FOLLOWING decolonization, the newly liberated third world countries had sought to follow a development trajectory that consciously broke away from the colonial pattern of international division of labour. Towards this end they had pursued a policy of import-substituting industrialization and their ex-colonial masters, though disliking it, could do little about it. They got their chance to attack it when there was some diffusion of capitalist industrialization from the metropolis to east Asia via a growth of the latter’s exports, initially as a fall-out of the Vietnam War and subsequently owing to a process of conscious relocation of activities from the metropolis stimulated by the latter’s lower wages. These factors had achieved high GDP growth-rates in some of these countries, which, as they were mostly small, had absorbed much of their labour reserves.

The assault by metropolitan countries on import-substituting industrialization took the form of advancing the claim that the success of east Asia could be replicated all over the third world if only all third world countries abandoned their “inward-looking” strategies of development of which import substitution had been an integral part, and opened themselves up to export-led growth, while not tinkering much with the price mechanism and allowing free mobility of goods and capital across borders. This was a theoretical justification for the neo-liberal strategy that was to come later; it was first contained in a seven-volume study published in 1970 and prepared for the OECD, which is essentially a rich countries’ club. There was one volume, written by I.M.D. Little, Tibor Scitovsky and M.Fg.Scott, giving the overall conclusions and six other volumes that were case-studies of particular countries, upon which these conclusions were based.

India was one of the countries studied, where the Nehru-Mahalanobis strategy of building heavy and capital goods industries was predictably the target of attack. The Left too had been critical of the Nehru-Mahalanobis strategy, but on entirely different grounds, namely, that by not carrying out land reforms and thereby keeping the rate of growth of the agricultural sector low, especially the foodgrains sector, it had contributed to the inflation that gripped the economy during the second five-year plan. But the OECD critique was altogether different: it did not demand land reforms, indeed was silent on land reforms; its critique was directed against the very attempt to consciously break away from the pattern of international division of labour inherited from colonial times.

The OECD argument was, as was to be expected, much criticised by the Left for being in conformity with imperialist dictates. The Left argument ran as follows. The pattern of production that prevailed over much of the third world, and especially the pattern of exports, was dominated by primary commodities, notably agricultural commodities, the world demand for which did not grow particularly rapidly; conscious state intervention to change the pattern of production behind protectionist walls therefore had to be resorted to for stepping up the rate of growth of the economy. The point however was to do so wisely and judiciously, maintaining a balance between the different sectors, so that inflationary pressures did not arise to worsen the already precarious living condition of the working people; for this, land reforms to boost agricultural output were absolutely essential.

The thrust of the OECD argument was to challenge this claim that exports of the third world were constrained on the demand side. It asserted instead that any country of the third world in any period could sell as much of its goods in the world market as it liked. In fact, together with the OECD volumes studying industrialization, the authors of the OECD study also came out with a criterion for selecting projects: if the government has to choose, say, between two projects, then on what basis does it decide which project to choose? And the criterion they suggested was to choose that project which gave a higher rate of return when its material inputs and output were evaluated at world prices. True, there were some adjustments made to this rule, but these were only for exceptional cases; the adoption of the general rule of evaluating inputs and outputs at world prices was predicated on the assumption that there were no demand constraints on exports in the world market.

This was of course an absurd assumption; and yet it has not received adequate criticism. The OECD argument has been rightly criticised on the grounds that even in east Asian countries the state played a major role in industrial development, that it was not just a question of leaving things to the “market”, that protection of the domestic market and the use of this protected market to earn large profits so that goods could be sold cheap in the world market, was a major plank behind the east Asian success. But the OECD argument’s ignoring of the demand side altogether has not been sufficiently exposed.

Such ignoring was justified by the “small country assumption”, namely, that each third world country was so small that it could, one can quite reasonably assume, sell as much as possible on the world market. The problem with the small country assumption however is that while it can be assumed for one country, it cannot be assumed to hold for a large number of countries at the same time: no general prescriptions can be made for a large number of countries assuming each to be a small country without creating a logical contradiction.

The situation here is analogous to the “paradox of thrift”. Refraining from consumption to add to one’s “savings” is supposed to be a way of becoming wealthier. But while one person doing so may indeed make that person wealthier, everybody’s doing so simultaneously causes a reduction in the level of aggregate demand, other things remining the same, and hence a recession that reduces income and employment for everybody; and the level of total wealth in society  remains unchanged. Thus paradoxically what may hold for one individual becomes counter-productive for all individuals taken together. Likewise, to believe that what may hold for one country holds ipso facto for all countries, as the OECD argument presumed, is utterly erroneous.

There was a second illicit argument advanced in support of this assumption that countries of the third world could export as much as they liked. This argument invoked the fact that for countries like India pursuing the so-called “inward-looking development strategy, their share in world trade in particular export goods, where they had been prominent before in the world market, had been declining. It was deduced from this fact that their exports had been constrained not from the demand side but from the supply side.

This argument too was fallacious; and an example would make clear why this was a fallacious argument. Suppose a country’s exports are so constrained from the demand side that they are expected to grow at only 1 percent per annum. Because of this the country pursues an “inward-looking” or import-substituting strategy; as a result, exporting does not become a national priority for it, and its exports do not grow at all, resulting in a decline in its share of the world market. From this fact however it does not follow that the original assumption that its exports could not grow at a rate greater than 1 percent per annum had been wrong. In other words, it is a complete non sequitur to infer from the observed consequences of a course of action based on a certain assumption that apparently negate that assumption, that the assumption was wrong; there is simply no basis for drawing any inference of this sort from observed facts.

The OECD argument was thus just a sleight of hand. It was not only a misinterpretation of the east Asian experience as it ignored the role of protection and of the state in general,  but also based on an assumption, of unlimited world demand for a country’s exports, which was completely untenable. And since the neo-liberal argument was ultimately based on the original OECD argument, it too was an untenable one.

To be sure, in defence of the neo-liberal argument it would be said that by pursuing this strategy all third world countries can gain at the expense of the metropolitan economies from where there would be a relocation of activities to the lower-wage third world. This presumes however that metropolitan states will simply sit and quietly watch their economies retrogressing; they would obviously take steps to prevent relocation that causes such retrogression. This indeed is what successive US administrations have been doing for some time; and Donald Trump in particular has been emphasizing this aspect.