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Cato Policy Report, January/February 1998

Cato Books:

How Development Economics Has Changed

A Tribute to Peter Bauer

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For decades, development economists believed that central planning, not economic freedom, was the key to economic growth in developing countries. In 1956 Gunnar Myrdal, winner of the Nobel Prize in economics in 1974, wrote, "The special advisers to underdeveloped countries who have taken the time and trouble to acquaint themselves with the problem all recommend central planning as the first condition of progress." While the argument that socialism is the key to growth in the developing world appears obviously unreasonable today--given the collapse of command-and-control economies around the globe--it was, when Myrdal wrote, the academic consensus. Only a few economists doubted such arguments and proposed alternatives. Foremost among them was Peter Bauer, author of such classics as The Economics of Under-Developed Countries and Dissent on Development, to whom the new Cato Institute book The Revolution in Development in Economics is dedicated.

The book--edited by James A. Dorn of the Cato Institute, Steve H. Hanke of Johns Hopkins University, and Sir Alan A. Walters of the AIG Trading Group--has drawn widespread praise. Nobel laureate James M. Buchanan says, "This book properly celebrates the achievement of Peter Bauer, whose ideas have been vindicated by a half century of history." Mary Anastasia O'Grady, editor of the Americas column in the Wall Street Journal, calls The Revolution in Development Economics "a brilliant survey of timeless, classical economic wisdom, a long-awaited tribute to Peter Bauer's prescient voice in the wilderness 40 years ago." And Nicholas Eberstadt of Harvard University adds, "This welcome volume not only acquaints the reader with some of Peter Bauer's most penetrating essays, but also draws together a wealth of insight from the almost three generations of scholars and policy analysts who have been influenced by his thinking."

The book contains 20 essays, many of which were originally published in the Cato Journal, and a foreword by Václav Klaus, former prime minister of the Czech Republic.

In his essay "Institutions, Ideology, and Economic Performance," Nobel laureate Douglass C. North introduces the idea of "adaptive efficiency," which judges markets on how well they adapt to change. Crucial to the adaptive process are strictly enforced property rights and the rule of law, which "encourage trials and eliminate errors." "For the Third World and socialist economies," writes North, "the consequences of the institutional framework have been to realize only very partially the productive potential of new technology."

Bauer, in "Western Subsidies and Eastern Reform," maintains that the West could do far more to increase economic growth in the former Soviet bloc countries by simply reducing or eliminating trade barriers against exports from those countries than by dispensing more foreign aid. Indeed, he argues, aid might have a counterproductive effect, since "external subventions promote or reinforce the belief that economic improvement depends on outside forces, not on domestic effort. Subsidies encourage governments to seek foreign assistance through beggary or blackmail instead of making changes at home. External subsidies have also helped to sustain governments, especially in Africa, whose policies have proved so damaging that only the subsidies have enabled them to remain in power and continue with such destructive policies."

In his essay "Economic Inequality and the Quest for Social Justice," the late Karl Brunner argues that free-market development policies and centrally planned development policies are based on two competing theories of justice. The free-market approach guarantees that rights are protected and maintains that the products of voluntary actions by players in a market economy are necessarily just, even if the distribution might be unequal. The centrally planned approach, in contrast, looks only at the end state. If, in the end, the distribution of goods is not egalitarian, then the outcome is unjust. However, as Brunner points out, in order to achieve an egalitarian distribution you must violate private property rights and the rule of law, which are central to economic development. "We need to emphasize once more," concludes Brunner, "that a society guided by the egalitarian principle will necessarily develop institutions of control and management that ultimately maintain substantial inequality of economic status and political power."

Other contributors to the volume include Julian L. Simon of the University of Maryland, Deepak Lal of the University of California at Los Angeles, and Alvin Rabushka of the Hoover Institution.

Book Authors Offer A Dissent on NATO Expansion

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Although NATO enlargement has received considerable media attention and has been a subject of discussion in foreign policy circles, the debate has not yet progressed beyond the preliminary stages. Key issues--including the strategic rationale for NATO enlargement, whether security guarantees to new members states can be made credible, and who will pay for enlargement--remain unsolved," write Ted Galen Carpenter and Barbara Conry in the introduction to the new Cato book NATO Enlargement: Illusions and Reality.

Former senator Gordon J. Humphrey says, "The painstaking analysis in this book shows NATO expansion to be counterproductive for a number of reasons, not the least of which is that it would waste a once-in-a-lifetime opportunity to help transform Russia into a peaceful, civilized power and instead force her into the role of troublemaker." And Michael Mandelbaum of Johns Hopkins University calls NATO Enlargement "the clearest and most comprehensive discussion available of the most fateful foreign policy issue that the United States will confront in the late 1990s."

Carpenter, vice president for defense and foreign policy studies at the Cato Institute, and Conry, associate policy analyst at Cato, have collected 19 papers originally prepared for a June 1997 Cato Institute conference on NATO expansion. The book is divided into four sections: "Problems of Cost and Credibility," "NATO Enlargement and Russia's Relations with the West," "Ins and Outs: Creating a New Division of Europe," and "Alternatives to an Enlarged NATO."

Christopher Layne, visiting associate professor at the Naval Postgraduate School, argues that admitting the Czech Republic, Hungary, and Poland to NATO would be a foolhardy move for the United States. In the absence of a hegemonic threat to Europe there is no reason for the United States to intervene in European affairs and to provide for the defense of European countries. "The time has come," concludes Layne, "to complete America's historic postwar project by finally and fully devolving to a prosperous and democratic Europe the task of managing its own affairs. The task of ensuring Europe's peace, stability, prosperity, and freedom is one for the Europeans themselves, not for the United States."

Owen Harries, editor of the National Interest, argues that NATO expansion is based on the false premise that Russia--even in the post-Cold War world--is inherently expansionist and has imperialist designs on the three potential new members of the alliance. He critiques the arguments of those who hold such a view, including Peter Rodman, who has written that "Russia is a force of nature; all this is inevitable." "That approach," says Harries, "is enormously counterintuitive, and its weaknesses have been particularly evident in this most ideological of centuries. Did it really make no significant difference to Russian foreign policy whether it was in the hands of a Stolypin, a Stalin, or a Yeltsin?"

Doug Bandow, senior fellow at the Cato Institute, maintains that the United States should not only oppose NATO enlargement, it should withdraw from the alliance entirely and allow Europeans to create new institutions to provide for their collective security. "NATO was created for a reason: to shield Western Europe from an expansionist totalitarian superpower. It has fulfilled its objective," says Bandow.

Other contributors to the book include James Chace, editor of World Policy Journal; William G. Hyland, former editor of Foreign Affairs; and Ronald Steel of the University of Southern California.

This article originally appeared in the January/February 1998 edition of Cato Policy Report.