Poverty of "Development Economics", The

Latin American Politics and Society, Summer 2002 by Asadullah, M Niaz

Lal, Deepak. The Poverty of "Development Economics. " 2d revised and expanded U.S. edition. Cambridge: MIT Press, 2000. Tables, figures, appendix, bibliography, 193 pp.; paperback $22.95.

The discipline of development economics has undergone considerable growth since the mid-twentieth century. Arguing that orthodox neoclassical economics, based on the price mechanism, is inadequate for our understanding of the causes of the underdevelopment of the vast majority of countries in Asia, Latin America, and Africa, this book has sought to provide a superior roadmap to solve the puzzle of underdevelopment.

Its evolution can be traced in the early writings of Hirschman, Arthur Lewis, Nurkse, Myrdal, and others. At the heart of this discipline is the concept of the "dirigiste dogma"; that is, the state as the provider of economic and social goods and services. This book attempts to critically examine the economics of that concept. Deepak Lal argues that the theoretical explanations used to justify active state interventions in developing economies are often incorrect, devoid of policy relevance, or weak in empirical support. Lal concludes by questioning the need for the discipline of development economics.

After an introduction to the dirigiste dogma in chapter 1, the second chapter, "The External Environment I: Trade," discusses different myths that have dominated development thinking, such as terms of trade, foreign exchange bottlenecks, the effective rate of protection, and other protective measures. This also provides a critical review of the major theoretical tenets of development economics. The author examines the empirical literature that tests models of underdevelopment propounded by Arthur Lewis, and other theories, such as the Singer-Prebish theory of declining terms of trade, and foreign exchange bottlenecks. Arguing that it is the internal constraints rather than the external environment (such as southern prosperity, as argued by Lewis) that retards the process of development, Lal identifies the liberal trade regime as a necessary condition for growth.

The third chapter, "The External Environment II: Commodities and Foreign Capital," analyzes other debates about the external environment facing the developing countries, particularly in the post-World War II period. The author shows how the Third World concern for commodity prices is unwarranted and the relevance of a commodity scheme is limited. He demystifies the conventional fear regarding foreign capital, which has haunted developing country policymakers, by defending the role of direct foreign investment (DFI) in development, explaining why the logic of appropriate products and simple technology is fallacious.

Lal then turns to one of the most important issues in the development process: industrialization and planning. In the fourth chapter, he draws on the Indian experience of industrialization and government planning as an example. He once again stresses the need for a regime of free trade for the purpose of successful industrialization.

Last, in chapter 5, "Poverty, Inequality and Employment," Lal talks about the most popular argument for government interventions: alleviating poverty, reducing inequality, and generating employment for the masses. Drawing from the literature on the relationship between inequality, poverty, and economic growth, and experience with land reform and rural development, he observes that "efficient growth ... is probably the single most important means of alleviating poverty" (p. 102). Government failure from rampant corruption and insufficient information means that to maintain a noninterventionist regime is second-best. An imperfect market is therefore superior to imperfect planning, and the institutional bases of neoclassical economics should be accepted to address the problem of development. The conclusion drawn by the Indian economist in chapter 6 sums up neatly the book's argument: "[the] demise of development economics is likely to be conducive to the health of both the economics and the economies of developing countries" (p. 109).

Lal expands this second edition with a new section, "Postscript 1997." The need for such a revision was acknowledged following the recent developments in East Asia, which, according to Lal, provide some fresh impetus for dirigisme. This section, organized in four parts, updates the reader by means of a nice review of the more contemporary debates on development up to mid-1996. The first part presents a brief but succinct historical summary of development experience (transition from plan to market) of the Third World in a global setting. As such, it highlights the new consensus that has emerged among the policymakers so as to reverse past dirigisme in the developing world.

In the second part, through his review of major events as well as ideas, Lal attributes to dirigisme recent crises in developing countries of Latin America and sub-Saharan Africa. He takes the reader through all the "major" arguments used by the dirigiste school and argues passionately against each of them. He seeks to expose the weakness of the argument for optimal tariff (as follows from commodity power); he explains the debt crisis as a mere consequence of dirigiste dogma, and faulty exchange rate policies for the lack of success of Latin American and sub-Saharan countries in the process of structural adjustment.