Gottfried Haberler, “Liberal and illiberal development policy”

This file is a single-author retrospective chapter and policy essay in development economics. Haberler writes as an international trade theorist revisiting the postwar formation of the field. He uses “liberal” in the classical, market-oriented sense and argues that the main illiberal doctrines of development policy—import substitution, exchange control, comprehensive planning, “big push” schemes, and chronic pessimism about trade—were built on a misreading of the Great Depression and on excessive aggregation of unlike countries.

It is no exaggeration to say that international trade has been a major factor in the development that has taken place.

Trade is the entry point because it supplies cheaper goods, goods not producible at home, foreign capital, entrepreneurship, and technical knowledge. Haberler’s first conceptual move is therefore to deny that poor countries need a separate economics. He allows for different institutions and policy details, but not for different laws of price, trade, capital, and incentives.

I believe in what some development economists call ‘monoeconomics’; that is to say, the same economic principles apply to developing and developed countries alike.

The chapter’s historical narrative explains why development economics turned anti-market. The Depression, the contraction of world trade, Keynesian secular-stagnation arguments, and the apparent successes of Nazi and Soviet planning made controls seem modern and realistic. Haberler reverses that lesson. The Depression was not capitalism’s normal tendency but a policy disaster, especially a monetary one.

One need not be an extreme monetarist to recognize that such a contraction of the money supply must have catastrophic consequences.

This diagnosis structures his critique of Prebisch, ECLA, and UNCTAD. The Prebisch-Singer thesis, he argues, mistook a cyclical fall in primary-product prices during depression for a secular deterioration in developing countries’ terms of trade. The “demonstration effect” patronized consumers and producers in poor countries while ignoring the more consequential imitation: governments copying fashionable planning doctrines. The “foreign exchange bottleneck,” two-gap models, and disguised-unemployment arguments make the same error in technical form. They assume fixed coefficients, inelastic demands, and administrative knowledge superior to market adjustment; Haberler answers with substitutability, entrepreneurial foresight, price responsiveness, and human-capital accumulation. Rural poverty is real, but it does not prove that masses of workers have zero marginal product or that deficit spending and controls can mobilize them without inflation.

The constructive center is the trade-policy discussion. Haberler accepts that infant-industry protection may be defensible in theory, especially where learning and training are involved, but he narrows the case sharply. If wage rigidities or state policies make labor too costly, the first-best remedy is to remove the distortion, not protect the industry. Import substitution often creates costly “white elephants,” factories unsuited to local resources and sustained by consumers, taxpayers, and agriculture. External-economy arguments for a “big push” likewise transform legitimate public goods—law, order, education, infrastructure, sound money—into central planning beyond the administrative capacity of poor states.

The best policy would be to let free markets, in other words, capitalism, do what they do best – develop new industries.

His exchange-rate advice applies the same principle. Inflationary countries should not defend overvalued currencies with quotas, rationing, or exchange control; they should float, or stabilize enough to peg convertibly to a sound currency or basket.

They should avoid import restrictions for balance of payments reasons, and avoid exchange controls like the plague.

The close rejects the pessimism of much development literature. Drawing on Kuznets, Haberler contends that postwar growth in less developed countries was historically high, though uneven, and that disappointment reflected inflated expectations produced by Soviet industrialization, the Marshall Plan analogy, and OPEC’s temporary success. His comparative examples—West Germany versus East Germany, South Korea versus North Korea, Taiwan versus China—turn the chapter into a broader indictment of planning.

There can be no doubt that market economies have performed better.

The essay remains relevant as a compact liberal critique of development economics: not a denial of public goods or institutional reform, but a warning that permanent protection and administrative control often outlive their excuses. Its core move is to treat development as ordinary economics under difficult conditions, rather than as an exception licensing illiberal policy.