the Guilty Secrets of Rich Nations
and the Threat To Global Prosperity By Ha-Joon Chang Random House, 2007 276 pages.
You’ve probably heard the Gospel of Free Market: if a country wants to break the cycle of poverty and achieve economic growth and prosperity, it should deregulate, open up its market, welcome investors, and unleash the power of the private sector. Nationalisation is anathema; protection is heresy; subsidies are so passé. This pervasive neo-liberal orthodoxy is driven with unrelenting vigour by the “unholy trinity” of International Monetary Fund (IMF), the World Bank and the World Trade Organisation (WTO).
Ha-Joon Chang, the “heretic”, set out to challenge this orthodoxy in Bad Samaritans. The title, of course, is a play on the biblical story of the Good Samaritan – the man who went out of his way to help a man left for dead on the road by armed robbers. Here the parable is flipped: The Bad Samaritans are the rich nations, and they have gone out of their way not only to give, but to force free market orthodoxy down the throat of unsuspecting, and often helpless, poor countries. They use the “unholy Trinity” to great effect in this relentless crusade for free market.
Chang, though, is not all sound and fury. He is meticulous and rigorous in his attention to details.
For good measure, to the extent that he is a believer in globalisation, he is hardly a revolutionary. He may be critical (of free market), but he is not a radical.
His overall thesis is simple: the developed countries of the world are not honest about the policies and strategies they deployed on their way to greatness, notably infant industry protection, subsidies and the leadership role of government in industrial policies and other forms of interventions. It was only when these nations attained a high of level of technical competence, technological leadership and industrial competitiveness that they opened up their markets. On the contrary, the “advice” – and it is more than mere advice – they are giving to poorer countries today amounts to forcing a football team of 11-year-old girls to compete with the Brazilian national team on a “level playing field”. It is a level playing field of unequal competitors – a clear contradiction in terms.
The book is organised into nine chapters, in addition to the prologue and epilogue. The first chapter explores the myths and facts about globalisation; the second chapter provides a historical analysis of industrial policies of rich countries. In the next three chapters, Chang critiques – but by no means dismiss – free trade, foreign investment, and private enterprise.
After this, in chapters six, seven and eight, he highlights some main obstacles that developing countries face in their struggle to remount the ladder of economic prosperity – intellectual property roadblocks; restricted access to international finance; and weak institutions. In the final chapter nine, he deals with the subject of false national stereotypes.
Chang does not romanticise protectionism and state-led industrialisation as the one magic wand that will solve all the problems of poor countries. He admits that “not all countries have succeeded through protection and subsidies, but few without them”. He also highlights some obstacles developing countries may face if they adopt protectionist strategies.
Chang begins with his homeland of South Korea. In 1961, the average South Korean yearly income stood at $82 per person, which was less than the average income of $179 per person in Ghana at that time. In short, South Korea was one of the poorest countries in the world. Within 40 years, however, the per capita income in South Korea has grown about 14 times in terms of purchasing power. “It took the UK over two centuries and the US around one and half centuries to achieve the same results”. So how did the South Korean “miracle” come about?
Chang’s riposte is worth quoting at length:
(The) neo-liberal establishment would have us believe that, during its miracle years between the 1960s and the 1980s, Korea pursued a neo-liberal economic development strategy. The reality, however, was very different indeed. What Korea actually did during those years (and) decades was to nurture certain new industries, selected by the government in consultation with the private sector, through tariff protection, subsidies and other forms of government support…until they ‘grew up’ enough to withstand international competition (page 14).
The South Korean government was pragmatic, rather than revolutionary, in its approach. It did not, like the communists, reject the market; neither did it embrace free market blindly. It saw the market as an opportunity that can only be harnessed by means of appropriate policy interventions, led by the government.
There is a question, though: is South Korea an outlier, and an exception to the gospel of free market? Quite the contrary, says Chang, and here he throws a “bombshell”: the prevailing history of capitalism is one bad fiction, and today’s poor countries are the main casualties. For, as the rest of the book then sets forth, practically every developed country today became rich “on the basis of policy recipes that go against neo-liberal economics.”
Enter Great Britain. Until the time of the Tudor monarchs, Britain was “a relatively backward economy, relying on exports of raw wool to finance imports”. At that time, Belgium and the Netherlands were the leaders of the Woollen manufacturing industry, which was Europe’s high-tech industry at the time. In order to turn things around, the British government “used protectionism, subsidies, distribution of monopoly rights, government-sponsored industrial espionage and other means of government interventions to develop England’s woollen manufacturing industry”.
These protectionist policies arguably reached its peak during the 21-year prime ministership of Robert Walpole (1721-1742). Export subsidies were given, tariffs on foreign goods were significantly raised, and British manufacturing industries were subsidised and encouraged to export.
The Americans followed Britain’s protectionist example when, in 1791, Alexander Hamilton submitted to the US Congress his Report on the Subject of Manufactures. The key measures proposed by Hamilton include: protective tariffs and import bans, subsidies, export ban on key raw materials, and regulation of product standards. Abraham Lincoln took this further in his presidency, earning the reputation as “the Great Protector”, on account of his strong advocacy for infant industry protection. Curiously, throughout the 19th century and right up to the 1920s – when the US was the most protectionist country in the world – it was also the fastest growing economy.
Developing countries planning to adopt protectionist strategies could learn a few things from past pitfalls. Chang also recognises that it will be much more difficult today for these strategies to succeed if the “bad Samaritan” countries are not persuaded that it is in their own enlightened interest too…
Chang does not romanticise protectionism and state-led industrialisation as the one magic wand that will solve all the problems of poor countries. He admits that “not all countries have succeeded through protection and subsidies, but few without them”. He also highlights some obstacles developing countries may face if they adopt protectionist strategies. Perhaps a weakness of the book is the absence of detailed historical analysis of failures experienced by some developing countries who adopted protectionist and import substitution policies in the past, notably some Latin American countries in the 1960s and 70s. Developing countries planning to adopt protectionist strategies could learn a few things from past pitfalls.
Chang also recognises that it will be much more difficult today for these strategies to succeed if the “bad Samaritan” countries are not persuaded that it is in their own enlightened interest too – especially with regard to new and bigger markets – if poorer countries employ protectionist strategies to grow their economies before opening up their markets.
The book also emphasises some issues, without resolving them. For example, Chang suggests that democracy can be a hindrance, and not a help, for state-led industrialisation, because the electoral process, and politicians, are often oriented towards short-term gains.
On the other hand, he criticises the idea of financial institutions like central banks operating independent of the political process and political office holders, saying it is a prescription of IMF aimed at dictating the fiscal policies of nations independent of democratic control in those countries. Even while admitting some of these unresolved problems, the book is nevertheless a compelling and thought-provoking read.
You don’t have to agree with everything he says to recognise that this is an important book that should, at the very least, encourage everyone to re-examine their assumptions about free market orthodoxy.