Actually, it's quite clear that the opposite is true. The past 20 yearshave been an abject economic failure for most countries, with growth plummeting.The World Bank publishes data on the growth of income per person, as do otherofficial sources. But few economists and almost no journalists have seen fit tomake an issue out of what history will undoubtedly record as the most remarkableeconomic failure of the twentieth century aside from the Great Depression.
Consider this: In Latin America and the Caribbean, where gross domesticproduct grew by 75 percent per person from 1960 to 1980, it grew by only 7percent per person from 1980 to 2000. The collapse of the African economies ismore well known, although still ignored: GDP in sub-Saharan Africa grew by about34 percent per person from 1960 to 1980; in the past two decades, per capitaincome actually fell by about 15 percent. Even if we include thefast-growing economies of East Asia and South Asia, the past two decades faremiserably. For the entire set of low- and middle-income countries, per capita GDPgrowth was less than half of its average for the previous 20 years. Also, asmight be expected in a time of bad economic performance, the past two decadeshave brought significantly reduced progress according to such major socialindicators as life expectancy, infant and child mortality, literacy, andeducation--again, for the vast majority of low- and middle-income countries.
There is no disputing this data; nor can anyone take issue with the timeperiods chosen for comparison. This is not a cyclical phenomenon: Both of theseperiods contain a world recession, and the 1970s had major oil shocks. In fact,if full data were available for the 1950s, the past 20 years would look evenworse.
Yes, growth isn't everything, but it's all that the authorities who havedirected policy for most of the developing world--the International MonetaryFund, the World Bank, the U.S. Treasury Department--have promised to deliver. Ifthe basic facts were better known, one big economic question would occupy centerstage with regard to the developing world: What are the structural and policychanges that have led to this terrible economic failure?
What Went Wrong? It is, of course, difficult to isolate the causes of along-term, worldwide economic decline that involves so many economies in verydifferent stages of development. But there is a pattern to the policies that haveemanated from Washington, D.C., during the past 20 years; and a few examples canillustrate a big part of the story. The Asian financial crisis of 1997 was brought on by an opening of capitalmarkets that led to a rapid inflow of foreign funds. This was forcefully promotedby the U.S. Treasury Department, despite the fact that the affected countries hadhigh domestic savings rates and did not necessarily need to increase theirforeign borrowing. As Nobel laureate Joseph Stiglitz--the World Bank's chiefeconomist at the time--has pointed out, the architects of this policy did nothave a single study showing that opening up capital markets led to higher growth.In this case, the policy had the opposite effect: In 1996 and 1997, there was areversal of capital flow that amounted to about 11 percent of the GDP of SouthKorea, Indonesia, Malaysia, the Philippines, and Thailand. The outflow of fundscrashed the local currencies and set off a financial panic. Washington intervened in several ways that helped transform the crisis into aserious regional economic downturn. First, Treasury convinced Japan to abandon aproposed Asian monetary fund, that would have provided at least $100 billion tostabilize the currencies before they went into free fall. Second, the IMF imposedunnecessary fiscal and monetary austerity on the crisis-ridden economies, withinterest rates as high as 80 percent in Indonesia. There were other majorblunders as well, and the result was disastrous: In 1998 Indonesia's economyshrank by 13.7 percent and Thailand's by 10 percent. The Asian crisis spread first to Russia and then to Brazil. This illustratesanother debilitating effect of the period's reckless liberalization ofinvestment: "Contagion" could now spread panic among countries that had only theslightest of commercial relationships with one another. The herd behavior ofinvestors who sought to avoid the next emerging-market meltdown was the onlyconnection needed. Once again, the IMF's intervention exacerbated the damage. In both Russia andBrazil, the organization insisted on maintaining overvalued exchange rates,propping them up with enormous loans ($42 billion in Brazil) and high interestrates (up to 170 percent in Russia). In both cases, the currencies collapsedanyway; the countries had suffered lost output and high-debt burdens in exchangefor no economic gain. The IMF's only proffered argument for maintaining theovervalued exchange rates was that a collapse would trigger hyperinflation. Butthe hyperinflation never occurred; and both economies responded very positivelyto the currency devaluations, with Russia recording its highest growth in twodecades (8.3 percent) in 2000. This scenario has been repeated most recently in Argentina, where thegovernment is currently defaulting on the mountain of debt it has accumulated inmaintaining its fixed exchange rate through four years of recession, a triplingof interest rates, and a phenomenal $40-billion loan package from the IMF lastDecember. To grasp the absurdity of the situation that Argentina was drawn into,imagine the U.S. government borrowing $1.4 trillion--70 percent of the federalbudget--to keep the overvalued dollar from falling. The transition economies are a special case, but they illustratethe monumental damage that can be done when America's best and brightest aregiven free rein to design a new society. Russia lost about half of its nationalincome in just a few years after adopting the recommended "shock therapy" programin 1992. Although the IMF has tried to deny it, Russia really did follow itsprogram, including immediate decontrol of prices (which resulted in 520 percentinflation within three months) and rapid privatization of industry. Thegovernment even met most of the IMF's fiscal and monetary targets, at least untilthe economy had collapsed to the point where barter became the preferred mediumof exchange. The result was a newly underdeveloped country with a per capitaincome that was less than Mexico's; outside of wars or natural disasters, it wasthe worst economic collapse in history. Other structural and policy changes also slowed growth in low- andmiddle-income countries during this period. Tight monetary policies (highinterest rates) were part of a general trend in IMF lending requirementsthroughout the developing world. This trend was evident in high-income areas aswell, including the United States and Europe (where it prevails today), and theresulting slower growth also hurt developing countries through reduced demand fortheir exports. In addition, monetary reserves held by developing countries grewmarkedly, probably as a result of more financial instability and globalization.In terms of forgone investment, the cost of holding these reserves issignificant--probably between 0.4 and 2 percentage points of annual growth,depending on the country's accumulation. The West's Double Standards The failed policies of the past two decades are oftendescribed as a product of extreme free-market or free-trade ideology. But this isnot accurate. For example, in the countries that sacrificed the economy in orderto maintain a fixed exchange rate--Russia, Brazil, and Argentina--the free-marketsolution would have been to abandon the peg and let the currency fall. In theAsian crisis, one of the few things that Washington actually did accomplish wasto get the governments of the region to guarantee the privately held debt offoreign lenders, rather than letting the banks be subjected to the discipline ofthe market. The more consistent pattern is that the national interests of thedeveloping and transition countries have been increasingly sacrificed for thesake of more-powerful foreign interests. This is perhaps most obvious in the caseof intellectual-property rights. The global South already loses some tens ofbillions of dollars annually to these foreign monopolies--a drain of resourcesthat will multiply if the rich countries succeed in implementing the World TradeOrganization's TRIPS (Trade-Related Aspects of Intellectual Property Rights)agreement. (To put this in perspective: Total Official Development Assistancefrom high-income countries to developing ones was $40.7 billion in 1999.) Patent monopolies are the most costly, inefficient, and--in the case ofessential medicines--life-threatening form of protectionism that exists today.From an economic point of view, they create the same kinds of distortions astariffs, only many times greater. Yet the attempt to extend U.S. patent andcopyright law to developing countries has become one of the primary objectives ofAmerica's foreign commercial policy. The expansion of foreign intellectual-property claims not only drains scarceresources from developing countries but also makes it difficult for them tofollow the more successful examples of late industrialization, such as SouthKorea or Taiwan, where diffusion of foreign technology played an important role.This is part of a more general problem that is reflected in the economic failureof the past 20 years. There have historically been many paths to development, butnone resembles the collection of policies that Washington foists upon developingcountries today. The late-industrializing countries used various combinations of industrialpolicy and planning, state-owned industries, extensive controls on subsidies andexchange rates, tariffs, and import restrictions to reach the point at whichtheir industries and firms could become internationally competitive. In manyrespects, these strategies were similar to those of the high-income countriesthat came before them. The United States had a hefty average tariff of 44 percenton manufactured goods as late as 1913. But the rich countries are now "kicking away the ladder," as economist Ha-JoonChang describes it in his forthcoming book by that title. It is difficult to sayhow much of the growth slowdown has resulted from the prohibition of potentiallysuccessful development strategies and their replacement by a rigid adherence tothe theory of comparative advantage. Trade liberalization has historicallyfollowed development, as national economies became competitive on world markets.It would not be surprising if attempts to reverse this pattern proved to becounterproductive. In response to such criticisms, the World Bank has produced a seriesof papers and arguments purporting to show that the countries that "globalized"the most during the past two decades were the most successful. Yet this researchproves nothing of the sort, as Harvard University's Dani Rodrik has demonstrated.It takes the trade share of GDP as its measure of globalization. But trade shareis an outcome, not a policy variable; it tends to increase with growth. So allthat the World Bank has really shown is that faster-growing countries tend toincrease the proportion of their economy devoted to trade. Indeed, the World Bank's favorite "globalizers" seem to be three countrieswhose growth has accelerated over the past 20 years: China, India, and Vietnam.But China and India have two of the most protected domestic markets in the world.China does not even have a convertible currency, and India retains strict capitalcontrols. So does Vietnam, where the majority of investment in recent years hasbeen undertaken by the state. The successful globalizers, then, are the exceptions that prove the rule. Andif there is any rule that can be gleaned from successful development experiences,it is that the conditions under which international trade and investment cancontribute to growth and development are country-specific. Even some of the mostbasic questions of international finance, such as whether to have a fixed orflexible exchange rate, depend on specific national institutions. All the morereason to let national governments make their own economic policies. But that is exactly the point that Washington's army of economists andbureaucrats will not concede. And they have a powerful creditors' cartel, headedby the IMF, that is able to determine policy for dozens of borrowing countries. Agovernment that does not comply with the IMF's conditions will often not beeligible for private credit or, in most cases, for credit from the World Bank,other multilateral lenders such as the Inter-American Development Bank, or Groupof Seven nations. Until this cartel is broken--or its policies drastically changed--onlycountries whose governments are strong enough to stand up to it will have areasonable chance of reversing the economic failure of the twentieth century'slast two decades.
