Monday, November 2, 2020

Review of How Rich Countries Got Rich and Why Poor Countries Stay Poor by Erik S. Reinert

Book can be found in:
Genre = Economic Development

Elaborate Description

There are two main themes in this book which are economic development and attacking neoliberals (neoclassical economics). Reinert points out that neoclassical policy recommendations have impoverished countries and are only helpful for trade between already rich countries. The main reason for the impoverishment is specialization in diminishing return products. Rich countries have an industrious base that taps into increasing returns products which also provides synergies for their own diminishing returns products.

The primary sector employment deals with food production and other natural resources. The more natural resources extracted, the harder it will get to extract more of the resource. Imputing more labor into production while getting less of the product means there are diminishing returns to production. The secondary sector employment deals with changing the natural resources to other products. These industries have decreased costs with increased production. Increasing returns to inputs. Countries get rich by investing into the increasing returns production such as industry, while countries become poor by investing more into diminishing return production.

Reinert urges poor countries to emulate what rich countries did rather than what rich countries say. Rich countries advice poor countries to specialize in their relatively efficient production such as agriculture and get rid of the inefficient production such as manufacturing. Countries who listened to rich countries had their industrious base removed, moving employment to production with diminishing returns. Reinert make the point that without alternative employment outside the diminishing returns production of natural resources, there is downward pressure on the wages.

Industry, such as manufacturing, operate under economies of scale which have cost decrease as production increases. Wages in industrial nations are higher because of their capacity for increased returns. Industrial nationals also require more knowledge and mechanization which increase wages further. Many industries cannot break even until producing enough products. Industry needs time to learn and grow. Poor countries should emulate the way rich countries got rich, by protecting their industries. Those protections become counterproductive only when the industry is large enough. When the industry is large enough, it can be competitive with similar industries in other nations.

The reason why economists keep claiming the Ricardian trade theory is due to a lack of history and mathematization. The dominant trade theory is easily represented in numerical form and can be internally well defended, but empirically poor to reality. Not taking into account the qualitative factors causes the models build to suffer from being to scholarly as opposed to being founded in reality of what actually happens. Economists claiming policies also do not look at what policies were actually implemented. Without learning the history of what policies actually took place and their impacts, the gap between rich and poor countries will continue. Now it seems that prescriptions for poor countries are palliative, targeting the ailments rather than the root causes.

As there are two main themes in this book, there are also two main problems with this book which are an underdeveloped production understanding and an overdeveloped attack on opponents. Reinert uses history throughout the book, but claims that emulation started with Henry VII. Empires have been emulating other states before the 15th century such as Mesopotamia appreciating Greek philosophy and living standards. Part of history is the difference between what the policies were implemented and what economists claimed should be the policies. The problem is that the economists he attacks do use real events but also express the alternatives. With the irony that Reinert uses history and expresses the alternatives.

Many paradoxes arise with overly attacking the opponents. In one chapter, claims that neoclassical theories cause problems. At another, claims that policy makers do not listen to neoclassical theories. Neoclassical theories are still blamed on the problems while claiming that they are not part of practice. This may be due to the reference that the rich countries can coerce the poorer nations to take on more of the neoclassical theories than the rich countries do in practice. Even so, the references made to poor countries have attached policies which further impoverished the nation. Another irony is that when referring Smith, depending on what he wants to express, Smith both expressed industrialization and did not see industrialization. That Smith was a theoretical, but actually went to the factories to see what was being done in practice. Smith wrote a book discussing that the means of production are the wealth of nations and not just money which had the aim of going against mercantilism, but Reinert considers Smith a mercantilist.

The development economics in the book is missing complexity. Appreciating creative destruction but only mentioning the creation part of industrialization. With industrialization, it seems that everyone wins. There does not seem to be any bad side to protecting industries. When countries tailor policies for the politician’s benefit, as long as it helps the country a little, would be considered good under the descriptions. Policies that produce industry at the expense of everyone else is not in this book. Historical examples used only support the view that industries have increasing returns. What is missing is the industrialization of china and USSR, both of which caused massive harm on their own people. By not including history that disconfirms his theory, commits the same flaw as the neoclassicals, making things internally perfect but empirically terrible.

Another missing history is when other countries emulate every other country tax policy like the cause of the Great Depression. With countries increasing the protections of their own industry, production came to a halt. This is the fallacy of composition, in this case, when one or a few countries protect their industries they do benefit, but when too many protect their industries everyone suffers. For certain industries, there can only be a certain number of producers to reach economies of scale, but these qualifications are missing from the book. The only qualitative factor that is in the book regards the time factor, where opening the industry to international competition should be only after it grows large enough and the protections should be gradually removed.

The book has a powerful message that poor countries should emulate the rich countries economic structure rather than listen to what rich countries want them to do. The message is lost in between the theoretical battle in which he is right in many cases but with too many simplified and wrong characterizations. Shortening the attack on theory, and increasing the understanding of the developmental economics would have greatly benefited this book.

Book Details

Edition ISBN:  9781586486686
Pages to read:   338
Publication:     2008
1st Edition:      2007
Format:            Paperback

Ratings out of 5:
Readability     4
Content           3
Overall           3