Sunday, November 28, 2010

The Development Dilemna

Terrance Heath has a very good article on the failures of austerity economics, looking at the case of the Republic of Ireland specifically. Once hailed as a neoliberal golden boy, the Celtic Tiger is in deep trouble today.  The European Union bailout is attached to a brutal four–year austerity program. Ireland is now effectively a vassal state of powerful interests and institutions beyond its shores. All of this in a nation long touted by the right-wing Heritage Foundation as one of the economically freest countries in the world. What is going on here?

Well, for one thing, Ireland is a revealing example of how a country should not try to develop. Ireland put on the neoliberal Golden Straightjacket and now is now being forced to wear the neoliberal sackcloth. By pegging their hopes on foreign investment and membership in the Eurozone as a route to development, the Irish effectively signed away their national sovereignty. The story is much the same in the Baltic Tiger nations like Latvia and Estonia, where foreign investors fled as fast as they ran in once the recession hit.

Historically, most of today’s rich countries developed through nationalistic economic policies that included tariffs to protect native “infant industries,” government subsidies to favored producers, and even state-owned enterprises. Some countries, such as Taiwan, engaged in sweeping land reforms. Indeed, the history of successful development is a history of the success of economic heterodoxy. Tariffs, state-owned enterprises, land reform, all these policies and others not mentioned are all considered violations of today’s prevailing neoliberal orthodoxy. Yet, most of today’s wealthy nations developed using some mixture of heterodox economics. 

Unfortunately, once development is achieved a nation runs into a host of new problems. Many of the development strategies used by developing nations in the past ended up creating a class of very powerful government and private elites. Corporations that once flourished behind tariff walls now seek to move production outside of the home nation in order to take advantage of cheap labor or weak environmental laws. The host nations in the Third World are then sent on a “race to the bottom,” competing with each other to offer up the most favorable business climate for foreign multinationals, whether this means keeping wages depressed, regulations lax, or taxes low.

Thus, the real trick for countries moving forward will be now to maintain sovereignty and democracy while also supporting a strong economy. Furthermore, how does a nation avoid some of the more corrosive effects of modernization, such as rampant consumerism and materialism? We might have to rethink some our basic assumptions about measuring economic growth, what constitutes development, how production is organized, and whole host of other issues.


  1. The economic programme you outline in the 3rd paragraph describes Irelands economic policy in the 30's and 40's. But emigration was rife. So the policy changed to in the sixties. The EU insisted that we destroy our state industries. Just recently it was discovered that our sugar beet industry
    destroyed due to and accounting mistake in Brussels. Many farmers lost their livelihoods due to a bureaucratic mistake. Subsidiarity my eye.

  2. Hi Mr. O'Regan,

    That is pretty shocking about an accounting mistake in Brussels destroying the Irish sugar beet industry. I think that example highlights the problems with supranational institutions like the European Union. The original concept might have been a good one, that is, bringing Europe together to prevent war and encourage cooperation, but now I see the European Union and the eurozone in particular preventing many countries from being able to deal with the economic crisis in a way they see fit. For example, countries cannot use national currency devaluation to spark an export boom as Sweden, South Korea, and Argentina have done in the last 20 years to get their economies back on track.

  3. Here in Poland the ruling party are a bunch of neoliberal ideologues.

    3 years ago the Prime Minister, Donald Tusk, was promising to turn Poland into the next Ireland. He also talked of emulating the policies of neighbouring countries such as Lithuania and Slovakia.

    Needless to say, these promises have been dropped very, very quietly.

    Luckily, Poland has managed to avoid the same mess as Ireland and the Baltics (up to now) Whether the government's good sense overcame their ideological instincts, or whether they just couldn't push their policies through fast enough

  4. Hi Czarny Kot,

    Good to hear that about Poland. I have a Polish-American friend that is a big fan of Radosław Sikorski and his wife Anne Applebaum. I don't know much about Sikorski and his wife but they seem like Polish neoconservatives from what I have read.