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Hard core development

12 September 2012 By Edward Hadas

Economic development is not a simple matter. If it were, the comforts and security of developed economies would be enjoyed by more than one-seventh of the world’s population. Political extremists, especially successful ones, help explain why development has benefited only a minority.

Over the last two centuries, many groups which started out tiny, extreme and persecuted ended up in power. Think of radical socialists in many nineteenth century European nations or the colonial freedom fighters in much of Asia and Africa. The rebels varied in their beliefs and sophistication, but they shared the conviction that the pre-existing social order was irredeemably corrupt. The groups were typically built around a hard core of true believers, with larger groups of fellow travellers and vague sympathisers, some of whom rose to quite high positions.

It is much the same for economic revolutionaries in very poor countries. At first, small bands of devotees emerge. These are people dedicated to the capitalist work ethic – discipline at work, innovation in enterprise and efficiency in production. These dreamers also aim to overthrow the economic arrangements that went before – the feudal hierarchies, economically stultifying social restrictions, aristocratic waste and primitive technology. Economic revolutionaries are invariably more selfish than their political counterparts, but they share the desire to turn everything upside down.

Industrial prosperity has fed the growth of these hard cores over the last few decades. Most poor countries have developed some industries and spawned at least a few billionaires. Nearly everyone in power now claims to be a sympathiser with the capitalist urge. Few speak out directly against industrialisation and economic modernisation.

Still, many countries which have escaped the most wretched poverty seem incapable of moving up to the highest level of prosperity. Only a few have emerged from what economists call the middle income trap. Mario Pezzini of the OECD describes these countries as ones with “a myriad of institutional and socio-economic deficiencies”. There are shortages of trust, skills, law enforcement and honest politicians, while social structures which restrict economic change remain firmly ensconced. In these countries the professional culture which is normal in developed economies remains revolutionary.

Indeed, a good way to describe this trap is as an incomplete economic revolution. There are three problems, each with corresponding political failures.

First, core revolutionaries have a hard time. Trotsky, the most idealistic leader of the Russian Revolution, was exiled (and eventually murdered) by the unimaginative Stalin. In a very different context, Lakshmi Mittal left his native India to build his steel empire in less hostile lands. Inside developing economies, powerful but inefficient incumbents often thwart the plans of the most imaginative industrialists. When economic fervour is allowed to flourish, it is often limited to groups identified as outsiders, for example among the overseas Chinese in many Asian countries.

Second, the hard core often softens when it gets into power. There is a long litany of once-idealistic leaders who led their countries into stagnation or worse. The list grows of businessmen in China, Brazil and India who have decided there is more to be gained from playing along with the powerful rather than disrupting existing arrangements. Managers at Brazil’s Petrobras, once considered a global quality operator, now find it easier to yield to the counter-revolutionary cash demands of its government owner.

Finally, revolutionaries often play establishment roles badly. The African National Congress in South Africa is the latest to discover that injustice is easier to condemn than to correct. Many industrial leaders in developing economies find it hard to move from subverting established economic structures to the construction of the open networks of trust and skills which underlie full industrial prosperity.

What can be done to complete economic revolutions? The political analogy suggests there are many bad paths, from the French Revolution’s terror to Mao Zedong’s proclamation of a Cultural Revolution after almost two decades in power. The rise of social democracy in continental Europe provides a more encouraging precedent. A tiny group of radical Marxists somehow metamorphosed into respectable politicians who could win democratic elections, neutralise old aristocracies and soften up new industrialists without compromising their hard core goals of social safety nets and universal public services.

The Social Democrat example suggests that the middle income trap may only be temporary. Perhaps the better educated children of today will find the values of the capitalist work ethic less alien. They could become economic revolutionaries with much less of the rebellious spirit than was required a generation ago. The critical challenge, though, will be to avoid the economic equivalent of the two great European wars which helped destroy the old and bring in the new order. Perhaps today’s economic authorities will yield more gracefully to this revolutionary force.

 

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