a young person's guide to economic policy in the third world

Economic policy, like other policy, is not just shaped by events: the prevailing intellectual environment matters. Following the reconstruction of Western Europe, after the Second World War, hopes for rapid development in the Third World were extravagantly high: political leaders and development economists saw underdevelopment as a temporary and primarily material problem to be solved by industrial investment. They also believed that welfare would spread automatically through the trickle-down effect and, accordingly, need not be considered. And so, economic growth was the sole aim of economic policy until the late 1960s. An important factor in this endeavor was development assistance. Economic growth did improve the lot of the poor in many developing countries and was still favorable throughout the 1970s, despite a mounting debt burden and the first oil crisis (1973-1974), which saw the price of raw materials fall. However, skepticism in developed countries about the adequacy of economic growth as the sole measure of development mounted because of growing poverty, unemployment, and income inequality in developing counties. (The distribution of welfare depends more on the structure of the economy, which does not necessarily change as a result of economic growth.) Consequently, the growth objective was supplemented by concern for increased employment, redistribution of welfare, and the satisfaction of basic needs. These ideas, however, were not received with enthusiasm in developing countries because they threatened to divert attention from the perceived need to reduce inequalities between countries, and from the developed countries’ joint responsibility in this enterprise. Notwithstanding, at the end of the decade the second oil crisis (1979-1980) provoked a deep economic recession in developed countries and a further drop in the demand for raw materials, which had already been in structural decline as a result of technological advances (stemming from greater efficiency and recovery of used products and the emergence of substitutes). Many countries experienced swingeing adjustment programs. More people than perhaps ever before suffered falling standards of living because of forced reductions in government spending, elimination of food subsidies, devaluations, and privatizations. The 1980s were overshadowed by the debt crisis and structural adjustments but witnessed also a reassessment of the market mechanism and the role of the private sector, as well as important steps towards the liberalization of the world economy. East and South-East Asian countries were the only developing countries able to achieve more rapid economic growth than that experienced in the 1960s, largely because they managed to stabilize their economies (via low inflation, realistic exchange rates, and control of government spending), implemented adjustment programs, and therefore attracted more development assistance. Because of the retreat of central planning in the 1980s and the apparent success of East Asian countries, there is now a desire for less government control, financial sector liberalization, more private enterprise, more autonomy for government-owned enterprises, and more reliance on competition. Signs of a world order geared to economic performance, and of a division splitting the South and the East into front-runners, those of intermediate pace, and stragglers, appeared in the 1990s. The front-runners are those countries whose economies feature high levels of technical innovation in products and production processes, and in methods of organizing production, distribution, and marketing. Those of intermediate pace are the countries whose economies will certainly not lead the field, but which will have sufficient comparative advantages in certain sectors to derive a measure of benefit from their activities. The stragglers are those countries whose economies do not have enough inherent vitality to stay the pace. With the end of the Cold War, symbolized by the breaching of the Berlin Wall on 9 November 1989, the political relevance of the latter has waned and they are being left more to their own devices. To complicate the situation, however, there is ample evidence to suggest that development does not work when attention is focused exclusively, or even primarily, on economies. Until the 1990s, the reigning worldview that economic growth deserves highest priority went almost entirely unchallenged. Not only was it assumed that the development of economies should be the central preoccupation of public policy, but most corporations, governments, and international institutions exerted all their efforts to this end: societal goals became synonymous with economic goals, e.g., material production and consumption, investment, productivity, growth, and profit. Those favoring societal goals now contend that culture, defined as the total way of life of a people or society, should be the focus of future developmental activity because it is concerned with the entire spectrum of human needs, as well as mankind’s relationship with the environment. Increasingly, some of the less appealing consequences of the Western economic miracle are condemned. They include pollution and destruction of the global ecosystem; exploitation and exhaustion of renewable and nonrenewable resources; and satisfaction of the materialistic demands of the few at the expense of the many. Not only is the environment more and more polluted and incapable of generating the resources required to support a rapidly expanding population, but the economic system as a whole fosters the interests of a small group of countries to the detriment of others. Thus, despite the appreciable gains that have been achieved in industry, agriculture, commerce, health, education, and technology as a result of placing economics and economies at the center of economic policy, these accomplishments have been offset by the numerous inequalities, inequities, and injustices which exist in income distribution, as well as by the colossal damage being inflicted on the environment. (December 1996) Copyright ©2002 Olivier Serrat