A History of Wealth and Poverty: Why a Few Nations are Rich and Many Poor, by John P. Powelson.


The Twenty-First Century

Power Diffusion versus Conventional Thinking

As the twenty-first century approaches, Western thought on economic development appears to be coalescing on two separate ideas, expressed in the following two quotations:

The triumph of the West, of the Western idea, is evident first of all in the total exhaustion of viable systematic alternatives to Western liberalism. [1]

Central Europe's turnaround may . . . be as much a matter of political courage and political will as of investments and of economics. [2]

The first quotation announces the triumph of liberalism over socialism in what Fukuyama chronocentrically [3] calls "the end of history." The free market, he avers, has been found to be the most efficient, fair, and humane way of conducting economic affairs. Since this is now obvious, it is only a matter of time before it will be accepted everywhere.

By citing "political courage" and "political will," Drucker implies in the second quotation that the necessary reforms must be undertaken by strong leaders despite popular resistance. What he has attributed to Central Europe surely would apply even more so to the Third World. If he sees any inconsistency between this proposed courage and democracy, he does not mention it.

Both quotations together reflect an oft-repeated theme of this book: that Western society believes in a liberal economic system that may be imposed (in other countries) by an interventionist power. The present book, however, argues that economic development so orchestrated contravenes the examples of the West and Japan and will not endure for centuries.

Reform from on Top: Structural Adjustment

The triumph of liberalism at the dawn of the twenty-first century is exemplified in the policies of the International Monetary Fund (IMF) and the World Bank, as well as the governments of Western countries. But if "political courage" is required to implement them in eastern Europe and the less-developed zones, then the dynamo of power diffusion has not been started. Because these societies are not culturally ready, the reforms are likely to fail just as historic reforms have failed when similarly mandated by the rulers of Russia, Turkey, China, Iran, and the Middle East, and by the colonial governments in Africa and Asia.

When the IMF began operations in 1947, its purpose was to create an orderly international monetary system. To do so, it would help countries with balance of payments deficits. One of the ways was to lend foreign exchange. [4] The IMF reasoned that if the borrowing governments continued the monetary, fiscal, and exchange policies that had caused their deficits, those deficits would also continue and the borrowed foreign exchange would also be lost. Therefore, it insisted on corrective measures, to be agreed on by the government and the IMF. Typically, these included balanced budgets, market exchange rates, and a rein on the money supply. Since loans would be made only if proposed measures were accepted by the IMF, this requirement became known as conditionality.

Over the years, the IMF has increasingly intervened in decisions of borrowing governments. Instead of requiring only an overall balanced budget or balanced international payments, it has stipulated ways to achieve these results: specific budget lines to be cut, the end of multiple exchange rates, revisions of price and wage controls, and others.

In the early 1970s, sudden increases in the price of oil destabilized the balance of payments of non-oil-producing Third World countries. [5] To compensate, their governments borrowed heavily from the IMF. Commercial banks in Europe and the United States also accommodated them, as a way to recycle the moneys deposited by newly rich governments of oil-producing countries. Even governments of oil-producing countries, such as Mexico, Venezuela, Nigeria, and Indonesia, borrowed on the expectation of repayment to be made possible by greater oil revenues in the future. When oil prices tapered off in the 1980s, many governments could not service their debts. In the face of this crisis, Western governments and international agencies agreed to stretch out payment terms or even forgive portions of the debt — provided that inefficient, even corrupt, state enterprises in the borrowing countries were privatized and market and production controls liberalized.

Believing that "it is virtually impossible to have a good project in a bad policy environment," [6] in the mid-1970s, the World Bank began making "structural adjustment" loans to assist in reforms to improve the environment for their projects. These reforms required moves toward balanced budgets, free markets, and market exchange rates.

In 1985, the United States government proposed the Baker Plan, by which commercial banks would increase their lending to the fifteen biggest debtor countries. Since these banks were reluctant to "send good money after bad," the IMF and World Bank would participate to increase the creditworthiness of the borrowers. Borrowing governments in return would "adopt economic policies — deregulation and privatization of state-owned industries, removing barriers to private and foreign investment." [7] The plan died two years later when commercial-bank losses became too severe. Foreign debt owed to them was selling on the market for a fraction of its face value.

This debt became a reason for further intervention both by Western governments and international agencies. In 1986, the IMF opened a Structural Adjustment Facility. Loans would be made to governments agreeing to IMF constraints on their "financial aggregates such as domestic credit, the public sector borrowing requirements, and external debt, as well as key elements of the price system, and — in some cases — the prices of commodities that bear significantly upon the country's public finances and foreign trade." [8]

International agencies intervened in internal economic structures in other ways as well. For example, in 1989, the World Bank encouraged the Philippine central bank to promote mergers to eliminate smaller banks, much to the righteous indignation of the latter. [9] This interference seems preposterous, coming from a culture that professes liberal democracy. In 1989, through the Brady Plan, the United States government "offered to forgive debt to countries willing to undertake tough reforms intended to foster a market-oriented economy." [10] Commercial banks were asked also to exchange part of their loans for new bonds or shares of Third World enterprises. [11]

What started as IMF conditionality therefore turned into structural adjustment directed by international agencies, Western governments, and commercial banks. What started as policy packages to improve government finance became directives for radical change in economic structures. What started as simple economic policy changes turned into political levers by which Western governments have tried to reshape the economic structures of the Third World in their own images. The debt crisis proved to be a convenient handle for this pressure.

This experience then supplied a model for Western governments and the International Monetary Fund also to pressure for change in the countries of the former Soviet Union. In 1992, these countries and the IMF proposed $24 billion of assistance to Russia, provided its government would implement President Boris Yeltsin's program of privatization of state enterprises and economic liberalization. [12] In a remarkable irony, therefore, foreign governments and international agencies are insisting on less economic intervention by Third-World and Soviet-successor governments, but on strong political intervention to make this happen.

This is history déjà vu. It is reminiscent of Peter the Great, who would restructure Russia along Western lines. It recalls the Tanzimat sultans, who with Western advice tried to make Turkey a European nation in the nineteenth century. It brings to mind the colonial powers in Africa, Britain in India, and France in Vietnam, trying to convert those areas into imitations of themselves. Per se, there is nothing wrong with "imitations of themselves." Western countries and Japan are the models of economic development; the free market has proved its worth; sound government finance and realistic exchange rates are economic boons. What is forgotten is how these came about in the West.

Even in this forgetfulness is history repeated. Having "forgotten" how they had ended feudalism in their own country, the British appointed the East India Company as the equivalent of an Indian feudal lord in the eighteenth century. They "forgot" it again when they put governments in Egypt under their tutelage in the nineteenth century. The French "forgot" their democratic revolutions of 1789, 1830, and 1848 when they inflicted government from Paris on their African colonies and Vietnam. The Germans "forgot" their struggle to become a nation when they imposed themselves on Tanganyika, Namibia, and Togo. The Italians "forgot" their wars against Spanish, French, and Habsburg overlords as they seized Eritrea, Ethiopia, and Libya.

In all these cases — as we have seen in earlier chapters — the colonial occupiers enhanced the power of local rulers who were already too powerful, in exchange for those rulers submitting themselves to European sovereignty and adopting European organizations. The restructuring succeeded organizationally, but not institutionally, while the enhanced power remained after independence. Thus the colonial masters contributed to the underdevelopment, inefficiency, corruption, violence, and fraud being committed in those countries today, though they did not cause them. Appendix 23.1 provides selected references to power and economic distortions in the Third World today.

This is the history being repeated today with structural adjustment for the Third World and the plans to modernize the former Soviet countries. However honest their intentions and however correct the economic policies, the power ambiance in these areas will inhibit their rulers from carrying out all their promises to Western governments and international agencies. Their "success" would depend on thousands of common people behaving, in response to commands, in the ways that Westerners have agreed to behave for mutual benefit. Also, these rulers or their successors may subvert the organizations they have founded, just as Latin American governments like Mexico and the Dominican Republic subverted the Congress and other political organizations they had copied from the United States. In the process, power may be enhanced for those who are already too powerful, just as happened in the eighteenth and nineteenth centuries in India and Africa. The beneficent objectives of liberalization, privatization, and a market economy will perish, and only the power concentration will remain. Other references to structural adjustment, including its interventionist nature, are listed in Appendix 23.2.

The Conventional Scenario

What will the twenty-first century bring the Third World and eastern Europe? The conventional scenario has an economic and a political part. According to the first, economic development consists in the cumulative growth of gross domestic product caused by increased investment and improved technology and labor skills. Labor flows from agriculture into industry, while the productivity of the remaining farm workers is increased to compensate for its loss. With greater income, population increase tapers off, ultimately to zero. Why the free market has not brought this about for so long before the present day is not explained. The political part, typified by Fukuyama, is that liberal democracy comes with economic development. Democracy is presumed to be accelerated if politicians with liberal market policies are kept in power. This description is brief and shorn of its usual qualifications, for the conventional scenario requires no elaboration here.

If History Repeats: Another Scenario

In the belief that liberalism requires political leaders who favor it, Westerners are biased by our own institutions. A society that already possesses a modern monetary system, an independent legal system, and free pricing has great flexibility in adjusting its fiscal, trade, and monetary policies as well as its laws. A society that lacks these institutions may appear to change policies or laws abruptly, but when the reverberations die down, the new resembles the old in critical respects. This happens regardless of who is in power. In the less developed world, political leaders are forced into policies and laws reflecting the dominant power balance, regardless of promises made to Western governments or international agencies. Therefore, no lasting benefit will come to Western leaders for favoring one politician, such as Yeltsin in Russia, rather than another.

The following is only one of many possible scenarios for the twenty-first century. Assume a country in either the Third World or eastern Europe. As food, housing, and other necessities become short because of corruption and inefficiency, a politician arguing for a free market seizes power. He is immediately supported by Western governments, in their belief that his is the most likely energy to bring about liberalism.

In exchange for foreign financial assistance, this ruler orders government-owned firms to be privatized. Competing groups now have access to resources. Let us suppose — as one among many — that labor unions demand that stock of some enterprises be sold to them at a preferential price. After some bloody strikes, they win. As new managers, the union leaders increase wages, running their firms at a loss until working capital is exhausted. (Yugoslavia before its breakup is a model.) To stave off bankruptcy, the workers riot, threaten violence, and set up roadblocks until the government grants subsidies. Heavy inflation ensues, the exchange rate is depreciated, and foreign reserves flow out. The international agencies complain that the government has not lived up to its structural-adjustment agreement, but they cannot force it to do so. Indeed, it cannot do so and survive.

Other enterprises are sold or given to former ministers who had managed them in the state apparatus. They operate them as private monopolies, based on privileges, price controls, and purchase agreements similar to those of the erstwhile state monopolies. State farms are sold, leased, or otherwise made available to farmers, who may now sell their crops on the free market. However, their inputs — fertilizer, seed, and machinery — are available only from newly privatized monopolies whose prices are extortionary and deliveries irregular. Although agricultural output increases at first, after a few years it languishes.

The governing clique reforms its organizations along Western lines, with Western advice: the central bank, the development bank, a banking code, commercial laws, labor unions, local governments, stock and commodities exchanges, and others, along with multiple-party democracy. Price controls are removed. However, the government cannot successfully command millions of people at lower levels suddenly to reverse their behavior of centuries. Political bosses, clans, and caudillos who manage virtual fiefs are able to thwart central-government commands. They demand special attention, without which they will at best refuse to cooperate and at worst rebel violently. [13] The development bank lends for questionable projects of the governing clique; the central bank creates unlimited reserves for both the development bank and others supporting the dominant party. Interest rates are kept artificially low while bank credit is rationed to privileged people. Laws are bent or not enforced. The dominant party absorbs other parties.

The governing clique sets up private food-distributing monopolies. Prices on the commodities exchange are arranged to favor these distributors. The parliament is a rubber stamp for the government's bidding. To avoid wage competition, labor unions limit their membership to long-time political supporters. The ministry of labor supervises wage negotiations, tilting decisions in favor of the unions. Using the leverage of their informal alliance with the governing clique, unions achieve wages for their members of five times the earnings of nonunion workers employed elsewhere.

While a single intervention in the economy, such as price controls, may yield the results foreseen by the powerholders, normally there are unforeseen side effects such as the proliferation of black markets and smuggling. These call for another intervention, then another and yet another, each intended to offset the adverse impacts of earlier ones. They pile up cumulatively until the powerholders are caught in such a web of inefficiencies and graft that they cannot extricate themselves. At this point the whole government may be removed by military coup. But the military is caught in the same web as before, and the cycle is repeated.

In all these ways the new wine (organizations) is poured into old bottles (institutions). The aforementioned events may happen with a set of political and economic organizations and rules identical to those in Japan, the United States, France, Germany, Britain, or other Western.

Many workers — those not in unions — are left out. As a simplified model, assume only two groups: a governing clique allied with unions on the one hand and supernumerary peasants or slum dwellers on the other ("supernumerary" means that their marginal product is very low).

Some development theorists of the 1950s and 1960s proposed that low-marginal-product labor was a hidden resource for less-developed zones, [14] to be drawn on in development plans. For example, farm surplus labor would be employed in urban industries. But none of these theories explained why this shift had not already occurred through the play of the market. A free-market scenario presumes either that supernumerary workers form their own enterprises or that firms employ them because of their low wages. The historic universality of entrepreneurship and trade supports this expectation, but history itself does not.

In discussions of the sectioned society in Chapter 17, two obstacles were suggested that might block the assimilation of the out-group. First, although in-group and out-group would both benefit from doing business with each other, the former does not trust the latter. Commercial banks refuse credit to small-scale farmers even though their projects and credit reputations are unblemished. Second, the governing clique precludes enterprises not in their control, that might dilute their power. In Peru they pushed entrepreneurs underground, in ways revealed by de Soto's research.

Before liberalization, the power group appropriated material wealth for itself in two ways. The first was to nationalize enterprises, both farm and business, and pay their profits to the state, which in turn would pay them to its favorite supporters. The second was through price and production controls placed on private enterprise. For example, governments would require farmers to sell their crops to state marketing boards at low prices and to buy their inputs from state monopolies at high prices. In an earlier writing, my co-author and I documented this activity for twenty-six Third World countries. [15]

If the agreement with Western governments and international agencies requires that these institutions be abandoned, in this scenario they survive through new organizations. Private monopolies replace nationalized, with the same managers now becoming owners. Farmers still may be limited in where they can buy their inputs or sell their outputs, and price controls continue. Disillusioned because liberalization has not brought the promised benefits, consumers riot frequently. Students strike, universities close. While many persons advocate general or millennial solutions, at first no group has a focused idea of its specific demands and what it would concede in exchange.

This scenario is only a sample; others are possible depending on power distributions. In one form or another, economic inefficiency and disorders continue for decades, perhaps for a century. This or another grim scenario continues until the survival crisis is reached. When violence and hunger so threaten the social order that government cannot rule, for its own survival it begins to negotiate with private groups. Only then is the power-diffusion process set into motion.

In the meantime, the weakness of government has permitted interest groups to form. The first to liberate themselves from central control are money changers, known as black marketers. Using small amounts of capital saved or borrowed from friends and neighbors, they acquire foreign currency and lend it out. Foreign money replaces the valueless national currency. In addition, money changers issue promissory notes of their own, as do businesses wanting to acquire inventories and working capital. In this way small-scale production of necessities — textiles, shoes, and housing — is revived.

Circumventing an impotent government, about the middle of the twenty-first century, producer associations meet to set private rules of economic interchange. They carve out monopoly markets and protect their prices. Disillusioned with bribes paid to the ministry of labor and the scanty favors bestowed by government, unions start to bargain directly with employers. Refusing to buy from and sell to state agencies or private monopolies, farmers form cooperatives to acquire inputs wholesale and to demand monopoly stalls in town markets. These cooperatives set prices favorable to farmers.

Only as enterprises grow and use modern technology do groups bargain with each other for mutual price reductions or exceptions to monopoly. These negotiations are reminiscent of reciprocal trade agreements among Western governments. As they continue over decades, monopolies diminish and the free market is gradually approached.

When negotiations become cumbersome because of the numbers involved — perhaps by the beginning of the twenty-second century — the groups elect delegates to congresses, and then to a parliament. At first, parliament is biased toward large enterprises and landowners, but gradually ethnic and tribal minorities and other disadvantaged producers force their way into parliamentary representation, on the strength of their products and lower prices. Their demands first are voiced through bloody battles, but over time, all parties recognize the positive sums arising out of face-to-face negotiation. Private groups agree on a system to enforce contracts, which is ultimately adopted by public courts. The money changers and note departments of businesses become banks, and eventually the central bank is revised or replaced to serve financial institutions impartially.

For those who wish to resolve all problems in one's own lifetime (or one's term of office), this scenario is intolerably slow. But all history is intolerably slow. Attempts to collapse it have only lengthened it.

This one of many possible scenarios is also history déjà vu. But the Western and Japanese experiences need not be repeated exactly. Rather, a well-known general characteristic recurs in a modern setting: that the governing clique and its successors persistently fail, over decades, to restore prosperity and order, despite their good intentions and despite foreign advice, support, and pressure. Only the interaction of many interest groups, none overly powerful, succeeds.

One pessimistic qualification remains. Suppose modern technology creates a sectioned society, in which unskilled labor is superfluous, [16] because in the future only skilled workers can supply all human needs. Some indications exist that the elasticity of substitution between labor and capital may be decreasing in some industries. [17] For example, no number of workers could replace the rocket that can hurl a person to the moon; thus the elasticity of substitution of labor for rocket is zero. Now suppose that the number of productive activities with zero elasticity of substitution is increased to the point where most essential production requires little labor, all of it skilled. It is, let us suppose, cheaper to dispense with unskilled labor altogether than to educate it, or else the cost of mistrust is too great to employ it. Unable to acquire skills or to instill trust, the abundant labor force becomes marginalized. Marx's prediction of a reserve army of unemployed laborers becomes realized, although not in the way he foresaw.

Unlike the peasants in medieval Europe and Japan, supernumerary laborers could not form alliances with upper groups and exert leverage, because they would have nothing to offer, nor would marginalized workers possess the material wealth to acquire arms for revolution. Their only leverage would be through the charity of those who take pity on them or through their "nuisance value" as robber bands or other disruptive forces.

The eleven examples cited in Appendix 23.3 indicate a likelihood that already in the United States labor proportions are shifting from unskilled to skilled. The empirical evidence is not fully clear, however.

But suppose it is true, and the transfer of technology from more-developed to less-developed zones renders their unskilled labor superfluous, in addition to being deemed "untrustworthy" because of ethnic or other biases. The ability of governing elites to manage without any assistance from unemployed workers would reinforce the deficit in trust and the vast communications gap. Of course, this condition is one of degree: elasticity of substitution may be low if not zero, and it may affect a greater or lesser number of activities. But if this tendency, now only speculative, should be confirmed in the next few decades, the turnaround for sectioned societies might be a long time away. The survival crisis, when it comes, would be bloody.

Power Diffusion in the Third World

To seek hopeful signs in the Third World, we do not examine increased gross domestic product or investment, as conventional economics does. Increases in these do not necessarily last over centuries, nor do they always affect all persons, especially in a sectioned society. Instead, we look for the survival crisis, however painful that may be, and signs of pluralism, leverage, and diffusion of power.

The South African Example

In South Africa, where the first black president assumed office just before this book went to press, reform-minded groups had long been forming from below: people's committees, black labor unions and chambers of commerce, the United Democratic Front which linked some 650 antiapartheid organizations, [18] the African National Congress (ANC), the Pan-African Congress of Azania, the black People's Convention, and the Zulu group Inkatha. The ANC, strongest of these groups politically, began serious negotiations with the white government after the release from prison of its leader, Nelson Mandela, in 1989. The following year the ANC renounced its earlier policy of violence, and both Mandela and the government expressed their willingness to compromise. In 1992, the white electorate voted 2-to-1 to endorse President F.W. de Klerk's policies leading toward political and economic equality for blacks and whites (though previous deficiencies in skills and lower income and wealth will inhibit true equality for a long time to come). In 1993 an interim committee was set up, including blacks, to plan election for a universal government. This committee presented a new constitution, totally abolishing apartheid, which was approved at the end of 1993. Fears on the part of the Zulu leader, Mangosuthu Buthelezi, that the new government would overly centralize power and be just as dictatorial and interventionist as those of many African states, were presumably overcome when Mandela, elected as the first black president, appointed Buthelezi to his unity cabinet in May 1994. The "honeymoon" may not last, however, since deep intellectual differences divide these powerful leaders, and a serious problem still exists over whether land confiscated from blacks decades ago will be returned.

A list of reforms already undertaken prior to the new constitution appears in Appendix 23.4. It is not possible to associate any of these with specific bargaining. Furthermore, counter-reform thrusts and violence also occurred. Yet the cumulative action of the many pressure groups just cited, rather than outside pressure, was surely the major cause of change. The reforms already were gaining momentum before international economic sanctions were applied in 1985-86. However, the threat of sanctions may also have been at work, so their impact relative to that of domestic groups is debatable.

If the newly-constituted society possesses checks on the arbitrary power of any group, including government, then the concept of power will have been depreciated, and durable economic development will be advanced. If on the other hand a small black elite should come to dominate instead of the white elite — as Buthelezi has feared — the power concentration may resemble that of other African states. If so, another cycle may be enacted. Success of the power-diffusion process depends on no group dominating others, but on all groups compromising because only thus will they survive.

Formation of Lower-Level Groups

Some have argued that lower-level interest groups do not form easily in the Third World. After a study of Manizales, Colombia, Drake concluded that "the ongoing voluntary associations . . . effectively represent only the interests of the ruling class . . . the cards are stacked against the development and survival of organizations that could possibly serve as a force for expressing the interests of the 'gente popular.' " [19]

But there is other evidence that lower-level groups have been forming in the Third World during the twentieth century, or even earlier. They fall into three classes: First are those that negotiate with the dominant groups, usually from an independent power position and sometimes with results that are mutually advantageous. Second are groups that are either destroyed or co-opted by the power group. Third are unfocused groups, which make millennial or undefined demands, such as for "democracy" with no clear idea of what it is. Sometimes the third type rebels out of frustration against real but poorly defined repressions, as in the Taiping Rebellion in China in the mid-nineteenth century and the centuries-long Tutsi-Hutu massacres in Rwanda and Burundi, in which tens of thousands died in 1994.

Sometimes leverage is applied by the first of these three types, in alliance — formal or otherwise — with more powerful groups. Before the 1994 constitution, South African businesspeople were pressuring to modify apartheid. [20] An arrested activist was released in Haiti after bishops had raised a protest. [21] In Peru, "the Government has been forced to turn its attention to the sierras because the Shining Path guerrillas got there first, exploiting the desperate poverty of the Indians . . . [T]he traditional neglect of the Andean Indians by Lima-based governments has become the rebels' greatest asset." [22]

Sometimes potential leverage is visible in the second type ("unsuccessful groups") but is not used. In El Salvador before the end of civil war in 1992, both government and rebels tried to improve the conditions of peasants [23] when not destroying their villages, but in either case, the peasants did not appear to participate much in decisions on their own behalf.

Co-opted groups are typified by Saudi Arabia. There the power of the royal family is so great that all other groups in alliance could not match it. "[P]ublic loyalty to the Sauds springs largely from a lack of alternatives . . . [O]ver the years the rulers have demonstrated extraordinary ability to juggle factions in society — tribes, traders, technocrats, religious leaders, and the military — so that grievances don't coalesce. Religious leaders . . . have been largely co-opted by a royal family that yields to them on social issues in exchange for exclusive political control." [24] Another group might replace the Sauds in a coup, but it would not spread the power. The combination of crown, nobility, and church in sixteenth-century Spain and Portugal was similar.

The Chinese students who protested in Tiananmen Square in 1989 represent the third type of group — unfocused.

Additional historical and current examples of all three types of groups are listed in Appendix 23.5.

Past, Present, and the Twenty-First Century

The hindsight with which we have viewed northwestern Europe and Japan runs the risk of appearing too neat, too sequenced. Only as we examine the present, with all its uncertainties, qualifications, and options, is our attention drawn to similar uncertainties, qualifications, and options at all points in history.

No world area need follow the exact pattern of any that has preceded it. It would be folly to suppose that contract feudalism — so important to me-dieval northwestern Europe and Japan — would be repeated today. It would be equally folly to suppose that land shortage and a geography unsuitable to international trade would initiate the power-diffusion process, as I speculate that they did for medieval northwestern Europe and Japan. Instead, we must seek modern counterparts to these. Where the survival crisis earlier comprised pressures among kings, nobles, land barons, peasants, workers, and bourgeois, today it is waged by presidents and bureaucracies, military and civilian controllers of resources, large corporations, and small independent producers, workers and farmers. Each time history repeats itself, it does so a little differently. If these differences accumulate, might they approach a threshold, beyond which prior patterns would no longer predict future events? For example, the information superhighway and other modern technology might change the nature of those who pressure the ruling elites or of the elites themselves. The widespread economic hardships heaped upon unfocused corporate categories might impel them into demands, peaceful or violent, so threatening that power groups will bring about liberalizing economic reform on their own, even without the vertical negotiation and leverage of history. Structural adjustment advocates are hoping so.

This seems unlikely. Had we not seen the pattern of unfocused groups before, many times, we might believe results would be different now. In the past, power groups that have enacted reforms when pressured to do so by unfocused corporate categories have retained their power — or another power group has overthrown them, to enact its own reforms. The generic power class has been reinforced, just with different members, and the survival crisis has been postponed.

Two polar scenarios appear possible for the twenty-first century, with many others in between. In the worst-case scenario, economic growth occurs in elite sectors of sectioned societies, but fear and mistrust widens the gulf between them and the out-groups. The perceived risk-cost to the elites of associating with these "lower" classes becomes prohibitive. Entrepreneurship may abound in either section, but the institutions of economic development are captured by the powerful and diverted to their benefit. Chronic growth becomes a sterile mirror of more developed zones, but grotesque, inefficient, and lacking vitality. Break-the-system is a repeated feature. Multitudes live in destitution in the slums, violence remains endemic, and gross domestic product increases slowly.

But the best-case scenario is alternatively possible for any society. In it, durable economic development depends on the tension among many autonomous corporate groups, not just corporate categories. These groups are already forming in eastern Europe and in many parts of the Third World. The free market in institutions consists in their jockeying back and forth, while exercising leverage through vertical alliances. The free market in goods and services — the most powerful force for durable development — emerges not as the dictate of the powerful, but as the second, only attainable, choice of each group. A precarious balance of pressures, as portrayed in the "balloon" analogy of Chapter 1 (page 7) sustains the structure. If any small number of groups becomes too powerful, even the strongest of liberal economies may become derailed. But the balance might hold and become institutionalized.

If societies are — as I have speculated — so obdurate that only a survival crisis will budge them in the direction of durable economic development, then we must look for such a crisis to determine which of the many scenarios a given society will follow. In whichever is chosen, the future will probably be little different from the past, of the same or some other society.


  1. Fukuyama 1989:3.
  2. Drucker, Peter, "Junk Central Europe's Factories and Start Over," Wall Street Journal, 07/19/90.
  3. "Chronocentric," not in the dictionary, means an exaggerated importance placed on one's own era.
  4. Technically, the IMF did not lend currency; it paid foreign exchange to buy the deficit country's local currency with a repurchase agreement. Since the deficit government could create its own local currency, the transaction was identical to a loan of a foreign currency.
  5. The impact on Third World balance of payments was much more severe than on the industrial world, because oil-producing countries tended both to keep their reserves and to invest in Europe and the United States. I performed a quantitative analysis of the directions of these flows in Powelson 1977.
  6. Michalopoulos, Constantine, "World Bank Lending for Structural Adjustment," Finance and Development, June 1987:7.
  7. Kilborn, Peter T., "Death of 'Baker Plan' on Debt Seen," New York Times, 5/26/87.
  8. "Conditionality: Financing and Adjustment Should Work in Tandem, According to Fund Policy," IMF Survey, 9/1/86.
  9. Tiglao, Rigoberto, "World Bank Presses Reform on the Philippines: Loan Tied to Changes," Business Affairs, 7/6/89.
  10. Farnsworth, Clyde H., "U.S. Falls Short on Its Debt Plan for Third World," New York Times, 1/9/89.
  11. Farnsworth, Clyde H., "World Bank and I.M.F. Approve Plan to Cut Debt of Poorer Lands," New York Times, 4/5/89.
  12. Greenhouse, Steven, "I.M.F. Endorses Russian Plan for Economy, Clearing Way for Aid and Membership," New York Times, 4/1/92.
  13. For Brazil, see Brooke, James, "Even Brazil is Shocked: State is One Family's Fief," New York Times, 11/12/93. For China, see WuDunn, Sheryl, "China is Sowing Discontent with 'Taxes' on the Peasants," in New York Times, 5/19/93. Other references to local bosses abound in the media.
  14. For example, Lewis 1954, and Fei and Ranis 1969.
  15. Powelson and Stock 1990.
  16. See Chapter 17, section on Guatemala.
  17. Zero elasticity means that either a machine or a laborer is indispensable, and neither can substitute for the other.
  18. Banks 1989:552.
  19. Drake 1973:11.
  20. Mufson, Steve, "Businessmen Pressure South Africa's Botha to Modify Apartheid," Wall Street Journal, 9/13/85.
  21. Ricks, Thomas E., "The Pope Visits Haiti Just as Church There is Challenging Regime." Wall Street Journal, 3/7/83.
  22. Riding, Alan, "In the Incas' Land, a War is Fought to Win over Impoverished People," New York Times, 11/18/86.
  23. Chavez, Lydia, "El Salvador's Military Trying to Win Peasants and Battles," New York Times, 8/26/84.
  24. House, Karen Elliott, "Saudis Find Stability in the Royal Family, but Frustrations Rise," Wall Street Journal, 6/16/81.

Copyright © 1994 by the University of Michigan. First published in the USA by the University of Michigan Press, 1994.

Published on the World Wide Web by The Quaker Economist with permission from the University of Michigan Press, 2005.

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