastation associated with financial crises. Second, capital controls can promote desirable types of investment and financing arrangements (e.g., long-term, stable and sustainable arrangements, which create employment opportunities, improve living standards, promote income equality, technology transfer and learning-by-doing) and discourage less desirable types of investment/financing strategies. Third, capital controls can enhance democracy and national policy autonomy by reducing the potential for speculators and various external actors to exercise undue influence over domestic decisionmaking and/or control over national resources. ... Nearly all industrialised countries successfully utilised capital controls for long periods of time. Continental European countries employed extensive capital controls during the economic reconstruction that followed World War II. Capital controls played critically important roles during the high-growth eras of Japan and most of the `Asian tiger' economies."

Countries need land reform and policies to protect their infant industries. They need to avoid the poverty trap of relying on natural resources and cheap unskilled labour. South Korea, for example, grew using active industry, trade and technology policies. It controlled finance flows, restricted foreign investment, ignored TRIPS (Trade-Related Intellectual Property Rights) and promoted R&D, education, and national ownership of industry.

As Martin Khor, Director of the Third World Network, concludes, "Capital controls constitute an integral part of a nation's right to economic self-determination and no pressure must be brought to bear on any state to abandon such controls if it has resorted to them."

John Sender, Professor of Economics at the School of Oriental and African Studies, criticises current aid policies promoting self-employment, "The history of most economies in which the percentage of the labour force living in absolute poverty has declined shows that an increasing proportion of the labour force became employed for wages, and that the percentage of the labour force employed for wages in large enterprises increased." By contrast, more self-employment means lower GDP.

He continues, "If the poorest women now rely, and will increasingly depend in the future, upon wage incomes to survive and to escape from poverty, then it is not clear that fashionable policies providing them with training to make baskets, or offering them micro-credit to facilitate start-up enterprises in rural environments already over-supplied with similar and failing enterprises, are sensible. Aid agency policies now focus on `capacity building' in all manner of ineffective, small-scale and corrupt decentralised organisations - NGOs [Non-Governmental Organisations], CBOs [Community-Based Organisations], Group Credit and other financial institutions, but any organisation that has a realistic prospect of increasing the political and economic bargaining power of the lowest-paid wage workers is shunned, or dismissed as potentially `market distorting' and, ipso facto, harmful to the poor. There is, for example no support for, or even discussion of, the need to allocate resources to support the formation of trade unions by seasonal agricultural labourers. ... In fact, the voluminous literature on poverty published by the aid bureaucracy and its consultants studiously avoids mentioning the specific organisations, the legislation, or institutions that have historically been most significant in defending the human rights and living standards of the poor in capitalist labour markets."
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