|JPRI Critique Vol. IX, No. 6, December 2002
Do As We Say, Not As We Did
by Michael Lind
According to the neoliberal Washington Consensus that governed thinking about global economic development during the 1990s, the only way for poor countries to catch up with the U.S., the EU and Japan is to adopt policies of free trade and free investment. To this a corollary was sometimes added: the developing countries had to be free from corruption and to strictly respect intellectual property rights. These prescriptions produced discouraging results. Shock therapy failed in post-communist Russia and Eastern Europe, while the liberalization of capital flows led to the catastrophic Asian financial crisis. The data is now in, and it turns out that most Third World countries developed more rapidly before they abandoned industrial policy tools like import substitution tariffs than in the period in which they followed the advice of the IMF, the World Bank and free-trade evangelists like Jeffrey Sachs, Jagdish Bhagwati and Paul Krugman.
If Ha-Joon Chang is right (Kicking Away the Ladder: Development Strategy in Historical Perspective, London: Anthem Press, 2002), then the failure of free-market globalism to help the developing world has not been an accident. The rules of the world economy are designed, not to help poor countries develop modern economies, but to lock in the advantages of the present industrial leaders like the United States. The U.S. and other advanced industrial countries are not only selfish but hypocritical. They would deny to newly-industrializing countries the very practices that they used in the past to become economic superpowers.
When they were in catching-up positions, the NDC's (now-developed countries) protected infant industries, poached skilled workers and smuggled contraband machines from more developed countries, engaged in industrial espionage, and willfully violated patents and trademarks, Chang observes. However, once they joined the league of the most developed nations, they began to advocate free trade and prevent the outflow of skilled workers and technologies; they also became strong protectors of patents and trademarks. In this way, the poachers appear to have turned gamekeepers with disturbing regularity.
Recent history as well as remote history undermines neoliberal dogma: All countries, but especially developing countries, grew much faster when they used bad policies during the 1960-1980 period than when they used good ones during the following two decades. Inasmuch as the bad policies like infant industry protection and nontariff barriers were used successfully to industrialize Britain, the United States, Germany, Japan and other contemporary industrial giants, Chang concludes that the developed countries are in effect kicking away the ladder by which they have climbed to the top. His metaphor comes from Friedrich List, who wrote in 1841: It is a very common device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. . . . Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.
A Historical Analysis
Coming from a conventional leftist critic of global capitalism, such an argument can be dismissed. But Ha-Joon Chang is a professor of economics at Cambridge University and the author of The Political Economy of Industrial Policy (1994) and Joseph Stiglitz and the World Bank: The Rebel Within (2001). His new book, Kicking Away the Ladder: Development Strategy in Historical Perspective, is the most important book about the world economy to be published in years. It has not been widely reviewed, but this comes as no surprise: if Chang is right, then not only the received wisdom about economic development but the reputations of many economists will collapse.
Chang challenges orthodox academic economics as much in his approach as in his conclusions. Instead of engaging in mathematical elaborations of a priori axioms, he does the unthinkablehe looks at history to determine what has worked. Chang notes that the contemporary discussion on economic development policy-making has been peculiarly ahistorical. Indeed, with a few notable exceptions, there have been few serious studies over the last few decades which deploy the historical approach in the study of economic development. It is with good reason that many Anglo-American economics faculties have abolished courses in economic history. The study of the history of industrial capitalism is as fatal to neoliberal orthodoxy as the Hubble Telescope is to the Ptolemaic theory of the universe.
Almost everything that most educated people in the English-speaking world think that they know about economic history is false. It is simply not true that there was a golden age of free trade ended by Americas adoption of the much-reviled Smoot-Hawley tariff in 1930a tariff which is unfairly blamed for the rise of fascism and World War II, phenomena which originated, respectively, in the cultural trauma of World War I and the geopolitical ambitions of Germany, Japan and Italy.
The school of thought in economic policy with the greatest global influence between the 1800s and the mid-twentieth century was not the laissez-faire English School of Adam Smith and David Ricardo but the rival school of economic nationalism, which is more accurately labeled as strategic economics because its prescriptions have been followed successfully by empires, trading blocs and city-states as well as nation-states. In the United States in the 1790s, the brilliant first Secretary of the Treasury, Alexander Hamilton, laid out a program for the industrialization of the country by means of infant-industry protection and other policies. Hamiltons program was developed in the next generation by Henry Clay, under the name of the American System, and implemented under Clays disciple and admirer Abraham Lincoln and his successors during the period between the 1860s and the 1940s, when the U.S. became the planets leading manufacturing economy behind an enormous wall of tariffs.
The lessons of the American school of national economy, transmitted to Germany by the German-American publicist Friedrich List, formed the basis of state-sponsored industrialization in Wilhelmine Germany and inspired the once-influential German Historical School in economic thought. During a visit to Germany in the 1870s, Okubo Toshimichi, one of the leaders of the Meiji Restoration, became acquainted with the Hamilton-List tradition. Returning to Japan, Okubo founded the Ministry of Home Affairs (Naimusho) to promote Japanese industry, and in 1874 issued an equivalent of Hamiltons 1794 Report on Manufactures, in the form of his influential Proposal for Industrial Promotion (Shokusan Kogyo ni kansuru Kengisho) which called for the government to induce and monitor the weak entrepreneurs to produce industries.
By the early twentieth century, then, the United States, Germany and Japan had successfully used strategic economics to catch up with Britain and (in the case of the first two nations) to surpass it. Even Britains dominions of Australia and Canada, emulating American and German practice rather than British theory, insisted on the right to use tariffs to keep out goods from the UK and establish their own manufacturing industries.
Not that Britain had any right to complain. From the Tudor period until the early nineteenth century, Britain used various protectionist devices to promote its own industries. The eighteenth-century prime minister Horace Walpole, remembered chiefly today as a corrupt politician pilloried by Alexander Pope, turns out, according to Chang, to have been an industrial-policy mastermind who inspired Alexander Hamilton. Only when Britains industrial supremacy was secure, did the British begin to promote free trade, in the hope of wiping out competitive industries in the United States, continental Europe and elsewhere. Following the Napoleonic Wars, which indirectly stimulated the growth of American manufacturing by ending trans-Atlantic trade, Lord Henry Brougham in 1816 told Parliament: It is well worthwhile to incur a loss upon the first exportation, in order by the glut, to stifle in the cradle, those rising manufactures, in the United States, which the war had forced into existence, contrary to the natural course of things.
The natural course of things, according to British politicians and British theorists of free trade, required the U.S. to supply Britain with agricultural goods and raw materials and to import, rather than make, all of its machinery and manufactured goods. John Adams wrote in 1819: I am old enough to remember the war of 1745, and its end; the war of 1755, and its close; the war of 1775, and its termination; the war of 1812, and its pacification. . . . The British manufacturers, immediately after the peace, disgorged upon us all their stores of merchandise and manufactures, not only without profit, but at certain loss for a time, with the express purpose of annihilating all our manufacturers, and ruining all our manufactories. In India and Ireland, the British imperial authorities actually outlawed the native textile industries.
Like Britain, the United States protected and subsidized its industries while it was a developing country, switching to free trade only in 1945, when most of its industrial competitors had been wiped out by World War II and the U.S. enjoyed a virtual monopoly in many manufacturing sectors. The revival of Europe and Japan by the 1970s eliminated these monopoly profits, and the support for free trade of industrial-state voters in the American Midwest and Northeast consequently declined. Today support for free-trade globalism in the United States comes chiefly from the commodity-exporting South and West and from American multinationals which have moved their manufacturing facilities to low-wage countries like Mexico and China. Like nineteenth century Britain, twenty-first century America tells countries that are trying to catch up: Do what we say, not what we did.
An Answer to Critics
Chang concludes that the currently recommended package of good policies, which emphasizes the benefits of free trade and other laissez-faire ITT [investment, trade and technology] policies, seems at odds with historical experience. With one or two exceptions (e.g., the Netherlands and Switzerland), the NDCs [now-developed countries] did not succeed on the basis of such a policy package. The policies they had used in order to get where they are now . . . are precisely those that the NDCs say the developing countries should not use because of their negative effects on economic development. The point is worth emphasizing: There is not a single major industrial nation, including Britain, that industrialized while following a policy of free trade.
To the neoclassical economist who says, Infant-industry protection in a particular country reduces the theoretical efficiency of the global economy, considered as a whole, the policymaker in a developing countrythe United States in the nineteenth century, Malaysia todaycan reply, I agree; but I am concerned with the relative wealth and power of my country, not with the well-being of humanity in the abstract. Likewise, when the neoclassical economist points out that agrarians and consumers will pay the price of import-substitution policies which force them to buy more expensive local goods rather than cheaper foreign goods, the policymaker can answer, Once again, you are right. However, just as our citizens are taxed to support our military, so our consumers will be taxed by means of higher prices to support a high-tech manufacturing sector, in the interests of national security, economic independence and economic diversification.
Jagdish Bhagwati, Paul Krugman, and other pop economists frequently deride critics of laissez-faire orthodoxy as half-educated fools whodo not understand economics. Among the ignoramuses who saw no necessary contradiction between mainstream economic theory and strategic economic policy were Adam Smith, who argued for a national-security exception to free trade, J.S. Mill, who conceded the usefulness of infant-industry protection, and John Maynard Keynes, who wrote: I sympathize, therefore, with those who would minimize, rather than those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travelthese are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national.
MICHAEL LIND, a Senior Fellow at the New America Foundation, is the coauthor, with Ted Halstead, of The Radical Center (Doubleday, 2001). A longer version of this essay will be published in the British monthly Prospect.