Ha-Joon Chang: Bad Samaritans

Ha-Joon Chang: Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (2007, Bloomsbury Press)

Chang starts with a future story about Mozambique, then points out that Korea was as poor in the early 1950s, when he was young, as Mozambique is today (p. 5):

Years later, in 2003, when I was on leave from Cambridge and staying in Korea, I was showing my friend and mentor, Joseph Stiglitz, the Nobel Laureate economist, around the National Museum in Seoul. We came across an exhibition of beautiful black-and-white photographs showing people going about their business in Seoul's middle-class neighbourhoods during the late 1950s and the early 1960s. I twas exactly how I remembered my childhood. Standing behind me and Joe were two young women in their early twenties. One screamed, 'How can that be Korea? It looks like Vietnam!' There was less than 20 years' age gap between us, but scenes that were familiar to me were totally alien to her. I turned to Joe and told him how 'privileged' I was as a development economist to have lived through such a change. I felt like an historian of mediaeval England who has actually witnessed the Battle of Hastings or an astronomer who has voyaged back in time to the Big Bang.

(pp. 14-15):

The popular impression of Korea as a free-trade economy was created by its export success. But export success does not require free trade, as Japan and China have also shown. Korean exports in the earlier period -- things like simple garments and cheap electronics -- were all means to earn the hard currencies needed to pay for the advanced technologies and expensive machines that were necessary for the new, more difficult industries, which were protected through tariffs and subsidies. At the same time, tariff protection and subsidies were not there to shield industries from international competition forever, but to give them the time to absorb new technologies and establish new organizational capabilities until they could compete in the world market.

The Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state direction. The Korean government did not vanquish the market as the communist states did. However, it did not have blind faith in the free market either. While it took markets seriously, the Korean strategy recognized that they often need to be corrected through policy intervention.

Now, if was only Korea that became rich through such 'heretical' policies, the free-market gurus might be able to dismiss it as merely the exception that proves the rule. However, Korea is no exception. As I shall show later, practically all of today's developed countries, including Britain and the US, the supposed homes of the free market and free trade, have become rich on the basis of policy recipes that go against the orthodoxy of neo-liberal economics.

(p. 16):

Today, there are certainly some people in the rich countries who preach free market and free trade to the poor countries in order to capture larger shares of the latter's markets and to pre-empt the emergence of possible competitors. They are saying 'do as we say, not as we did' and act as 'Bad Samaritans,' taking advantage of others who are in trouble. But what is more worrying is that many of today's Bad Samaritans do not even realize that they are hurting the developing countries with their policies. The history of capitalism has been so totally re-written that many people in the rich world do not perceive the historical double standards involved in recommending free trade and free market to developing countries.

(pp. 17-18):

In the main chapters of the book that follow the historical chapters (chapters 3 to 9), I deploy a mixture of economic theory, history and contemporary evidence to turn much of the conventional wisdom about development on its head.

• Free trade reduces freedom of choice for poor countries.
• Keeping foreign companies out may be good for them in the long run.
• Investing in a company that is going to make a loss for 17 years may be an excellent proposition.
• Some of the world's best firms are owned and run by the state.
• 'Borrowing' idea from more productive foreigners is essential for economic development.
• Low inflation and government prudence may be harmful for economic development.
• Corruption exists because there is too much, not too little, market.
• Free market and democracy are not natural partners.
• Countries are poor not because their people are lazy; their people are 'lazy' because they are poor.

(p. 31):

To sum up, the truth of post-1945 globalization is almost the polar opposite of the official history. During the period of controlled globalization underpinned by nationalistic policies between the 1950s and the 1970s, the world economy, especially in the developing world, was growing faster, was more stable and had more equitable income distribution than in the past two and a half decades of rapid and uncontrolled neo-liberal globalization. Nevertheless, this period is portrayed in the official history as a one of unmitigated disaster of nationalistic policies, especially in developing countries. This distortion of the historical record is peddled in order to mask the failure of neo-liberal policies.

On British development under Robert Walpole, from 1721 (p. 45):

Walpole's protectionist policies remained in place for the next century, helping British manufacturing industries catch up with and then finally forge ahead of their counterparts on the Continent. Britain remained a highly protectionist country until the mid-19th century. In 1820, Britain's average tariff rate on manufacturing imports was 45-55%, compared to 6-8% in the Low Countries, 8-12% in Germany and Switzerland and around 20% in France.

Tariffs were, however, not the only weapon in the arsenal of British trade policy. When it came to its colonies, Britain was quite happy to impose an outright ban on advanced manufacturing activities that it did not want developed. Walpole banned the construction of new rolling and slitting steel mills in America, forcing the Americans to specialize in low value-added pig and bar iron, rather than high value-added steel products.

Britain also banned exports from its colonies that competed with its own products, home and abroad. It banned cotton textile imports from India ('calicoes'), which were then superior to the British ones. In 1699 it banned the export of woollen cloth from its colonies to other countries (the Wool Act), destroying the Irish woollen industry and stifling the emergence of woollen manufacture in America.

Finally, policies were deployed to encourage primary commodity production in the colonies. Walpole provided export subsidies to (on the American side) and abolished import taxes on (on the British side) raw materials produced in the American colonies such as hemp, wood and timber. He wanted to make absolutely sure that the colonists stuck to producing primary commodities and never emerged as competitors to British manufacturers. Thus they were compelled to leave the most profitable 'high-tech' industries in the hands of Britain -- which ensured that Britain would enjoy the benefits of being on the cutting edge of world development.

(pp. 73-74):

In recommending free trade to developing countries, the Bad Samaritans point out that all the rich countries have free(ish) trade. This is, however, like people advising the parents of a six-year-old boy to make him get a job, arguing that successful adults don't live off their parents and, therefore, that being independent must be the reason for their successes. They do not realize that those adults are independent because they are successful, and not the other way around. In fact, most successful people are those who have been well supported, financially and emotionally, by their parents when they were children. Likewise, as I discussed in chapter 2, the rich countries liberalized their trade only when their producers were ready, and usually only gradually even then. In other words, historically, trade liberalization as been the outcome rather than the cause of economic development.

(pp. 86-87):

These flows are not just volatile, they tend to come in and go out exactly at the wrong time. When economic prospects in a developing country are considered good, too much foreign financial capital may enter. This can temporarily raise asset prices (e.g., prices of stocks, real estate prices) beyond their real value, creating asset bubbles. When things get bad, often because of the bursting of the very same asset bubble, foreign capital tends to leave all at the same time, making the economic downturn even worse. Such 'herd behaviour' was most vividly demonstrated in the 1997 Asian crises, when foreign capital flowed out on a massive scale, despite the good long-term prospects of the economies concerned (Korea, Hong Kong, Malaysia, Thailand and Indonesia).

(pp. 118-119):

Privatization of natural monopolies or essential services will also fail if they are not subject to the right regulatory regime afterwards. When the SOEs concerned are natural monopolies, privatization without the appropriate regulatory capability on the part of the government may replace inefficient but (politically) restrained public monopolies with inefficient and unrestrained private monopolies. For example, the sale of the Cochabamba water system in Bolivia to the American company Bechtel in 1999 resulted in an immediate tripling of water rates, which sparked off riots that resulted in the renationalization of the company. When the Argentinian government partially privatized roads in 1990 by awarding contractors the right to collect tolls in return for road maintenance, '[c]ontractors in control of a road leading to a popular beach resort sparked protests by building earthen barriers across alternative routes in order to force motorists to pass through their pay booths. And after travellers complained about the rip-off along another highway, contractors parked a fleet of phony squad cars at tollbooths to give the appearance of police backing.' Commenting on the privatization of the Mexican state-owned telephone company, Telmex, in 1989, even a World Bank study concluded that 'the privatization of Telmex, along with its attendant price-tax regulatory regime, has the result of "taxing" consumers -- a rather diffuse, unorganized group -- and then distributing the gains among more well-defined groups; [foreign] shareholders, employees and the government.'

(p. 125):

This is not a fringe phenomenon. A lot of research is conducted by non-profit-seeking organizations -- even in the US. For example, in the year 2000, only 43% of US drugs research funding came from the pharmaceutical industry itself. 29% came from the US government and the remaining 28% from private charities and universities. So, even if the US were to abolish pharmaceutical patents tomorrow and, in response, all the country's pharmaceutical companies shut down their research labs (which will not happen), there would still be more than half as much drugs research as there is today in that country. A slight weakening of patentee rights -- for example, being forced to charge lower prices to poor people/countries or being made to accept a shorter patent life in developing countries -- is even les likely to result in the disappearance of new ideas, despite the patent lobby mantra.

(pp. 158-159):

Gore Vidal, the American writer, once described the American economic system as 'free enterprise for the poor and socialism for the rich.' Macroeconomic policy on the global scale is a bit like that. It is Keynesianism for the rich countries and monetarism for the poor.

When the rich countries get into recession, they usually relax monetary policy and increase budget deficits. When the same thing happens in developing countries, the Bad Samaritans, through the IMF, force them to raise interest rates to absurd levels and balance their budgets, or even generate budget surplus -- even if these actions treble unemployment and spark riots in the streets. As noted above, during Korea's financial crisis in 1997, the IMF allowed the country to run budget deficits equivalent to only 0.8% of GDP (and, at that, after trying the opposite for several months, with disastrous consequences); when Sweden had a similar problem (due to the ill-managed opening-up of its capital market, as was the case with Korea in 1997) in the early 1990s, its budget deficits were, in proportional terms, ten times that (8% of its GDP).

Zaire vs. Indonesia, both countries with similar records of corruption, different records of development (pp. 160-161):

Zaire's income per capita in purchasing power terms in 1997, when Mobutu was deposed, was one third of its level in 1965, when he came to power. In 1997, the country stood 141st among the 174 countries for which the UN calculated a 'human development index' (HDI). The HDI takes into account not only income but also 'quality of life' measured by life expectancy and literacy.

Considering the corruption statistics, Indonesia should have performed even worse than Zaire. Yet where Zaire's living standards fell by three times during Mobutu's rule, Indonesia's rose by more than three times during Suharto's rule. Its HDI ranking in 1997 was 105th -- not the score of a 'miracle' economy, but creditable nonetheless, especially considering where it had started.

The Zaire-Indonesia contrast shows the limitations of the increasingly popular view propagated by the Bad Samaritans that corruption is one of the biggest, if not necessarily the biggest, obstacle to economic development. The argument goes that there is no point in helping poor countries with corrupt leaders, because they will 'do a Mobutu' and waste the money. This view is reflected in the World Bank's recent anti-corruption drive, under the leadership of former US deputy defence secretary Paul Wolfowitz, who declared: 'The fight against corruption is a part of the fight against poverty, not just because corruption is wrong and bad but because it really retards economic development.' After Wolfowitz assumed leadership in January 2005, the World Bank suspended loan disbursements to several developing countries on grounds of corruption. Wolfowitz resigned from the Bank in 2007 [because of his own corruption scandal], but its campaign against corruption continues.

Corruption is a big problem in many developing countries. But the Bad Samaritans are using it as a convenient justification for the reduction in their aid commitments, despite the fact that cutting aid will hurt the poor more than it will a country's dishonest leaders, especially in the poorest countries (which tend to be more corrupt, for reasons I shall explain).

(pp. 172-173):

The answer is no. Unlike what neo-liberals say, market and democracy clash at a fundamental level. Democracy runs on the principle of 'one man (one person), one vote.' The market runs on the principle of 'one dollar, one vote.' Naturally, the former gives equal weight to each person, regardless of the money she/he has. The latter gives greater weight to richer people. Therefore, democratic decisions usually subvert the logic of market. Indeed, most 19th-century liberals opposed democracy because they thought it was not compatible with a free market. They argued that democracy would allow the poor majority to introduce policies that would exploit the rich minority (e.g., a progressive income tax, nationalization of private property), thus destroying the incentive for wealth creation.

posted 2008-06-27