Emerging from Poverty: The Economics That Really Matters
Professor Gerald Meier’s purpose is set out in the first sentence of his book. He wants to appraise “the efforts by economists to understand the economics of being poor as well as the policy measures they have proposed that will allow the countries of Asia, Africa, and Latin America to emerge from poverty.” According to Meier, “the economists’ primary goal must be the elimination of poverty.” Economists since Adam Smith, he notes, have created theories to try to explain why countries are poor and what can be done to improve their economic performance. In one way or another these theories have become the basis for government policies.
After World War II the rich countries devoted much effort to applying economists’ ideas to the damaged economies of Europe and to the poor countries of Africa and Asia, many of which were just gaining political independence. Prominent economists advised governments to make loans of large amounts of money for poor countries to invest in dams, factories, agricultural improvements, and other projects that were thought necessary for reconstruction and economic recovery. In other cases, the poor countries received credits and other direct aid.
Many of these efforts have been subject to criticism in recent years for being ineffectual, wasteful, and misguided. Meier believes that some of them were successful. For example, he says that after the Korean War, foreign aid helped South Korea to develop from “a subsistence economy with 60 percent of its cultivated land laid waste, most of its limited industrial capacity destroyed.” As the economy grew, foreign aid was replaced by an increase in domestic savings and foreign exchange earnings.
In other countries, he says, government aid policy has been largely responsible for development. For example, when the Ivory Coast became independent from France in 1960, it was among the poorest nations in the world, with a per capita income of about seventy dollars. Shortly after independence, the French government decided to promote agricultural exports and use “foreign capital and know-how.” It encouraged the importation of skilled labor from abroad, mainly from France.
Agriculture was encouraged through public investment in infrastructure [such as roads] and by direct incentives to production, especially the maintenance of relatively high and stable producer prices for the main agricultural products. Continued efforts toward agricultural diversification gave the Ivory Coast a clear advantage in the production of coffee, cocoa, oil palm products, copra, pineapple, and bananas. It has also become economically feasible to produce cotton, groundnuts, rice, and maize.
As a result of these policies, Meier writes, income per person reached $680 in 1976, and “over the period 1960–1975, the real growth in national output averaged a remarkable 7.5 percent per annum.” By 1975, he reports, “its exports of cocoa, coffee, and timber were, respectively, 4, 5, and 30 times the 1950 exports in volume. The Ivory Coast now ranks third among world coffee and cocoa producers.”
But other countries, especially those in sub-Saharan Africa which rely heavily on producing agricultural crops for export, have not progressed despite receiving considerable amounts of foreign aid and loans from other international organizations. “During the last decade,” Meier says, “15 countries actually suffered a negative rate of growth of income per head. Output per person rose more slowly in Sub-Saharan Africa than in any other part of the world, particularly during the 1970s.”
What accounts for such different results? Partly, on Meier’s view, the failure of economic theory to suggest adequate policies. He believes that the conventional theories of most Western economists—whether based on the classical model of the free market or on Keynesian interventionism—contained assumptions that did not work for the very different social systems and conditions of the less developed countries (LDCs). For example, development economists of the 1940s and 1950s “questioned the relevance of the market-price system of neoclassical economics for the poor countries. The price system in the LDCs existed in only a rudimentary form: markets were fragmented and localized; market imperfections were pervasive; and there was little range for the sophisticated exercise of the logic of choice in a well-defined price system.”
Instead of encouraging free markets, these economists proposed to build up poor economies by a “big push” of investment in local industry, a view which owed something to the Keynesian policies of the 1930s. For proponents of this view, “the crucial task of a development plan was to achieve sufficient investment to mobilize the unemployed and under-employed for the purpose of industrialization.” According to many economists who supported a big push of investment, the economy of a poor country is made up of two “sectors”—one modern (containing factories, mines, plantations) and one traditional (with family farms, petty trading activities, and handicraft work). Through large investment in the modern sector, the unemployed find jobs in “the more productive capitalist sector, and the low-productivity traditional sector withers away.” By the 1970s, Meier writes, many economists realized that this “strategy of high growth with a reliance on a trickle-down mechanism to reach the poor did not in reality operate to bring the benefits of growth to the poor. The gains were concentrated in the upper-income groups.” They began instead to recommend policies emphasizing what were called “basic needs”: living conditions, nutrition, health, education, conditions of employment for the poor, such as small farmers, landless laborers, and urban workers.
Other economists, Meier notes, went further and argued that poverty in “underdeveloped” countries would not be surmounted until radical changes were made in the international economy. According to one influential group of economists—the so-called dependency school—the major obstacles to development are not domestic. Rather, “the international economy acts as a mechanism of international inequality, perpetuating or widening the gap between rich and poor countries,” which are said to be “dependent” on overseas economic forces. One important version of this view argued that there is a “center” which consists of the industrialized capitalist countries that became rich through early technical development and now have “organized the system as a whole to serve their own interest”; the countries on the “periphery,” on the other hand, are “linked in common to the center through their production and export of raw materials.” On this view, rich countries impose conditions of trade on poorer countries that adversely affect their “terms of trade.”* By manipulating the terms of trade, it is argued, rich countries “siphon off income from the periphery to the centers.”
While Meier does not think the theories of the dependency school have much merit, they have, as he shows, great appeal to the poor countries of Africa and Asia. He does not make his own views very clear, but he appeals to economists to pay more attention to the problems of the poor. Although economists have always been “trustees of the poor,” he writes, in the nineteenth century they came to think of themselves differently, as “guardians of rationality,” concerned less with poverty than with “the husbanding of resources” and “the exercise of choice in allocating resources among alternative objectives.” Meier underscores the number of people living in “absolute poverty”—not merely those at the lower end of a nation’s income distribution but those who suffer from what the World Bank calls “a condition of life so degraded by disease, illiteracy, malnutrition and squalor as to deny its victims basic human necessities.” People in such conditions, he writes, have increased to include roughly 40 percent of those living in the poor countries. The development economist should not think of himself as a guardian of rationality alone. He must concentrate upon “the removal of absolute poverty, reduction of unemployment and underemployment, and more equitable distribution of income,” and upon such concrete problems as how to reduce population growth or improve agriculture in poor countries.
He also thinks that “more attention should be given to the international system.” While the radical Marxist-Leninist criticism of the market system found in the dependency school is questionable, he says, the problems of the poor are related to the growing “interdependence” of countries, as shown by international transfers of capital, technology, and resources and by the growth of multinational corporations. Conflicts between countries about free access to markets for exports, or terms of trade, or foreign investment, have increased in recent years. The “management” of these international conflicts, he thinks, requires the creation of “an international public order.”
Professor Meier is well read in classical economics and also in the most influential postwar development literature. He is at home in modern economic theory. He is also well versed in current affairs and has had close contacts with international agencies, with conventional and Marxist development economists, and with third world governments. As the quotations I have cited suggest, his gifts of exposition are exceptional. His book is an excellent concise survey of classical writings on development and also of the most influential academic, official, and neo–Marxist-Leninist views on the subject. It will have a wide readership.
Meier’s consistently clear prose, however, masks major shortcomings of argument. Some of these should be evident to the reflective general reader, while others will escape readers unfamiliar with the less developed countries and development literature. Meier’s discussion, as we have seen, is addressed almost entirely to the currently prominent schools of economic theory, including those favoring the “big push” and those emphasizing “basic needs”—as well as dependency theory. He virtually ignores the contemporary literature that puts central emphasis on the workings of the market, and its fundamental criticisms of the major tenets both of the conventional literature and the dependency school and of neo–Marxist-Leninist writings. Such economists as Herbert Frankel, Gottfried Haberler, Harry Johnson, Melvyn Krauss, Deepak Lal, Douglas Rimmer, Simon Rottenberg, Thomas Sowell, and Dan Usher are not mentioned. The same goes for such authoritative critics of the population scare as Julian Simon and Paul Demeny. Some others, for example Hla Myint, are mentioned only cursorily, a practice reminiscent of the way certain crack German regiments before World War I had a solitary commoner (Konzessionschulze) among their officers.
Indeed, the main problem with Meier’s book is that he blandly summarizes conventional views but often hardly seems aware of the substantial criticisms that have been made of them. For example, he gives much prominence to the view that the LDCs are caught in a “vicious circle” of poverty, a view that was a cornerstone of development economics in the 1950s. He quotes at length from the work of the widely influential economist Ragnar Nurkse, who died in 1959 while a professor at Columbia. According to Nurkse, there is “a circular constellation of forces tending to act and react upon one another in such a way as to keep a poor country in a state of poverty.” He believed that a poor country could not emerge from poverty unless capital could be accumulated and then invested in productive growth in factories, farms, and other sectors of the economy. But where in a poor country is such capital to come from? People in such countries, he wrote, cannot save very much from their earnings, which are already low. Their income, in turn, is low because they are not highly productive, and this reflects their poor health, which itself is a result of their lack of capital. According to Nurkse, escape from poverty is well-nigh impossible without external assistance.
This is technically defined as the ratio of export prices to import prices for the goods and services of a country; for example, if Costa Rica's major export to the United States is coffee and that of the United States to Costa Rica is machinery, then, if the price of coffee has fallen relative to that of machinery, the "terms of trade" for Costa Rica are said to have deteriorated.↩
This is technically defined as the ratio of export prices to import prices for the goods and services of a country; for example, if Costa Rica’s major export to the United States is coffee and that of the United States to Costa Rica is machinery, then, if the price of coffee has fallen relative to that of machinery, the “terms of trade” for Costa Rica are said to have deteriorated.↩