- The Washington Times - Monday, August 21, 2006

Deepak Lal’s book reviews modern development economics from a free market perspective — rare among development specialists, who are mostly paid by organizations immune from the market. Mr. Lal demonstrates that in spite of the defeat of communism, many Western special interests still introduce rheumatism into the invisible hand of the free market.

Mr. Lal believes that although the defeat of communism discredited conventional socialist alternatives to the market, there is a new “Dirigiste Dogma” that governs economic development policies.

The Dirigiste Dogma funnels resources through kleptocratic local governments, channels aid and development advice through Western institutions whose staff have a command-and-control outlook, places nongovernmental organizations (NGOs) with anti-market political agendas at the center of development activity and forces Third World countries to adopt economically counterproductive policies on labor, trade and the environment.

Many of Mr. Lal’s examples are taken from India, and he is clear-headed on how Indian economic growth took off only after both socialism and the Dirigiste Dogma had been rejected.

Mr. Lal is particularly scathing on World Bank poverty statistics, which rely on local government data collectors whose livelihood depends on proving poverty to be a serious continuing problem: When two Indian government departments collected different statistics on poverty, the department with the more favorable (and accurate) statistics was closed down.

World poverty is much lower than is admitted by the World Bank, with a particularly rapid decline in poverty after 1980, as free market policies were adopted worldwide.

Rent seeking is incessant, not only in Third World governments but in development banks, aid agencies, NGOs and the climate science community, to the extent that neither the recommendations nor the “facts” emanating from such bodies can be trusted.

The solution is to return closer to the pre-1914 model of economic development, in which free trade didn’t have to be multilateral, development finance was provided by the private sector and countries were free to choose their own route to economic success.

Cutting off Western funding to corrupt local elites would place the private sector squarely at the center of economic growth, though new mechanisms must be found to ensure that revenues from oil and other commodities do not flow primarily to local governments.

The transition to economic success can be attained only by societies with locally owned and managed private sector companies large enough and prosperous enough to depend on success in the world market and not local political connections.

The World Bank, by funding mainly public sector infrastructure, allows local governments to waste their own money on armaments and corruption, while the International Monetary Fund (IMF), by providing a “lender of last resort” to the Western banking system, introduces intolerable moral hazard into international lending. Mr. Lal thus favors closing the IMF and drastically shrinking the World Bank to focus on only the poorest countries.

Mr. Lal’s discussion of the economic transition from medieval to modern Europe is more debatable. His location of the crucial nexus in the 11th-century papacy is eccentric, and his discussion of economic trends in early modern Europe is contradicted by modern scholarship which suggests that the 16th century saw population pressure and impoverishment in England, not economic advance.

On the other hand, he demonstrates convincingly that the cosmological beliefs of a civilization can remain unchanged while the material beliefs adapt to modernity; thus India, China and eventually Africa can follow the Japanese route of economic modernization while retaining their distinctive societies.

The principal threat to a free market world order is the repugnance to capitalism, which has developed in the West through the decay of traditional morality and the moral nihilism of the 1960s. Activists use government and NGOs to enforce their political preferences; in many cases the non-economic dictates of human rights and environmentalism are attractive precisely because they are destructive to the international capitalist order.

In a sense, this is a reversion to pre-modern practices; the merchant or trader in traditional societies succeeded by disrupting existing arrangements in pursuit of novelty, and was hence unpopular in a stable agrarian community.

The one failing of Mr. Lal’s economic model for the world, with completely free movement of labor, capital and goods, is its effect on the poorer citizens of rich countries, who the author admits are badly affected by Third World competition.

“Get an education,” he recommends — easier for a professor at the University of California at Los Angeles to recommend than for an unintellectual high school student to achieve. We may need some barriers to the completely level playing field — but let’s at least pick the right ones, and avoid the nostrums of a corrupt Western intelligentsia.

Martin Hutchinson, a journalist and banker, is the author of “Great Conservatives.”

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