I first came across the “infant industry argument” during my A-level economics class at Bearwood College. It was forever imprinted on my memory as an absurd excuse by inefficient states for protectionism. We were taught that the process to good economic development was through free trade and more importantly history and theory supported it. Of course since then I have come across fantastic papers that debunk the one sided nature of the free trade indoctrination, with Robert Driskill’s ‘Deconstructing the argument for free trade’ probably being among the best of them. However, it remains the case that this simplistic and biased view of free trade continues to dominate current development economic thinking and media punditry. Such is the scale of the challenge that the brilliant South Korean economist Ha-Joon Chang seeks to overcome in this entertaining and highly readable book. In my view the book successfully demolishes the free trade and economic development myths that are perpetuated by “neo-liberal economists” and the “bad Samaritan” institutions of the IMF, World Bank and WTO and their supporting governments.
Anyone preaching a different doctrine of development from the "neo-liberal" brigade is naturally declared a heretic and consigned to the periphery of mainstream economic thought. Not Ha-Joon Chang. A renowned development economist, who has worked as a consultant for the World Bank, Asian Development Bank, various UN agencies and many governments around the world. A recipient of the prestigious Leontief Prize and good friend of Nobel Laureate Joseph Stiglitz, Professor Chang has published many articles on the subject, including the critically acclaimed 'Kicking Away the Ladder - Development Strategy in Historical Perspective'. If anyone knows how the South East Asian miracle was born and any lessons it holds for poor nation, it is Chang.
Bad Samaritans aims to reverse the conventional wisdom and logic about development, especially the “official narrative” about how rich countries became prosperous and the implications it has for the advice being provided by the IMF / World Bank to developing nations like Zambia. By taking an in-depth look at the history and policies of developed nations, Bad Samaritans successfully demolishes the current free trade model of economic development and in its place erects a pragmatic and reasonable alternative. There are many important points raised in the book, but four critical conclusions are worth highlighting in this short space.
First, history rejects “free trade” and supports the “infant industry” argument as a model for development. According to Bad Samaritans, the “official version” of free trade globalisation is that Britain and the USA have been long adherents of free trade and this was responsible for their march towards growth and prosperity. Chang demonstrates that not only did these economies and other European nations emerge from protectionism, which they have denied developing countries, but they often imposed free trade on weaker countries to perpetuate their inbuilt advantages. To make matters worse (or better depending on your stand point), virtually all successful economies, developed and developing, got where they are through selective and strategic integration with the world economy rather than through unconditional global integration. Crucially, according to Chang, the performance of the developing countries was much better when they had a large amount of policy autonomy during the 'bad old days' of state-led industrialisation than when they were totally deprived of it during the first globalisation (in the era of colonial rule and unequal treaties) or when they had much less policy autonomy (as in the past quarter of a century).
Second, economic theory, properly understood demonstrates the limited nature of free trade theory and lends credence to the infant industry argument. The modern argument for free trade is based on the Heckscher –Ohlin-Samuelson (HOS) argument where comparative advantage is derived from differences in endowment of key factors of production, with each country specialising on those things where it has a relative advantage. Under the HOS theory free trade is beneficial, even in the face of protectionism (i.e. unilateral free trade) because the country concentrates on what it’s good at and imports the rest. The basic flaws of this theory are well understood and include issues related to immobility of economic factors of production and weak compensation mechanisms of losers from trade. Where Chang deals it a fatal blow is the cogent argument that the theory is about efficiency in the short run use of given resources and not about increasing available resources through economic development in the long run (which is what we really want). In the words of Chang, "contrary to what [free trade] proponents would have us believe, free trade theory does not tell us that free trade is good for economic development". Underline the phrase “economic development”.
Thirdly, the path to development lies in sacrificing today’s pleasure for long term benefit. The current free trade globalisation, according to Bad Samaritans, is built on a false premise that effective economic development embodies certain key requirements: privatisation of state utilities; unrestricted FDI; very low inflation; balancing the budget (no deficits!); deregulated capital markets; fully convertible currencies; thriving democracy; and, zero tolerance on corruption. Bad Samaritans provides evidence that contradicts each of these requirements. In particular, Chang shows that had countries such as South Korea and Japan followed these policies early on in their economic development, their industries would have been wiped out by external competition. Japan and South Korean would have remained as developing states rather than the economic powerhouses that we see today. By extension, if developing countries are to advance economically they need to rely on a different model to that proposed by the neo-liberal framework. It is important for developing countries to “defy the market” and deliberately promote economic activities that will raise their productivity in the long run — mainly, though not exclusively, manufacturing industries. Chang argues that this process involves capability-building, which, in turn, requires sacrificing certain short-term gains for the sake of raising long-term productivity (and thus standards of living) — possibly for decades.
Finally, if developed nations really want to help developing countries they should accept asymmetric protection. According to Chang, the proper role of developed countries and institutions like the World Bank, IMF, and the WTO, is to get out of the way of developing countries and more importantly accept asymmetric protection for developing states. Neo-liberal, free trade policies serve only to impede and kill off long-term development efforts. Rather than allow developing economies to nurture and grow their home-grown “infant industries,” free trade policies encourage developing countries to focus their economies on less-productive activities such as agriculture which bring gains only in the short run. True economic development, according to Chang, follows from emulating and mastering advanced foreign technologies, applying them to manufacturing, and protecting national industries from foreign competition for a long time. It is decades before such efforts will bear measurable fruit but Chang argues there is no other viable path to an industrialized economy. The challenge for bad Samaritan nations is to give developing countries headroom for them to grow.
These are very fundamental and radical conclusions from a book that is buried in evidence and yet profoundly easy to read. However, there are one or two places where the lack of detail leaves Chang with the need to return to them in the future. One particular area that was glaringly noticeable is the discussion of state led capitalism. While Bad Samaritans ably demonstrates the many flaws with various IMF / World Bank engineered privatisation programs and offers examples of where state owned companies have been successful (e.g. Singapore Airlines) it largely repeats what has already been documented elsewhere. The book would have been more useful discussing what sort of ownership or organisational structures that can be pursued to make for successful state led enterprises. For example, why is Singapore Airlines very successful and other state airlines have failed? Then there’s the all issue of "strategic industries". How does one go about distinguishing areas where the state should or should not consider direct production? I was also slightly disappointed that Chang failed to mention the complicated problem of government taking part in markets where other players already exists and the problems that has for regulation. These are probably issues beyond the scope of the book, but nevertheless pertinent to visioning how Chang's advice can be applied at the country level.
Reading Bad Samaritans and the conclusions inevitably fills one with hope and despair. The despair stems from that it seems like perhaps we are condemned to a different economic fate by the powerful nations that make the rules of international engagement. After all, changing how the bad Samaritans interact with Africa is a slow, if not an impossible task. Chang shows not only that these richer nations have double standards in dealing with ailing nations, but they are systematically erecting an international system of trade that is not to our advantage e.g. preventing African governments from accessing new technology through perverse patent systems. One can’t help but wonder whether the obstacles, however inadvertent, are just too many against African countries.
But there’s also hope, which in my view rests at three levels: at the global, country and personal levels.
At the global level, the credit crunch should rightly be viewed as an opportunity. The current global turbulence has lifted the lid off the fallacy of neo-liberalism unreserved trust in free and unregulated markets. Crucially, the reaction of western governments in face of rising unemployment, financial meltdown and social discontent has been characterised with significant state interventionism (e.g. nationalisation of banks), rising deficits and increased tendencies towards protectionism. Ironically, it is the state driven markets of China and India that now hold the key to global prosperity as their insatiable demand for commodities seek to stabilise the global ship. The age of the IMF and World Bank bully boys may not be over but the model they have espoused appears to be on the verge of collapse. After all, if the USA and France are abandoning neo-liberalism at this critical time, where is the argument for other nations not to do the same?
For Zambia, there are hopeful lessons too, which our current leaders would do well to reflect on :
Anyone preaching a different doctrine of development from the "neo-liberal" brigade is naturally declared a heretic and consigned to the periphery of mainstream economic thought. Not Ha-Joon Chang. A renowned development economist, who has worked as a consultant for the World Bank, Asian Development Bank, various UN agencies and many governments around the world. A recipient of the prestigious Leontief Prize and good friend of Nobel Laureate Joseph Stiglitz, Professor Chang has published many articles on the subject, including the critically acclaimed 'Kicking Away the Ladder - Development Strategy in Historical Perspective'. If anyone knows how the South East Asian miracle was born and any lessons it holds for poor nation, it is Chang.
Bad Samaritans aims to reverse the conventional wisdom and logic about development, especially the “official narrative” about how rich countries became prosperous and the implications it has for the advice being provided by the IMF / World Bank to developing nations like Zambia. By taking an in-depth look at the history and policies of developed nations, Bad Samaritans successfully demolishes the current free trade model of economic development and in its place erects a pragmatic and reasonable alternative. There are many important points raised in the book, but four critical conclusions are worth highlighting in this short space.
First, history rejects “free trade” and supports the “infant industry” argument as a model for development. According to Bad Samaritans, the “official version” of free trade globalisation is that Britain and the USA have been long adherents of free trade and this was responsible for their march towards growth and prosperity. Chang demonstrates that not only did these economies and other European nations emerge from protectionism, which they have denied developing countries, but they often imposed free trade on weaker countries to perpetuate their inbuilt advantages. To make matters worse (or better depending on your stand point), virtually all successful economies, developed and developing, got where they are through selective and strategic integration with the world economy rather than through unconditional global integration. Crucially, according to Chang, the performance of the developing countries was much better when they had a large amount of policy autonomy during the 'bad old days' of state-led industrialisation than when they were totally deprived of it during the first globalisation (in the era of colonial rule and unequal treaties) or when they had much less policy autonomy (as in the past quarter of a century).
Second, economic theory, properly understood demonstrates the limited nature of free trade theory and lends credence to the infant industry argument. The modern argument for free trade is based on the Heckscher –Ohlin-Samuelson (HOS) argument where comparative advantage is derived from differences in endowment of key factors of production, with each country specialising on those things where it has a relative advantage. Under the HOS theory free trade is beneficial, even in the face of protectionism (i.e. unilateral free trade) because the country concentrates on what it’s good at and imports the rest. The basic flaws of this theory are well understood and include issues related to immobility of economic factors of production and weak compensation mechanisms of losers from trade. Where Chang deals it a fatal blow is the cogent argument that the theory is about efficiency in the short run use of given resources and not about increasing available resources through economic development in the long run (which is what we really want). In the words of Chang, "contrary to what [free trade] proponents would have us believe, free trade theory does not tell us that free trade is good for economic development". Underline the phrase “economic development”.
Thirdly, the path to development lies in sacrificing today’s pleasure for long term benefit. The current free trade globalisation, according to Bad Samaritans, is built on a false premise that effective economic development embodies certain key requirements: privatisation of state utilities; unrestricted FDI; very low inflation; balancing the budget (no deficits!); deregulated capital markets; fully convertible currencies; thriving democracy; and, zero tolerance on corruption. Bad Samaritans provides evidence that contradicts each of these requirements. In particular, Chang shows that had countries such as South Korea and Japan followed these policies early on in their economic development, their industries would have been wiped out by external competition. Japan and South Korean would have remained as developing states rather than the economic powerhouses that we see today. By extension, if developing countries are to advance economically they need to rely on a different model to that proposed by the neo-liberal framework. It is important for developing countries to “defy the market” and deliberately promote economic activities that will raise their productivity in the long run — mainly, though not exclusively, manufacturing industries. Chang argues that this process involves capability-building, which, in turn, requires sacrificing certain short-term gains for the sake of raising long-term productivity (and thus standards of living) — possibly for decades.
Finally, if developed nations really want to help developing countries they should accept asymmetric protection. According to Chang, the proper role of developed countries and institutions like the World Bank, IMF, and the WTO, is to get out of the way of developing countries and more importantly accept asymmetric protection for developing states. Neo-liberal, free trade policies serve only to impede and kill off long-term development efforts. Rather than allow developing economies to nurture and grow their home-grown “infant industries,” free trade policies encourage developing countries to focus their economies on less-productive activities such as agriculture which bring gains only in the short run. True economic development, according to Chang, follows from emulating and mastering advanced foreign technologies, applying them to manufacturing, and protecting national industries from foreign competition for a long time. It is decades before such efforts will bear measurable fruit but Chang argues there is no other viable path to an industrialized economy. The challenge for bad Samaritan nations is to give developing countries headroom for them to grow.
These are very fundamental and radical conclusions from a book that is buried in evidence and yet profoundly easy to read. However, there are one or two places where the lack of detail leaves Chang with the need to return to them in the future. One particular area that was glaringly noticeable is the discussion of state led capitalism. While Bad Samaritans ably demonstrates the many flaws with various IMF / World Bank engineered privatisation programs and offers examples of where state owned companies have been successful (e.g. Singapore Airlines) it largely repeats what has already been documented elsewhere. The book would have been more useful discussing what sort of ownership or organisational structures that can be pursued to make for successful state led enterprises. For example, why is Singapore Airlines very successful and other state airlines have failed? Then there’s the all issue of "strategic industries". How does one go about distinguishing areas where the state should or should not consider direct production? I was also slightly disappointed that Chang failed to mention the complicated problem of government taking part in markets where other players already exists and the problems that has for regulation. These are probably issues beyond the scope of the book, but nevertheless pertinent to visioning how Chang's advice can be applied at the country level.
Reading Bad Samaritans and the conclusions inevitably fills one with hope and despair. The despair stems from that it seems like perhaps we are condemned to a different economic fate by the powerful nations that make the rules of international engagement. After all, changing how the bad Samaritans interact with Africa is a slow, if not an impossible task. Chang shows not only that these richer nations have double standards in dealing with ailing nations, but they are systematically erecting an international system of trade that is not to our advantage e.g. preventing African governments from accessing new technology through perverse patent systems. One can’t help but wonder whether the obstacles, however inadvertent, are just too many against African countries.
But there’s also hope, which in my view rests at three levels: at the global, country and personal levels.
At the global level, the credit crunch should rightly be viewed as an opportunity. The current global turbulence has lifted the lid off the fallacy of neo-liberalism unreserved trust in free and unregulated markets. Crucially, the reaction of western governments in face of rising unemployment, financial meltdown and social discontent has been characterised with significant state interventionism (e.g. nationalisation of banks), rising deficits and increased tendencies towards protectionism. Ironically, it is the state driven markets of China and India that now hold the key to global prosperity as their insatiable demand for commodities seek to stabilise the global ship. The age of the IMF and World Bank bully boys may not be over but the model they have espoused appears to be on the verge of collapse. After all, if the USA and France are abandoning neo-liberalism at this critical time, where is the argument for other nations not to do the same?
For Zambia, there are hopeful lessons too, which our current leaders would do well to reflect on :
- There is an alternative to continuous subservience to IMF and World Bank who were the supreme architect of our failed privatization policy of the early 1990s and have been the key proponents of the current ideology that has led to our vulnerability in face of the current commodity price slump. Had Zambia developed a different model we would have earned significant windfall from the mines and we would have been able to diversify our economy. The IMF / World Bank policies for selling everything because we are incompetent were wrong. We must learn not to repeat these past mistakes.
- Developing nations can depend on their home grown experts and solutions. Bad Samaritans demonstrates that nations such as South Korea and China have relied on their own experts to devise solutions. These experts may not be economists educated in the finest institutions in the west, but their understanding of local constraints and care for the implication of their advice more than compensates for what bad Samaritan sponsored advisers might offer. We need to trust our own Zambian experts and offer them the chance to come up with indigenous solutions.
- FDI needs careful thought and should take into account that FDI can be both useful and harmful to long term prosperity. We should not be afraid to ask and answer the important questions: Is it in Zambia's interest that 70% plus of our banking system is foreign owned ? We need to consider whether it is for our long term benefit that all of our mines are in foreign hands. If we have learnt anything from our history it is that ultimate stability can only be guaranteed if Zambians themselves retain some residual control over the future of their economy. Yes, we need foreign direct investment, but we should not do that at the expense of securing a better future for Zambian children in the long term.
Where I find Chang particularly enlightening is in the concept of how we ensure strong markets emerge in developing countries that form the basis of durable societies. To Chang strong markets are not found in neo-liberal free trade but in a pragmatic long view of what delivers development. Sometimes domestic markets have to be protected, as one would a young child, until they grow and are able to compete and stand strong. The mistake of the neo-liberal ideology is to make strong markets synonymous with unregulated markets. Chang is clear that the goal is not state or free markets, but finding the right balance that delivered strong and durable markets that underpin long term productivity.
To be sure like any book Bad Samaritans has its own imperfections, one of which I have pointed out. However, in my view Bad Samaritans significantly advances the debate on how best developing countries can grow and contribute towards global prosperity. If I had money, I would get every Zambian parliamentarian a copy, with extra copies given out free to every visitor at State House. It is a must read.
To be sure like any book Bad Samaritans has its own imperfections, one of which I have pointed out. However, in my view Bad Samaritans significantly advances the debate on how best developing countries can grow and contribute towards global prosperity. If I had money, I would get every Zambian parliamentarian a copy, with extra copies given out free to every visitor at State House. It is a must read.
Comments
Post a Comment