The Rise of “The Rest”: Challenges to the West from Late-Industrializing Economies

Published by EH.NET (September 2001)

Alice Amsden, The Rise of “The Rest”: Challenges to the West from

Late-Industrializing Economies. New York: Oxford University Press, 2001.

vi + 405 pp. $35 (hardback), ISBN: 0-19-513969-0.

Reviewed for EH.NET by John R. Hanson II, Department of Economics, Texas A&M

University.

This book is a landmark in a large and now-familiar literature touting the

“developmental state” as a workable alternative to the hands-off state as an

instrument of economic development for poor nations. Amsden asks what lessons

can be learned from the experience of a group of twelve middle-income

countries — for example, Argentina, Mexico, and Taiwan — which have enjoyed

at least a modicum of success in the international growth race and especially

an expanding manufacturing sector in recent decades. To her and others they

represent a new paradigm, perhaps the elusive Third Way of which economic

reformers have dreamed for so long. The developmental state sets clear

policies and goals for the economy — for example, export promotion,

investment in human capital, and credit allocation through development banking

— and carries these out through innovative means of solving basic economic

coordination problems while simultaneously minimizing corporate rent-seeking

and bureaucratic failure. The developmental state represents a

remarkable combination of official pride — it has the wisdom to set proper

goals — and humility — it knows that bureaucrats may err and adopts measures

to mitigate the consequences of this. It also has the stomach to guide and

discipline powerful corporations with a clever combination of carrots and

sticks. Yet, withal, it is hospitable to markets and foreign investors. If

this sounds naive, let it be said that Amsden is not an uncritical apologist

for this style of economic management. Her book contains many examples of

failure, despite its fondness for this approach.

The bloom, however, is off this rose. The Asian Miracle, after recent crises

in various Asian economies, has gone the way of its predecessor, the

late-lamented Japanese Miracle. Academic research has cast doubt on industrial

policy — another name for the developmental state — as the reason for

several non-Western success stories. There is now a counter-literature

suggesting that, in Asia particularly, regulatory reform should be a top

priority and rent-seeking remains unconquered. So there seems to be a growing

opinion, if not consensus, that hallmarks of the developmental state may not

be the solution to poverty but part of the problem. More generally, one might

agree with Paul Krugman, who has observed in his book Pop

Internationalism that institutional fads come and go — Soviet communism

was one such in the 1950s. The developmental state could be just the latest of

these.

So the book is ill-timed, and the argument will convince fewer people than

would have been true only two or three years ago, although hardcore industrial

policy advocates will no doubt welcome it as a magisterial statement. I

generally agree with the skeptics because the book, its considerable expertise

and thoroughness to the contrary notwithstanding, does not meet the highest

standards of rigor, even in a non-mathematical sense. Many assertions it makes

about economic principles as well as the reasons for events in particular

countries remain to be proved. The book is a massive research agenda, as well

as expert summary, synthesis, and interpretation from Amsden’s point of view

of a large secondary literature. Thus, many phrases of the “it was only

natural that” or “it was to be expected that” variety are sprinkled throughout

the text. Economists are as susceptible to ad hoc arguments as anyone else —

the egregious Paul Samuelson comes to mind — but the frequency with which

they appear in Amsden’s treatise should not be lightly forgiven despite her

otherwise careful documentation of assertions. I also wondered at times

whether, Margaret Mead-like, Amsden could have been yet more critical of the

operation of the developmental state in her sample countries, but declined

because of a suppressed desire to make a point with domestic applicability:

industrial policy works! Yet, to be fair to her, she does not delve into

domestic policy explicitly.

Amsden might be better appreciated as having written a useful work of economic

history that reinforces iconoclastic but salutary trends in modern economics.

Although the glories of laissez-faire economics are now widely appreciated by

policymakers and the public, professional economists have been exploring

subtleties in the operation of markets — the role of asymmetric information,

for example — which at least admit the possibility of effective official

action for the public good. Some scholars are portraying Adam Smith as a

pragmatist (correctly in my view) rather than as a free-market absolutist. It

is well to recognize that the world of experience has produced successful

economic cases which are not explicable in popular laissez-faire terms even if

one is suspicious of Amsden’s apparent sentiment that these successes are

easily replicated or can serve as models for remaining impoverished

countries. Many Third World leaders treated Rostow’s stages-of-growth analysis

as a blueprint for development, with dreadful consequences. Amsden writes in a

Rostovian spirit and likewise could be overinterpreted by policymakers and

leaders. Still, Amsden provides a useful reminder that the old development

scholars, though excessively bold in their claims, accurately sensed or

anticipated the insufficiency of the strict market models so many revere

today.

John R. Hanson II is Professor of Economics at Texas A and M University. His

article “Culture Shock and Direct Investment in Poor Countries,” appeared in

the Journal of Economic History in March 1999.