Reclaiming Development, an important critique of neoliberal economics, has now been updated in the wake of the 2008 crash, and exposes the persistent myth of neoliberal success, argues Peter Stauber

A lot has changed since Reclaiming Development first appeared in 2004. After the financial crash of 2008, criticism of the sort that Ha-Joon Chang and Ilene Grabel direct at neoliberal development economics became a lot more common. In particular, as the authors write in the preface of the new edition, many countries have turned their backs on the International Monetary Fund and sought to insure themselves against possible crises in other ways. However, with the financial turmoil that began six years ago, the IMF made a comeback, as it was restored to a ‘central place as first responder to financial crisis’ (p.xxviii). This can be witnessed in the role it plays in the euro crisis, where it is responsible, together with the European Commission and the European Central Bank, for the imposition of austerity policies on the European south. Indeed, much of the criticism that the book levels at the neoliberal myths of establishment development policy is as relevant today as it was ten years ago.

The structure of the book provides a useful way of exposing neoliberal myths. In the first part, ‘Myths and Realities about Development’, Chang and Grabel first present the orthodox economic view of a particular economic problem and then offer an alternative solution. Unlike other critiques of neoliberalism, they do not limit themselves to a cursory explanation of the neoliberal view before debunking it at length, but instead go into quite some detail in exploring the myths, quoting figures and prominent neoliberal economists to support the arguments. In this way, their rejection of the theory carries more weight.

One of the most important myths is the depressingly resilient idea that neoliberalism actually works, that policies like enhancing the role of the private sector, fostering free trade, and encouraging labour market flexibility are ‘the only path to economic prosperity for developing countries in today’s globalized world economy’ (p.15). The authors tackle this claim head-on, starting with the neoliberals’ supposedly strongest claim: growth. They present figures that show that growth during the post-war period, in which state intervention was still relatively strong, was much better than in the years 1980-2000. While growth in industrialised countries fell substantially during the neoliberal era, developing countries fared even worse; average annual per capita income growth slowed from three percent during 1960-80 to half that figure in the subsequent two decades. In the poorest developing countries, there was even a decline. Growth rates during this time ‘have been buttressed by the acceleration of economic growth in the two largest developing economies, namely China and India – countries that in no sense followed the neoliberal formula’ (p.17).

An important point is made about the supposed discipline that international institutions bring to the economies of developing countries, that is to say, the claim that ‘it is vitally necessary to place policymaking authority in the hands of the technocrats that staff powerful, politically independent policymaking institutions, such as central banks and currency boards’ (p.49). Events in southern Europe over the past three years have shown how popular this idea still is with policymakers in international institutions like the IMF or the European Commission.

The same policies that were applied to developing countries in the 1980s are now being used to ‘discipline’ Greece and other indebted countries in southern Europe; privatisation of state assets, cuts to public expenditure, and the slashing of welfare budgets. It did not work then, and it does not work now. As the authors write, delegating policy to independent authorities following neoliberal policy is not only economically undesirable, as it puts severe costs on the economy and adversely affects the most vulnerable people in society, but also undermines democracy, transparency and accountability (p.49).

The second part of the book is dedicated to alternative development policy. Again, the authors first present the neoliberal view and then explain its inadequacies. They deal with everything from trade policy to intellectual property rights and capital controls. For example, they reject the myth that state-owned enterprises are always inefficient and that dynamic economies need a large private sector. They show that in fact the opposite is true: economies with large state-owned sectors have performed very well in the post-war period, and products and services ‘that are essential to human life (such as water, utilities, sanitation, basic education and communications) and critical natural resources should always be under the control of the government’ (p.88).

Even though the discussion is again detailed and sometimes technical, it serves as a useful primer on international development and economics. The authors explain, for example, how capital controls work, what the difference between brownfield and greenfield investment is, and what distinguishes foreign direct investment from portfolio investment.

However, the structure of the book – the juxtaposition of two differing views – also limits the scope of the argument. Chang and Grabel are always reacting to the neoliberal view, which means that they start at the present state of affairs, and not at the best way of organising the economy. This is why parts of the book seem to merely suggest ways to manage existing problems, rather than to propose ways to avoid the problems in the first place. For instance, they write about the problems of large capital inflows and outflows and the ways in which both can damage the economy of developing countries. The solution they propose, sensibly enough, are capital controls that manage the volume and allocation of capital (as many European countries did after World War Two), but they do not deal with the underlying problem of capital. Why is there such a large surplus in the first place? Moreover, if this surplus remains under the profit compulsion and is therefore looking for new investment opportunities, and rushing in or out of a country, it has the capacity to wreck a whole economy.

This is not really the fault of the authors, as they did not set out to present a theoretical critique of our economic system, but it does make the book seem more like an ad-hoc guide to manage problems as they present themselves now.  It does not deal with the larger problem of a capitalist economic system that will always produce dilemmas that cannot be resolved simply by establishing more state-owned enterprises or introducing capital controls.