Development Without Aid, by Melvyn Krauss, New York: McGraw-Hill, 1983, 208 pp., $18.50.
In an intellectual arena in which government planning and redistribution rather than growth have become synonymous with economic development, Melvyn Krauss is a voice in the wilderness. A few scholars, of course, such as Peter Bauer (Dissent on Development) never let up the plea for free markets and economic growth during the '70s. Melvyn Krauss joins these few, rekindling the case for private choice and initiative.
Krauss's most recent book, Development Without Aid, unabashedly argues "that big government in both the North and South constitutes the single most threatening force to the economic prosperity of the Third World." In contrast, much of the 1970s' development analysis placed the blame for underdevelopment on external forces—a decline in the terms of trade for raw materials, exploitation by multinational corporations, high energy prices, and more broadly, the remains of Western imperialism.
The first half of Krauss's book soundly repudiates this focus. The primary problems in the less-developed countries (LDCs), he claims, result from ruinous tax and spending policies within the Third World itself. This is not a new argument (a fact that does not diminish its importance). Even among advocates of big government, the dismal performance of so many LDCs has led to criticism of numerous domestic tax and spending programs. Almost without exception, however, these complaints have been accompanied by arguments merely for replacing one set of controls, manipulations, or interventions with another.
Krauss does not succumb to this folly. Instead, he staunchly supports cutting tax rates sharply to spur private-sector initiative and economic growth. Moreover, in contrast to many theorists, Krauss argues that development of roads, bridges, airports, and all the other elements of an "infrastructure" can only come in response to growth. Public-sector spending on infrastructure cannot generate growth.
Nor do redistribution policies benefit Third World economies and their poor. Food-price ceilings aimed at benefiting consumers do so at the expense of producers. Krauss aptly notes that "rice at a low price that is unavailable does not feed poor people."
Krauss is too generous when he says that laudable aims fuel the urge to pursue these devastating policies. It is far more likely that the road to hell (as he puts it) is paved not with good intentions but with political self-interest.
Krauss's exposition is a welcome addition to development literature, but he stops short, at least in this book, of denouncing government welfare programs altogether. In appealing for drastic reductions in taxes to stimulate Third World economic growth, Krauss is adapting the familiar supply-side theory of economics to less-developed nations.
In this context, Krauss observes that "for the Third World attention has centered on…whether public spending is to be financed out of economic growth or by high tax rates on a stagnant economic base." And supply-siders, he notes, are "not necessarily opposed to increases in public spending per se, but they are against high tax rates to finance public spending. Indeed, it is in arguing that public needs can be more adequately met by low tax rates than high ones that the Laffer curve makes its principal contribution."
It is not clear in Krauss's presentation whether he is merely describing the theory or whether he is also endorsing it. Does he implicitly accept the effectiveness (and necessity) of public spending on welfare services, education, health, and so on, provided they are pursued with revenues resulting from low tax rates in a climate of rapid economic growth? Throughout the rest of the book, Krauss rigorously denounces such expenditures in industrialized nations, but in discussing supply-side economics he curiously makes no such denunciation.
Perhaps the most interesting feature of Krauss's discussion of disastrous domestic policies in the LDCs is not his analysis of their economic effects, especially if one already appreciates the benefits of free markets. More interesting and more original is his attempt to link the resulting economic chaos to political violence and even fascism. He sketches mini-scenarios of Uruguay, Ghana, El Salvador, and Costa Rica in which he analyzes their current political troubles in the light of their redistributive policies. While his portrayals may be overly simplistic, they do raise some important points, most particularly about the tight relationship between economic and political stability.
The second half of Development Without Aid contains Krauss's most thought-provoking and novel arguments. Here, he turns to the effects of the redistributive policies of the industrialized welfare states, the so-called developed nations, on Third World development. Many analysts have condemned the developed nations for their trade protectionism, which, in curtailing imports from the Third World, inhibits economic development. But most of these discussions of protectionism focus only on foreign-trade and foreign-worker policies.
Krauss goes a step further by analyzing the effects for the Third World of domestic workers' rights programs and redistributive policies in the industrialized nations. He shows how workers' rights programs that lead to subsidizing inefficient industries directly hamper Third World infant industries.
Prospects for Third World development have also been compromised by income transfer programs and stagnation induced by big government and a slow-growth mentality. Krauss's criticisms of these are not unique. What is original is the way he links these policies to foreign aid, showing them all to be different facets of the same doctrine. Krauss argues that aid is a foreign extension of the social democrat's commitment to redistribution. As such, aid is not only ineffective but actually harmful for LDCs. "Foreign aid constitutes another way big government subsidizes exports or foreign policy objectives. For the recipient country, foreign aid allows big government to pursue policies that damage the competitive sectors of the economy and thus its economic base."
To bolster his argument, Krauss points to South Korea and Taiwan, both of which had stagnating economies while they received US aid. Only when the aid stopped did each country pursue policies that resulted in economic growth and prosperity.
Apart from an occasional lapse into simplistic exposition, the only flaw that mars Krauss's work is in his explanation of why welfare policies and, especially, workers' rights policies, prevail in the industrialized nations. Krauss claims that it is not because special-interest groups have pushed for such policies and politicians have too easily succumbed to such pressures. Rather, he suggests that the public in general has come to perceive workers' rights policies as legitimate and just.
This proposition, however, seems to gloss too hastily over the political-systems analyses of interest-group politics and the incentives for political participation, including Mancur Olson's most recent work, The Rise and Decline of Nations. These works present a far more convincing explanation for such policies than does Krauss's theory. This is an important flaw in Krauss's work, because how one perceives the cause of big-government redistributive and workers' rights policies determines the solutions one proposes.
Generally, however, this is an excellent book. One might quibble over some details of Krauss's arguments, but it is refreshing to read an analysis of economic development that breaks out of the big-government mold.
Book Review Editor Lynn Scarlett is a Ph.D. candidate in political science, specializing in the political economy of Third World development.
This article originally appeared in print under the headline "Breaking Out of the Big-Government Mold".