Friday, 7 September 2007

Kicking Away The Ladder

This is a book referred to in an earlier post. It's by Ha-Joon Chang (a development economist at Cambridge), and is well worth reading.

It provides an overarching review of how the developed countries really came to their current prosperous economic states. Did they use the same policies and institutions recommended and instigated by the "Washington Consensus" on today's developing countries? Of course not - what's sauce for the goose is not sauce for the gander.

The book is really good in showing - in a fairly damning way I would say - that the neo-classical or neo-liberal or orthodox economics espoused by the intelligentsia (and heartily echoed by the financial community and others with well-entrenched interests) is actually very often diametrically opposite to the techniques used by the US, UK, Germany, France, Japan, Sweden etc in making their significant leaps forward from pre-Industrial Revolution days.

Most people would view this as blatant hypocrisy - and indeed its tough to reach any other conclusion. The book itself, however, is no hysterical diatribe - and is therefore much more powerful for it. Written by a trained and respected academic, it is actually quite useful as a primer and introduction to the actual economic history of the Developed World. The unemotional counterpoints he provides by comparing these actual practices to what is recommended to (and let's be honest here, often forced down the throat of) Developing Countries are very provocative.

It is a very welcome blast of transparency which shows the hypocrisy which runs through the orthodox or neo-classical economic establishment - and considering how well-educated this establishment is, some readers may well also ask whether this is a wilful and deliberate hypocrisy borne out of self-interest.

My notes on the book run to >15 pages, but I won't replicate them all here! I won't try and summarise the arguments either - simply because there's a summary from the author himself
here (or you can always try Amazon or Wikipedia). Instead, I'll just highlight some of the "unexpected" points and historical facts that I found intriguing:
  • the Developed Countries extensively used interventionist industrial, tariff and trade policies to actively manage their economic development
  • these policies included heavy tariff manipulation, infant industry protection, capacity building through education and infrastructure, deliberate shunning of intellectual property rights
  • the USA was arguably the founding father of protectionism, making heavy use of infant industry protectionist policies for well over a century
  • laissez-faire free trade policies have been extensive for a very short period of time in history (essentially the 2nd half of the 1800s) - before and after the major economic nations have used protectionist ITT policies
  • Friedrich List, a German economist who was exiled in the US and heavily influenced by US legislators, writing in 1841, analysed English economic development as follows - “they perceived that their newly established manufactures could never hope to succeed in free competition with the old and long-established manufactures of foreigners…hence they sought, by a system of restrictions, privileges, and encouragements, to transplant on to their native soil the wealth, the talents and the spirit of enterprise of foreigners”
  • free trade was advocated by many British economists, who had a variety of recommendations particularly for the US - Adam Smith: “were the Americans, either by combination or by any other sort of violence, to stop the importation of European manufactures, and, by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their annual produce, and would obstruct intead of promoting the progress of their country towards real wealth and greatness” (emphases mine, contrast this with what US actually did, and interestingly with the current anti-free trade stance of presidential hopefuls)
  • British advocacy of free trade really kicked in only about 50 years into the Industrial Revolution (upto which point Britain had been actively interventionist), when British firms clearly had built up considerable technological and productive advantages
  • even then, there was also a clear tangential agenda, behind free-trade activists of (a) reducing cost and expanding availability of primary raw materials (to counter the “fostering bounties which the high-priced food of the British artisan has offered to the cheaper fed manufacturer of those countries” ), and (b) improve ability to access and exploit export markets on the back of their technological advantage (hence Britain’s espousal and advocacy of free-trade as the intellectually and allegedly practically virtuous path)
  • “halt[ing] the move to industrialisation on the Continent by enlarging the market for agricultural produce and primary materials” was also a significant motive, as attested to by the words of the free-trade lobbyists themselves, eg: Cobden arguing that “the factory system would, in all probability, not have taken place in America and Germany. It most certainly could not have flourished…in these states, and in France, Belgium, and Switzerland”
  • the US political leaders were aware of what the consequences of such British-advocated policies would be (although perhaps they also had their own electoral or commercial interests within the US in mind) - Jefferson tried to stop the publishing of Ricardo's works in the US, whilst elsewhere List cites a US congressman as stating that English trade theory “like most English manufactured goods, is intended for export, not for consumption at home”
  • even by the 1880s, previously assertive English manufacturers in some industries were starting to advocate tariff protection, and from 1879/1880 tariff barriers began rising back across nations
  • industrial espionage was encouraged by many states, including Germany, France, Sweden
  • intellectual property rights were largely ignored by all Developed Countries - Britain (pre-1852), Netherlands, Austria & France specifically permitted “patenting of imported inventions by their nationals, while US granted patents to its nationals “without any proof of originality” until 1836, and “did not acknowledge foreigners’ copyrights until 1891”
  • Switzerland refused any form of patent law until 1907, significantly aiding its chemical, pharmaceutical and food industries – any guess on the nationality of many of today's largest food and drugs companies??
  • public funding of capacity building can and does have significant benefits (ie, it cannot just be left to the "market" to provide) - in the US, the proportion of educational investment which was publicly funded rose from <50% in 1840 to c. 80% by 1900, with an increase in literacy ratio to 94% by 1900
  • Germany’s building of new schools and universities included “the reorientation of their teaching from theology to science and technology…at a time when science and technology was not being taught in Oxford or Cambridge”, and led to a net inflow of students from the US to Germany for 100 years
  • US government actively supported agricultural research from mid-19th C, including establishing research institutes and granting government land to agricultural colleges
  • Defense-related procurement means US government continues to be a major driver of R&D, with historical benefits accrued by industries such as IT, aerospace, internet
  • US government’s National Institutes of Health continue to play “critical role” in “supporting R&D in pharmaceutical and biotechnology industries”, funding 29% of R&D vs 43% by the industry itself
This list could continue even more, but should be sufficient as a canvas to contrast some of the Washington Consensus policies for Developing Countries, examples include the arguments over patent rights in medication and even food (surely hypocritical), the imposition of free-trade (milk from overseas is cheaper in Tanzania than domestic milk!), the recommendation that the "market" (ie foreign companies, entrepreneurs, and investors) should be left to fund and finance development (including major capacity-building like transport and utilities) etc.

If you have the time, read the book itself. It's not an academic textbook, more a background primer, and will leave you with a much better briefing and often damning context as regards many of the topics you see advocated by the special interest groups (public and private) in the Developed Countries, and which make for debate in the newspapers as well.

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