20 Century

Created 2/12/1997
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Slouching Towards Utopia?: The Economic History of the Twentieth Century

-XXI. False--and True--Starts to Development in the Third World-

J. Bradford DeLong
University of California at Berkeley and NBER

February 1997

Decolonization

When the European colonial powers Britain and France withdrew from their empires, the bureaucracies and structures of government left behind were that of the industrial west: representative parliamentary institutions, independent judiciaries, laws establishing freedom of speech and of assembly, and a strong civil service tradition among the bureaucracy. The hope was that, freed from the oppressive controlling hand of colonial rule, democracy in the newly-independent former colonies was thought likely to fiourish. And since their economies would no longer be controlled in the interests of the imperial power, economic prosperity should follow as well.

But it was not to be. In most countries the political aftermath of decolonization was a catastrophe. Westminster-style parliamentary politics and independent judiciaries soon became rare exceptions: found only in India (a very important exception indeed) and a few others.

Instead, régimes emerged that derived their authority not from electoral competition between different groups of possible representatives but from the army and the police suppressing dissent with a varying level of brutality, or--in the best case--from populist attachment to a charismatic nation-symbolizing reforming leader.

In many places the economic aftermath was also a near-catastrophe. Relatively less oppressive modern dictatorships produced rapid and impressive economic growth in the non-Communist fringe of Pacific Asia, and in Saharan Africa. India with great tenacity maintained its hold on parliamentary democracy (but its economic growth was unimpressive).

But long-independent Latin America by and large continued to fail to close the relative income gap vis-a-vis the industrial west (although it continued to increase GDP per capita in absolute terms). And in a large belt beginning in South America, taking up almost all of tropical Africa, and also including much of southern Asia, economic growth has been the exception and not the rule over the past generation.

In Africa south of the Sahara, only Botswana, Lesotho, the Cameroon, and perhaps one or two others have managed to reduce the relative income gap vis-a-vis the industrial west. Kenya, Mali, Malawi, Zimbabwe, Guinea, the Côte d'Ivoire, Nigeria, and South Africa among others in Africa have seen rising living standards, but a rising relative income gap vis-a-vis the industrial core. In these countries the glass is still half-full: increasing relative income gaps vis-a-vis the industrial core have been nevertheless accompanied by rising living standards and productivity levels.

But in another group of countries the average person is probably poorer in absolute terms than their counterparts back in 1965: Mozambique, Togo, Ethiopia, Tanzania, Senegal, Ghana, Madagascar, Chad, Zaire, Zambia, Niger, and Uganda, among others in Africa; Argentina, Boliva, Chile, El Salvador, Jamaica, Nicaragua, Peru, and Venezuela among others in Latin America.

Why has this happened? What has gone wrong? The storehouse of industrial technologies developed since the industrial revolution is open to all. The forms of knowledge and technologies that make the industrial west today so rich are public goods. The benefits from tapping this storehouse are enormous, and have the potential to multiply the wealth of all social groups and classes--property owners and non-property owners, politically powerful and politically powerless alike--manyfold. All developing economies ought to have experienced not just substantial growth in absolute living standards and productivity levels, but ought to have closed some of the relative gap vis-a-vis the world's industrial leaders since independence.

Yet a large proportion of the successor régimes to colonial domination have failed to do so.

Absolute poverty is not the reason. Even relatively poor parts of the third world today have levels of material wealth as high as those found in seventeenth century Scotland or Italy. Resource scarcity is not the reason: the world as a whole can far more than feed itself, and there is no shortage of mineral and energy resources to provide constructive and socially valuable work for even unskilled hands.

Government by the Thieves:

One short answer is that the fault--where there is fault--lies in governments: kleptocracy--govenment by the thieves, as it has been named in analogy with aristocracy (goverment by the best), monarchy (goverment by the one), and democracy (government by the people)--has impoverished much of the third world over the past generation.

A longer answer would detail why bureaucrats, army officers, and politicians in the third world, as benevolent and as concerned with national wealth as bureaucrats, army officers, and politicans anywhere, have so often sacrificed economic development and the long-run interests of all to the short-run interests of a relative few.

Many modern dictatorships rule because the army tolerates the present rulers, either the politicians or the set of colonels who led the last coup. The first priority, therefore, is to keep the army happy: well-fed and supplied with expensive war toys imported from abroad. Modern dictatorships rule peacefully because they control the visible centers of sovereignty: the physical locations in the capital from which the bureaucracy expect to receive their orders, and the centrally-located radio and television broadcast sites through which the rulers speak to the nation. Modern dictatorships are thus very vulnerable to urban discontent. If an urban riot overruns the president's palace, the ministries, or the television stations, then the government's rule is in serious danger. The second priority, therefore, is to avoid urban riots. And the third priority is to keep the notables-the bureaucrats and the political operatives-content, and potential opposition quiet or disorganized.

The pursuit of these aims comes prior to the formation of policy in the minds of rulers. All rulers believe they are the best people for the job: alternative ruling groups are at best incompetent, most likely wrongheaded and corrupt, and at worst amoral and destructive tyrants. Unless the government can stay in power, nothing good will be achieved for the country or the people. And so the first and most benevolent deed they can dois to make sure they remain in power. Only after the government's seat is secure will debates about development policy take place. But the pursuit of a secure hold on power almost always takes up all the rulers' time, energy, and resources-and thus makes their development policies for them.

To achieve the primary aim of damping down potential threats to the government, money is necessary. And not just any kind of money. Urban workers can be appeased by cheap food and high wages, but the army and the bureaucracy require imported luxuries, which requires that the government gain control of exports. Therefore governments squeeze export agriculture most of all: the acquisition of large revenues from it is the most important means to the preservation of the government's authority. And governments squeeze the rest of agriculture next: cheap food helps to avoid urban riots. High urban wages also protect against urban discontent, and urban discontent is dangerous because it immediately threatens the symbols of authority and sovereignty.

An overvalued currency makes everyone willing to do the government favors so that they can have access to scarce currency import pemits; and it makes imported luxuries relatively cheap. This policy package thus meets with the approval of the military, of the bureaucrats, and of the urban masses. The only politically powerful groups that remain whose interests are harmed by these policies are the bourgeoisie, the business class, the entrepreneurs and industrialists that serve as the engine of economic development in market economies.

Why don't potential entrepreneurs--those who would benefit most from pro-development policies, and whose enterprises would in turn employ and sell to and thus benefit many others--work to overthrow this anti-development ruling régime? Political scientist Robert Bates asked this question of a cocoa farmer in Ghana, seeking to learn why successful cocoa farmers did not lobby and agitate for a reduction in the huge gap between the price the government paid them for cocoa and the price at which the government sold the cocoa on the world market. "He went to his strongbox," Bates reports:

and produced a packet of documents: licenses for his vehicles, import permits for spare parts, titles to his real property and improvements, and the articles of incorporation that exempted him from a major portion of his income taxes. "If I tried to organize resistance to the government's policies on farm prices," he said while exhibiting these documents, "I would be called an enemy of the state, and would lose all these."

Businessmen find themselves heavily taxed and restricted by the state. But they also know that they continue to operate at even this reduced level because of the permission of the state, and that the state has the power to shut them down. The most vulnerable spot is usually the requirement of businesses to import goods to maintain their equipment. Permits for such imports are easy to control or withhold, are relatively cheap to provide, and yet can serve as sources of very strong pressure: without small and inexpensive imported spare parts, large, expensive, and highly productive imported machines will not work.

Besides, the state can also protect key existing businessmen from potential competition: potential future entrants into industries produce the most social benefit from an economic development perspective, yet have no resources with which to lobby because they have no existing businesses or clients. Restricting them does existing businessmen a favor at very low political cost. Since the overvalued exchange rate has made foreign currency a scarce good, competition from manufacturers abroad can also be easily strangled in selected sectors as a favor to key existing businessmen.

These redistributions from the entrepreneurial cutting edge of the economy to politically powerful interest groups are particularly expensive in the long run because the social benefits from innovation, entrepreneurship, and enterprise are so high. Observers of Africa, in particular, find it hard to believe that the present set of policy régimes can last for long: it is so demonstrably and obviously irrational and destructive. But then the Soviet Union's centrally-planned economy operated for nearly seventy years before an ideological sea change led to large scale demands for reform; and whether reform in the Soviet Union will be successful is still an open question.

The natural conclusion from third world history is that successful economic development is difficult without either a limited government or a developmental state: the logic of politics is that of favors performed, wealth redistributed, infiuence exercised, and taxes collected; that is very different from the logic of economic growth. Only a state that is limited in the amount of damage it can do to the economy, or a state that is secure enough, independent enough, and committed to rapid economic growth can avoid this development trap.

Yet throughout the post-World War II period intellectuals on all sides have applauded the strength of the state, on the ground that only a strong state could perform the historical tasks necessary for economic development. As one usually clear-eyed observer, the political scientist John Hall, put it:

forced development is socially brutal. Such development cannot be achieved under the ægis of soft political rule, and this means that the chances of a transition to democracy are correspondingly at a discount. [M]odernization, under whatever politicial ægis, involves at least disciplining the peasantry and at most forcibly removing it from the land. the removel of tribalism, the destruction of rival cultures, the creation of a lingua franca, and the establishment of national bureaucracies. Third World countries have learnt with time that successful modernization is impeded by democracy. For people do not easily accept the loss of their land and of their customary ways of life: this requires force [and]a totalizing ideology."

If past patterns continue, the future of much of the third world is one of continued relative economic stagnation.

With some luck, however, an increasing relative gap does not mean absolute decline: instead, there ma well be absolute improvement in productivity levels and living standards--but not as fast as productivity growth in the industral core.

Juan Peron and Argentina:

To see how these forces worked themselves out in the years after World War II, take a closer look at one instructive case: that of Argentina.

The first thing to know about Argentina is that it has no business being a third world nation today. In 1929 Argentina had appeared as rich as any large country in continental Europe. It was still as rich as Europe in 1950, when western Europe had for the most part reattained pre-World War II levels of national product.

In response to the social and economic upheavals of the Depression, Argentina adopted demand stimulation and income redistribution. These policies were coupled with a distrust of foreign trade and capital, and an attraction to the use of controls instead of prices as allocative mechanisms. Argentina's growth performance in the post-World War II period was very poor. Even in the 1950's, and even relative to Britain, Argentine growth was slow.

Carlos Díaz-Alejandro provided the standard analysis of Argentina's post-World War II economic stagnation. According to his interpretation, the collapse of world trade in the Great Depression was a disaster of the first magnitude for an Argentina tightly integrated into the world division of labor. While Argentina continued to service its foreign debt, its trade partners took unilateral steps to shut it out of markets. The experience of the Depression justifiably undermined the nation's commitment to free trade.

In this environment Juan Perón gained mass political support.

Taxes were increased, agricultural marketing boards created, unions supported, urban real wages boosted, international trade regulated. Perón sought to generate rapid growth and to twist terms of trade against rural agriculture and redistribute wealth to urban workers who did not receive their fair share. The redistribution to urban workers and to firms that had to pay their newly increased wages required a redistribution away from exporters, agricultural oligarchs, foreigners, and entrepreneurs.

The Perónist program was not prima facie unreasonable given the memory of the Great Depression, and it produced almost half a decade of very rapid growth. Then exports fell sharply as a result of the international business cycle as the consequences of the enforced reduction in real prices of rural exportables made themselves felt. Agricultural production fell because of low prices offered by government marketing agencies. Domestic consumption rose. The rural sector found itself short of fertilizer and tractors.

Squeezed between declining production and rising domestic consumption, Argentinian exports fell. By the first half of the 1950's the real value of Argentine exports was only 60 percent of the depressed levels of the late 1930's, and only 40 percent of 1920's levels. Due to the twisting of terms of trade against agriculture and exportables, when the network of world trade was put back together, Argentina was by and large excluded.

The consequent foreign exchange shortage presented Perón with unattractive options. First, he could attempt to balance foreign payments by devaluing to bring imports and exports back into balance in the long run and in the short run by borrowing from abroad. But effective devaluation would have entailed raising the real price of imported goods and therefore cutting living standards of the urban workers who made up his political base. Foreign borrowing would have meant a betrayal of his strong nationalist position. Second, he could contract the economy, raising unemployment and reducing consumption, and expand incentives to produce for export by decontrolling agricultural prices. But once again this would have required a reversal of the distributional shifts that had been his central aim.

The remaining option was one of controlling and rationing imports.

Not surprisingly, Perón and his advisors believed that a dash for growth and a reduction in dependence on the world economy was good for Argentina. Díaz Alejandro writes:

First priority was given to raw materials and intermediate goods imports needed to maintain existing capacity in operation. Machinery and equipment for new capacity could neither be imported nor produced domestically. A sharp decrease in the rate of real capital formation in new machinery and equipment followed. Hostility toward foreign capital, which could have provided a way out of this difficulty, aggravated the crisis...

Subsequent governments did not fully reverse these policies, for the political forces that Perón had mobilized still had to be appeased. Thus post-World War II Argentina saw foreign exchange allocated by the central government in order to, first, keep existing factories running and, second, keep home consumption high. Third and last priority under the controlled exchange régime went to imports of capital goods for investment and capacity expansion.

As a result, the early 1950's saw a huge rise in the price of capital goods. Each percentage point of total product saved led to less than half a percentage point's worth of investment. Díaz Alejandro found: "[r]emarkably, the capitalin electricity and communications increased by a larger percentage during the depression years 1929-39 than 1945-55," although the 1945­55 government boasted of encouraging industrialization. Given low and fixed agriculture prices, hence low exports, it was very expensive to sacrifice materials imports needed to keep industry running in order to import capital goods. Unable to invest, the Argentine economy stagnated.

In 1929 Argentina had appeared as rich as any large country in continental Europe. It was still as rich in 1950, when Western Europe had for the most part reattained pre-World War II levels of national product. But by 1960 Argentina was poorer than Italy and had less than two-thirds of the GDP per capita of France or West Germany.

One way to think about post-World War II Argentina is that its mixed economy was poorly oriented: the government allocated goods, especially imports, among alternative uses; the controlled market redistributed income. Thus neither the private nor the public sector was used to its comparative advantage: in Western Europe market forces allocated resources--even, to a large extent, for nationalized industries--the government redistributed income, and the outcome was much more favorable.

In the absence of the Marshall Plan in particular and of an internationalist United States interested in fighting the Cold War and restructuring western Europe in general, might have Western Europe followed a similar trajectory?

In Díaz Alejandro's estimation, four factors set the stage for Argentina's relative decline: a politically-active and militant urban industrial working class, economic nationalism, sharp divisions between traditional elites and poorer strata, and a government used to exercising control over goods allocation that viewed the price system as a tool for redistributing wealth rather than for regulating the pattern of economic activity.

From the perspective of 1947, the political economy of Western Europe would lead one to think that it was at least as vulnerable as Argentina to economic stagnation induced by populist overregulation. The war had given Europe more experience than Argentina with economic planning and rationing. Militant urban working classes calling for wealth redistribution voted in such numbers as to make Communists plausibly part of a permanent ruling political coalition in France and Italy. Economic nationalism had been nurtured by a decade and a half of Depression, autarky and war. European political parties had been divided substantially along economic class lines for a generation.

Yet Europe avoided this trap. After World War II Western Europe's mixed economies built substantial redistributional systems, but they were built on top of and not as replacements for market allocations of goods and factors. Just as post-World War II Western Europe saw the avoidance of the political-economic "wars of attrition" that had put a brake on post-World War I European recovery, so post-World War II Western Europe avoided the tight web of controls that kept post-World War II Argentina from being able to adjust and grow.

The Case of Iran:

Could things have been better? The case of the Iranian Revolution suggests that in many cases the answer is "no." For the reasons that the Shah of Iran was overthrown in 1979 had relatively little to do with his faults (which were many), but had much to do with obstacles to successful economic development.

The Imperial Iranian government was a tyranny. It had a fierce and dreaded secret police. It used revenues from sales of government-owned oil to build up an impressive and powerful military. But these were not the reasons that the Shah was overthrown.

The Shah hoped to use the bulk of oil revenues to turn Iran into an industrial country in one generation. This meant, first, land reform: distribute land to turn tenants and sharecroppers into independent farmers, and compensate landlords with government oil revenues. But rapid population growth and a desire not to offend rich landlords too much meant that the plots distributed were small. The boom in oil exports and the rise in oil prices together pushed up Iran's exchange rate by a wide margin: and with an overvalued exchange rate, it became profitable to import food. So newly-propertied peasant farmers found themselves with small plots and facing declining prices for what they sold.

They were supposed to become bulwarks of the regime, grateful to it for distributing land. Instead, they scratched what they saw as an inadequate living off of too-small plots, or moved to the cities. While a large share of the Iranian population saw their incomes growing rapidly in the years leading up to 1979, a large share of the Iranian population did not.

Steps to emancipate women proved unpopular among traditional infiuence makers as well. Steps to boost education-and the Shah was truly and genuinely committed to turning Iran into a literate, educated, technologically-proficient country-also produced a large body of students and intellectuals attracted to revolutionary politics.

From exile, the Ayatollah Khomeini--a former opponent of land reform--lit the fuse, calling on the Islamic clergy and the people to seize power from the despot and make an Islamic revolution. A forty-day cycle of demonstrations began, during which young religious activists would be shot by the police, thus triggering another demonstration forty days hence to mourn their deaths. In January 1979 the Shah fied into exile.

Thereafter Iran's economy stagnated. The decade-long war with Iraq absorbed tremendous resources. And the newly-dominant religious government had little interest in economic development: "the Iranian people did not make the Islamic revolution to reduce the price of watermelons."

From a cynical perspective the interesting question might be not why was there economic stagnation in much and absolute economic decline in some of the third world, but why there was rapid growth in other portions. Brazil, Mexico, and Panama in Latin America; Morocco, and Tunisia in Saharan Africa; and Hong Kong, Malaysia, Singapore, South Korea, Taiwan, and Thailand in Asia are just some of the countries that have made impressive strides toward closing the relative material prosperity gap vis-a-vis the industrial west in the post-World War II era. How have they managed to do this? What have been the key factors separating successful from unsuccessful episodes of economic development?

Patterns of Growth

Four simple factors together account for half of the variation in economic growth rates of developing countries since World War II:

But what reason is there to think that these factors--especially equipment investment--are determinants rather than consequences of growth. The chief reason is the law of supply and demand: where growth is high, the relative price of capital goods is low. High equipment investment, low equipment prices, and rapid growth go together. If rapid growth was the cause of high investment, then the chain of causation would run from rapid growth to high future profits, from high expected profits to a high rate of investment and a high demand for equipment, and from a high demand to a high quantity of investment and a high price of equipment.

A high demand will lead to a high quantity only insofar as the high demand raises the price, and so makes it profitable for domestic producers to expand production and importers to expand imports. If high machinery investment were an effect rather than a cause of rapid growth, we would expect to see a high rate of growth and of machinery investment also associated with relatively high prices of machinery and equipment.

 

By contrast, if high equipment investment drives rapid growth, then we would expect to see supply conditions (pro-growth government policies, and a favorable environment). Favorable supply leads firms and investors to migrate down and to the right along their demand-for-machinery curve, and leads to a high quantity of equipment only insofar as the price is lower. If a high quantity of equipment leads to a rapid rate of economic growth, and so we see a high rate of growth and of equipment investment also associated with relatively low prices of machinery and equipment.

The importance of equipment investment as a correlate of growth in is not new. There is a similar pattern in the long run growth record of industrialized countries. This suggests that the association of machinery investment and productivity growth is not a result of any particular features of the post-World War II period, but instead refiects a deeper structure that will be present in most cases of industrialization and development.

The Key Role of Mechanization

Why should machinery play such a key role? It is, of course, no accident that the era in which European economic growth took off is called the Industrial Revolution. Blanqui, first to use the phrase in print, identified its beginnings in the invention and spread of those "two machines, henceforth immortal, the steam engine and the cotton-spinning [water frame]." Ever since, qualitative historical discussions of growth have emphasized the role of machinery investment in augmenting labor power. The statement that "the machine is at the heart of the new economic civilization" is typical of accounts that have assigned a central role to mechanization. Technology embodied in machinery has been"the lever of riches."

Historians of technology have argued that the capital goods industries are uniquely well suited to serve as centers for technological diffusion to other sectors of the economy where such knowledge had practical applications. Rosenberg cites the Brown and Sharpe milling machine, built during the Civil War to make twist drills required for musket production. The newly invented machine turned out to have uses far beyond its initial application. "[W]ithin ten years afterthe first machine in 1862," Brown and Sharpe "had sold similar machines to manufacturers of hardware, tools, cutlery, locks, arms, sewing machines, textile machinery, printing machines, professional and scientific instruments, locomotives" and in subsequent decades sold to " a succession of firms producing cash registers, calculating machines, typewriters, agricultural implements, bicycles, and automobiles." The new technology is largely embodied in the milling machine, and diffuses rapidly throughout the economy to the extent that other firms purchase the machine tool.

If the case studies cited by the historians of technology are representative, they suggest-like the international cross-section-that a high rate of machinery investment is necessary for rapid economic growth. Certainly an anemic rate of machinery investment has been associated with rapid relative economic decline in the past, notably that of Britain. In 1870 Great Britain was still the center of the world's most advanced technologies. But, as Arthur Lewis puts it, by 1913: "organic chemicals became a German industry; the motor car was pioneered in France and mass-produced in the United States; Britain lagged in the use of electricity, depended on foreign firms established there, and took only a small share of the export market. The telephone, the typewriter, the cash register, and the diesel engine were all exploited by others." This is certainly consistent with the hypothesis that a lack of intensive practice using the machines that embody cutting-edge technologies retards the development of the skills necessary to efficiently use such cutting-edge technologies.

This suggests a strong role for the right sort of government intervention to advance industrial development: the government should step in because private investors do not face the right incentives to invest early and heavily in modern machinery and equipment. The private market system is, on this interpretation of the way the world works, likely to do a relatively bad job in encouraging the pattern of economic activity that will lead to very rapid growth, because those whose decisions are key for growth--firms that purchase and use machinery and equipment--do not recognize and are not rewarded according to the total social return to their actions.

A government that could be trusted to concentrate on economic development, and not on state-building or on its own maintenance of power, should be capable of generating a rapid acceleration of economic growth.

But how many governments can be so trusted? And what are the preconditions for the successful creation of a "developmental state"? These are questions to which no one has the answers.

Is a high rate of machinery investment sufficient for successful development? Clearly not. It is possible to commit very large portions of national output to equipment investment and yet to grow slowly. Equipment investment appears to produce large benefits only if market price signals--rather than administrative allocations--guide its use. Are the two factors of a high rate of machinery investment and a market economy together sufficient for rapid economic growth? Perhaps. At least, to date there are no strong counterexamples. And both the macroeconomic and microeconomic evidence can bear the interpretation that equipment investment, when the allocation of equipment is determined by market price signals, is the strategic factor in long-run economic growth.

Over the past two decades, many have argued that the typical systems of regulation introduced in developing countries to accelerate development were in fact retarding development. First, they were preventing the economy from responding to international price signals by shifting resources to activities in which the country had a long-run comparative advantage. Second, they were inducing firms and entrepreneurs to devote their energies to seeking rents by lobbying governments instead of seeking profits by lowering costs.

Critics of this line of thought have not been silent. They have pointed to countries-most notably Japan and Korea--that are by every definition prone to rent-seeking behavior, have explicitly eschewed laissez-faire development strategies, and yet have grown very rapidly. And they have argued that just because some cases of government regulation have been destructive does not mean that all will be, or that at the relevant margin a shift to an activist "industrial policy" will be harmful.

Noting the salience of machinery investment as a determinant of productivity growth points the way to a reconciliation. Countries like Japan and Korea have exhibited relatively low, not high, prices of machinery. This suggests that producers of capital goods have more often than not been on the losing side of rent-seeking coalitions in Japan and Korea. If equipment truly is an important factor in economic growth, then high growth is consistent with a policy régime that is susceptible to rent-seeking as long as interests seeking high prices and low quantities of equipment investment are on the losing side of political contests. But note that rent-seeking behavior has presumably had a significant negative impact on consumer welfare in Japan and Korea, by depriving consumers of access to imports and by preserving agricultural sectors that consume much land and yield relatively little by world standards.

The general conclusion is one that Adam Smith or Karl Marx would have found natural: market economies prosper and grow when they are managed in the interests of the business class. When governments intervene to shift prices and quantities in order to distribute income away from the productive and entrepreneurial classes-both current and prospective future members of the bourgeoisie-and toward others, whether urban consumers, bureaucrats, or small-scale inefficient rice farmers-economic growth and development suffers.

However, there are powerful pressures on governments, particularly on non-representative "modern dictatorships" peculiarly vulnerable to urban unrest and military coups, that push them in the direction of becoming anti-developmental states.

These pressures have, in the post-World War II period at least, been strong enough to counteract the natural tendency for poor countries to learn rapidly about technology and catch up to rich ones. There is no clear reason on the horizon for these pressures to diminish. Optimists hope that the record of economic failure provided by much third world experience in the past generation will lead to the creation of intellectual pressures for reform strong enough to overcome the bias for stagnation.

And if ideas truly are the decisive forces making history in the long run, perhaps the optimists are right.


The Left in the Third World:

Yet another factor has made successful development difficult since World War II. The ideological currents of the post-World War II era have also made it more difficult for governments. Governments that listened to intellectuals from the left because the left had been anti-colonial--while the center and the right were, before World War II, imperialist. Thus the Indian National Congress would look to the British Labour Party--their friends in Britain--for advice on how to create the preconditions for successful economic growth.

And left wing political opinions throughout most of the twentieth century have been at least somewhat Marxist. Thus Marxist doctrines that markets are evil in their essence--that markets were bad, hence anything that replaced markets must be good--had a large influence on third world development policy in the first post-WWII generation.

The tying of left wing commitments first to the Leninist-Stalinist régime established in Russia after the Bolshevik Revolution, and then to the successor régimes that emerged from decolonization did harm to the political left as a moral entity. Marx had looked forward to immense material wealth evenly distributed, to freedom of occupational and residential choice, to representative governments, to free speech and free association. But the governmetns that the political left found itself associated with--the products of the Bolshevik revolution and of decolonization--had relatively little of these.

The commitment to representative government was the first commitment the political left threw overboard: only an educated and informed electorate could exercise its right to vote, and until such an educated and informed socialist electorate could be created, a centralized party was necessary in its place. To rank representative institutions high on any list of the criteria of a good society was, it was mistakenly thought, implicitly to attack decolonization and to defend the late colonial order. The commitment to free speech and free association went next. Nation-building required unity. If politicians and newspapers could whistle different tunes and criticize the government, this would disrupt the fragile unity of new nations. Then advocacy of private economic freedoms disappeared: all of the resources of society had to be mobilized according to a single plan for rapid industrialization.

As liberalism evolved in Europe, it proceeded from a demand for personal rights (freedoms of movement, of occupational choice, and of property, and rights against self-incrimination, against arbitrary arrest, and to justice) through political rights (freedoms of speech, of assembly, and of organization, and the right to choose one's governors) to social rights (to social insurance programs, to a relatively equal distribution of income, and to material wealth). All of these dropped away as the left found itself in an increasingly uncomfortable embrace with the regimes of "really existing socialism" and of post-colonial nationalism.

Thus the left-wing historian E.P. Thompson could write in the 1970s that:

...the Communists of the 1930's and 1940's were not altogether wrong, intellectually or politically.[the] visions [we feared] were of Panzers or of Sherman tanks rolling into the East, breathing racial purity or the freedom of capital down the barrels of their guns...

Put to one side the rhetorical pairing of Franklin Roosevelt and Adolf Hitler as exaggeration not meant to be taken seriously. Note instead that, in Thompson's mind, freedom of speech, freedom from arbitrary execution, freedom to elect the government, and material wealth orders of magnitude greater than that produced by Stalin's bureaucracy--all these piled together--count for little because they come tied to "freedom of capital."

Eggs are broken. The habit of breaking them on whim grows. But no omelet appears.

Perhaps the worst place to be in the third world in the fifty years after World War II was in the Communist regimes of Asia China. The Chinese Communist Party had won the civil war (which was interrupted for a while to fight the Japanese during World War II) because of its ability to create a hierarchical organization that could exert power in even the smallest of villages-a legacy that Mao owed to Lenin. Its opponent, the Chinese Nationalist Kuomintang, retreated to Taiwan, reformed itself (after an initial bloody massacre of Taiwanese), and became a model of post-World War II economic development. The People's Republic of China quickly became the personal dictatorship of Mao Zedong, and careened from disaster to disaster.

Chinese agriculture appears to have recovered from the devastation of World War II and the 1945-1949 civil war in the first years of Mao's rule. Official statistics--worth in this case what you pay for them--reported a seventy percent increase in wheat and rice production between the end of the civil war and the mid-1950s. The small share of China's population resident in the cities did worse, as private enterprise was destroyed and social parasites executed or sent off to concentration camps. Considerable technical and economic aid from the Soviet Union aided Chinese development before the Sino-Soviet ideological split in 1960.

The late 1950s, however, saw the beginning of a downward spiral. Agriculture was collectivized: individual farms replaced by village communes dominated by the local party official. The collectivization of agriculture was followed by the "Great Leap Forward": a policy that sprang from Mao's visionary inspiration to lessen China's industrial and human underdevelopment by making use of hte human resources of the whole country--to replace the "material" factor by the "spiritual". Never mind what the technocratic "experts" said could not be done; the "Red" revolutionaries would do it. People would make steel in backyard furnaces. China would industrialize village-by-village, without imports of foreign capital goods or the advice of foreign engineers.

Of course it was a disaster. To command--from the center--that peasants go out and build backyard blast furnaces guarantees that you will get little steel and less grain. Because the dictator had set out this policy on his own, everyone reported that the Great Leap Forward was proceeding magnificently. Perhaps forty million people died in the famine.

As the extent of the disaster became known, Mao's principal lieutenants moved slowly and cautiously against him. In December 1958 Mao was replaced by Liu Shaochi as head of state, with Deng Xiaoping as Liu's right hand man. In July 1959 Peng Dehuai, one of the highest ranking military officers and Minister of Defense, accused Mao of "subjectivism" and "petty bourgeois idealism", and sought Mao's effective retirement. Mao was retired, but Peng Dehuai was condemned for "rightism" and dismissed from the party and the government.

It took six years before Mao could arrange a counterstroke, using his power as symbol of the regime. His political counteroffensive was a call to destroy the leadership of the Communist Party, to "bombard the headquarters" in order to eliminate bureaucracy. Once again the "Red" was exalted over the "expert". Liu Shaochi was killed; Deng Xiaoping imprisoned for the heresy of claiming that it was more important to be competent than to be politically correct--"a good cat is not a cat that is red or white, a good cat is a cat that catches mice." Universities were closed; engineers were sent to the countryside to work with the peasants; technocrats of all kinds dismissed from their jobs. Mao's counterstroke was successful--although he then had to assassinate his new defense minister, Lin Piao, to keep Lin Piao from doing to him again what Liu Shaochi had done a decade before.

We do not know the human cost of the Cultural Revolution.

We guess that in 1970--after the first phase of the Cultural Revolution--that China's level of material prosperity was perhaps half that of India's, and was the rough equivalent of today's level of material well-being in Tanzania or Ethiopia or Mali or Madagascar, the poorest countries on earth.

Next Chapter

20 Century

Created 2/12/1997
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Associate Professor of Economics Brad DeLong, 601 Evans
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