Book Review: Beating the Odds by Lin and Monga
Once again, I find myself called upon to critique the central tenets of welfare economics. Quarrelling with the giants of the profession is something I undertake with reluctance and humility. Alas, someone has to do it.
That the so-called “evidence-based policy making” (RCTs and comparative cross-country regression analyses, and so on) is pulling wool over our eyes is incontrovertible (see for example Angus Deaton & Nancy Cartwright). The researcher does not have the unilateral right to call the facts that they like “evidence” to be emulated and the facts that they don’t like “problems” to be eliminated. There are good reasons to justify the welfare approach to development but “evidence” is not it: evidence cannot be used to justify ignoring local facts in order to impose imported facts. For example, the fact that a school is failing is evidence; the proper use of this evidence is to accept it and act on it accordingly — for example, by recognizing alternative forms of knowledge transmission and differences in the relevance and applicability of formal education. I suggest that we differentiate these two ways of using evidence by calling the siloed assessment of local facts “evidence-based policy making” and the invidious comparative assessment and universalist interpretation of local facts for purposes of a totalitarian implementation of social programs by a different name such as “welfare economics” or “socialism”.
Using welfare economics or socialism has the following advantages. First and foremost, it provides ownership and accountability. For the social program seeking to interfere with, and deprive, citizens of their autonomy and right to self-determination, agency, and dignity (e.g., labelling them with pejorative opinion adjectives such as poor, failing, underdeveloped, and so on), to be undertaken with justice, it must have an owner who is accountable for the outcomes. We have to acknowledge that the valuing system being privileged is the result to a subjective human decision and not the dictate of objective scientific facts [or the discovery of neutral information in the form of prices]. Secondly, the developmental challenge is a multi-decade undertaking that requires hand-on management rather than the drive-by, or fly-by, arms-length research analyses being currently provided. Finally, the developmental path is nonlinear; it faces multiple setbacks that require the developmental program to step back in order to move forward. This dialectical dynamism is precluded in blind policy emulation which, therefore, opens the door to rampant corruption while closing the door of common sense.
Side note: Using socialism is consistent with Max Weber’s Socialism (first published 1916, Eds. W.G. Runciman, Chapter 12) and Joseph Schumpeter’s (1942) Capitalism, Socialism and Democracy. In Weber and Schumpeter, the defining feature of socialism is the growth of regulations and the promotion of large scale public and private enterprises so that most people are [unhappily] working for others rather [happily] working for themselves (i.e., entrepreneurship). Joseph Stiglitz (Whither Socialism, 1994, p. 20) has also argued that the separation of ownership and control of business enterprises has minimized the importance of [private] ownership: owners, whether public or private, have limited control over managers.
Welfare economics will be the lens with which I examine Justin Yifo Lin and Celestin Monga’s “Beating the Odds: Jump-Starting Developing Countries”. In particular, I will examine a fundamental flaws in the main thesis of the book: the way that the market system is co-mingled with human-managed institutions. I will also elaborate briefly on genuine market process as an autonomous alternative to human-managed industrial policy.
It has to be said from the outset that the book is a bold challenge to the currently predominant economic thinking. According to the inside cover, it confronts the “conventional wisdom [that] countries that ignite a process of rapid economic growth… [need]… essential preconditions for development such as good infrastructure and institutions”. Exactly when these now-retired world leading economists (World Bank and African Development Bank respectively) came to this epiphany is not clear. What to make of this u-turn is up to the reader.
Be that as it may, the author seek to debunk “the misguided notion that economic prosperity can occur only in places with an excellent business environment and that growth is the result of painful and politically difficult reforms” (p. 5–6). They do this by shedding “light on ways economic transformation can be engineered even in countries with a suboptimal institutional environment and weak overall physical and human capital (p. 6). The fuel for this illumination is lessons from economic history, economic theory and economic analysis.
Beating the Odds: Jump-Starting Developing Countries
The choice of this particular title —which, by the way, is a quantitative title that is never quantified — suggests, to me at least, a Freudian slip. This gambling analogy is indicative of an underlying flippant attitude towards “poor” people's right to self-determination. Not only do the author’s initial decidedly low estimation of developing countries’ potential fail to inspire, but — if we rely on the subtitle — the odds after their proposed intervention are equally uninspiring. Merely jump-starting a dead battery does not replicate the functions of working battery. Going by the choice of analogy alone, therefore, Lin and Minga’s “practical blueprint for moving poor countries out of low-income trap regardless of circumstances” leaves a lot to be desired.
Why so many beauty salons in a township?
The tone of the title continues to the first page where we are left to ponder this momentous question about the people of the township of Diepsloot, Johannesburg, South Africa: why so many beauty salons in a township? The authors, it seems, are merely surprised that the people in this township are “among the hardest working and most entrepreneurial in the world”. But find “most surprising” “…the high concentration of barbershops and beauty salons.” Apparently non-tradable services focusing so much on beauty — arts of elegance and the aesthetics of the body — are to be expected in “Hollywood, Paris, or Milan” but not this low-income neighborhood. However, this realization that their preconceived ideas about township life is fundamentally wrong does not seem to have slowed the penchant to rush to judgment. They write:
“poor people, just like everyone else, have high ideals for their actions and behavior, such as requiring that their decisions conform not only to economic utilitarianism of survival …but also to moral standards of self-love and self-respect, such as “clean”, “good-looking”, “elegant”, “free from contempt, or desired”. (p. 2)
Clearly, these people are not “just like everybody else”: the concentration of “non-tradable services focusing so much on beauty” — that is, rejection of economic utilitarianism — is special. However, having discovered this specialness among this particular representative of poor people, the insight is not much translated into policy recommendations!
Puzzling assertions supporting the central thesis of the book
1. Economic development… started with the Industrial Revolution
The notion that “economic development… started with the Industrial Revolution” (see p. 3,16) is one of several puzzling assertions that support the central thesis of the book. This statement is so patently ridiculous that I, at first, dismissed it as a poorly stated obligatory homage to the book’s benefactors [I will refer to Aristotle (384–322 BC) from whom our theories on economic development originated and have not been much superseded). However, further reading revealed that the book is held together by this notion that the industrial revolution in Europe is the original and singular template for economic development. More succinctly, there are no competing developmental models for developing countries to choose from.
We will leave to the side the fact that the industrial revolution — when it arrived, for example, in Africa, between 1880 and 1900 — was a period of unprecedented loss of life, wealth, health, ecology and culture. In Europe itself, the notion that the industrial revolution is part of the rise of the mechanized factory system is extremely anachronistic. Secondly, direct research continues to cast serious doubt on the alleged welfare benefits of the industrial revolution (see Feinstein,1988; Revolutions of 1848 that the informed Marx and Engel’s The Communist Manifesto; Emma Griffin’s Liberty’s Dawn: A People’s History of the Industrial Revolution).
2. Socialize the costs and capitalize the profits
Having established the industrial revolution in Europe as the singular developmental model to be emulated, the authors can examine some of its tendencies. They write: “Economic development….is a process of continuous improvement in labor productivity through industrial and technological upgrading. It is fueled by entrepreneurship and facilitated by an enabling government that provides appropriate infrastructure and institutions and encourages learning and knowledge sharing” (p. 3).
The authors are well aware that development is a tranformative process of discontinuous change (see paragraph 3 of the same page). However, they find the justification for discounting discontinuous change in the fact that “the history of successful economic development includes only a handful of countries that have…gone through the process of creature destruction” (ibid). It seems the authors believe that countries can escape the consequences of creature destruction merely because they did not initiate it. Alternatively, countries can escape creative destruction when the government “select[s], identif[ies] , and target[s] of industries in which an economy has a comparative advantage — that is, low factor costs of production compared with producing similar goods and services in other countries” (p. 3). Only then should the government can hand the baton to the favored “industrialist” to reap the profits.
We also learn that “countries that have undergone successful transitions, such as China, Mauritius, and Vietnam, adopted a pragmatic, gradual, dual-track approach” (p. 5). By dual-track the authors mean that these countries embrace the create part and reject the destruction part. In this manner, not only does the government provide the appropriate infrastructure and institutions; bear the costs of identifying, selecting, and targeting of industries where the country has comparative advantage; it must also shield the “industrialist” from the consequences of mistakes, and technological change.
Alternative Ideas
The central thesis of the book is that the government plays a vital role in industrial policy. This type of policy intervention has been promoted by others including Dani Rodrik’s One Economics, Many Recipes: Globalization, Institutions, and Economic Growth. While the two books have important similarities, there is a fundamental difference in how comparative advantage is operationalized.
1. Functional (or transient) verses structural intervention
In “Beating the Odds” — it can be argued — the sources of comparative advantage are environmental conditions that pre-exist (or emerge organically) rather than manmade institution building. The role of the policymaker is therefore functional first and institution building second as the latter follows a common sense exploitation of the comparative advantage. As we read in the book, the Chinese local authorities [of Anding County in Gansu province] considered seasonal nature of potatoes, developed new and better product varieties, offered subsidies to build storage facilities and the promoted the creation of a potato processing industry (pgs. 10–11). Therefore, “in sum, sensible industrial policy by local government led to [the] remarkable transformation … [so that the county has become China’s potatoes capital]” (p. 11).
In Rodrik’s account (see chapter 5) — the logic is somewhat less developed because the analysis relies on comparative empirical analysis rather than a direct examination of internal processes—manmade institutions to discover the “price” incentives to support private initiative are a prerequisite of realizing comparative advantage. As Rodrik states it, “it became clear that incentives would not work or would generate perverse results in the absence of adequate institutions” (p. 153).
Lin and Monga have to be commended for this functional approach relative to prior research. The structural approach has limitations as I discussed in the post Reflection on the 2021 Africa Evidence Summit. I have called this problem, the self-propagating structural and institutional fragility that the productive activity itself brings about.
2. Fundamental Flaw of Industrial policy
The industrial policy of both approaches, however, makes a fundamental error in the way that the market system is co-mingled with human-managed institutions. Industrial policy, as indeed economics in general, assumes that financial reward and the utility of the industrial produce are complementary rather than contradictory. In this framework, the role of markets is reduced to providing [discovering] information about prices/value and reducing transaction cost. Consequently, money prices and utility are used interchangeably. Lin and Monga seem willfully unaware of this contradiction (i.e., that increases in production and utility are often accompanied by reductions rather than increases in financial reward) when they observe,
“increased production attracted many traders who knew nothing about price information .…analysis of government’s supply chain revealed that lack of market information and weak-collective-bargaining power among farmers were the main reasons for their low share of income [from potatoes]” (p. 10).
However, this difference between money prices and utility has been know at least since Aristotle who observed:
Of everything which we possess, there are two uses: both belong to the thing as such, but not in the same manner, for example, a shoe is used for wear, and is used for exchange; both are uses of the shoe. He who gives a shoe in exchange for money or food to him who wants one, does indeed use the shoe as a shoe, but this is not its proper use, for a shoe is not made to be an object of barter…. In the first community, indeed, which is the family, this art [exchange] is obviously of no use, but it begins to be useful when the society increases (Politics, Book I, Chapter 9, 1257a)
This difference is central to Schumpeter and Minsky as I discussed in my working paper Economics of Microcredit-From current crisis to new possibilities.
This problem of use-value versus exchange-value can be summarized as follows: does the policymaker direct prices or is she directed by [discovery of] prices?
3. Does the policymaker direct or is she directed by prices
If exchange is merely a more efficient form of barter, what causes prices and utility to move in different direction? For Aristotle, divergence is due to the “art of getting wealth” by “unnatural” production for exchange in a firm (1258b). Therefore, Aristotle’s association of this divergence with “wealth-getting” suggests that divergence is a potential tool for the policymaker to be exploited rather than as a mistake to be corrected. Karl Marx also viewed divergence as a tool within the developmental process, albeit in a more negative sense as part of social relations.
Needless to say, the notion of divergence as a potential tool for the policymaker is absent in standard economics. The seminal paper by Coase “The Nature of the Firm” (1937) seems to be the decisive moment when standard economics turned towards transaction costs and information asymmetries for an explanation of surprising observations in the interaction between markets and human-managed firms/institutions. Transaction costs and information asymmetries is the topic of numerous journal papers and several Nobel prizes. This extremely high volume of publications, relative to the principle of parsimony, is perhaps one of the strongest indicators that the framework is built on a shaky foundation. In sum, as the publication of this book indicates, there seems to have been little progress in economic development theory since Aristotle.
4. The genuine market process versus welfare economics
Before concluding, I will take a few moments to describe my perspective on the genuine market process. I will focus on points where my explanation departs from the industrial policy in “Beating the Odds”. Fortunately the explication is fairly simple.
Continuing with the framework in Aristotle, I distinguish two types of market exchanges. One, the barter exchanges of acephalous human societies — and interestingly, also of standard economics — where use-value and exchange-value are equivalent. Two, “wealth-getting” exchanges of larger human societies where — because of the process of money creation, since the form of money used in the economy serves no function other than as a means of payment — use-value and exchange-value diverge [see Schumpeter (1927, 1928, 1954) who observed that as a result of credit creation, the “parallelism between the flow of money and the flow of goods [is] destroyed” (1927, p. 302) and “processes in terms of means of payment are not merely reflexes of process in terms of goods” (1934, p. 95)].
It can be argued that the latter market system emerges from the need to direct the operation of the economic system. The “wealth-getting” market system has the advantage that society can direct the production of future economic goods [or production technology or new markets]. Divergence between use-value and exchange-value allows exchange-value to be used in this production because barter exchange does not permit existing goods to be exchanged for those future goods.
Therefore the “wealth-getting” market system and industrial policy do the same thing in different ways. The former relies on exchange-value within the context of a deliberate money creation process while the latter relies on institution building where the policymaker or manager makes decisions based on use-value.
