Conghaileach
4th July 2002, 14:49
History debunks myth that free trade is best for all
Ha-Joon Chang
You are visiting a developing country as a policy analyst. It has the
highest average tariff rate in the world. Most of the population
cannot vote, and vote-buying and electoral fraud are widespread.
The country has never recruited a single civil servant through an open
process. Its public finances are precarious, with loan defaults that
worry investors. It has no competition law, has abolished its
shambolic bankruptcy law, and does not acknowledge foreigners'
copyrights. In short, it is doing everything against the advice of the
IMF, the World Bank, the World Trade Organisation and the
international investment community. Sounds like a recipe for
development disaster? But no. The country is the United States - only
that the time is around 1880, when its income level was similar to
that of Morocco and Indonesia today. Despite wrong policies and sub-
standard institutions, it was then one of the fastest-growing and
rapidly becoming one of the richest - countries in the world.
Especially in relation to trade policy. Many top economists,
including Adam Smith, had been telling Americans for over a century
that they should not protect their industries - exactly what today's
development orthodoxy tells developing countries.
But the Americans knew exactly what the game was. Many knew all
too clearly that Britain, which was preaching free trade to their
country, became rich on the basis of protectionism and subsidies.
Ulysses Grant, the civil war hero who was president between 1868 and
1876, remarked that "within 200 years, when America has gotten out of
protection all that it can offer, it too will adopt free trade". How
prescient - except that his country did rather better than his
prediction.
The fact is that rich countries did not develop on the basis of the
policies and institutions they now recommend to developing countries.
Virtually all of them used tariff protection and subsidies to develop
their industries. Once they became rich, these countries started
demanding that the poorer countries practise free trade and introduce
"advanced" institutions - if necessary through colonialism and unequal
treaties. Friedrich List, the leading German economist of the mid-19th
century, argued that in this way the more developed countries wanted
to "kick away the ladder" with which they climbed to the top and so
deny poorer countries the chance to develop.
In the past two decades developed countries have exerted
enormous pressures on developing countries to adopt free trade,
deregulate their economies, open their capital markets, and adopt
"best-practice" institutions such as strong patent laws. During this
period, a marked slowdown has occurred in the growth of the developing
countries. How do we address this failure?
First, the conditions attached to bilateral and multilateral
financial assistance to developing countries should be radically
changed. It should be accepted that the orthodox recipe is not
working, and also that there can be no "best-practice" policies that
everyone should use.
Second, the WTO rules should be rewritten so that the developing
countries can more actively use tariffs and subsidies for development.
Third, improvements in institutions should be encouraged, but this
should not be equated with imposing a fixed set of Anglo-American
institutions on all countries, nor should it be attempted in haste, as
institutional development is a lengthy and costly process.
By being allowed to adopt policies and institutions that are more
suitable to their conditions, the developing countries will be able to
develop faster. This will also benefit the developed countries in the
long run, as it will increase their trade and investment opportunities.
That the developed countries cannot see this is the tragedy of our
time.
Ha-Joon Chang teaches at the University of Cambridge
Ha-Joon Chang
You are visiting a developing country as a policy analyst. It has the
highest average tariff rate in the world. Most of the population
cannot vote, and vote-buying and electoral fraud are widespread.
The country has never recruited a single civil servant through an open
process. Its public finances are precarious, with loan defaults that
worry investors. It has no competition law, has abolished its
shambolic bankruptcy law, and does not acknowledge foreigners'
copyrights. In short, it is doing everything against the advice of the
IMF, the World Bank, the World Trade Organisation and the
international investment community. Sounds like a recipe for
development disaster? But no. The country is the United States - only
that the time is around 1880, when its income level was similar to
that of Morocco and Indonesia today. Despite wrong policies and sub-
standard institutions, it was then one of the fastest-growing and
rapidly becoming one of the richest - countries in the world.
Especially in relation to trade policy. Many top economists,
including Adam Smith, had been telling Americans for over a century
that they should not protect their industries - exactly what today's
development orthodoxy tells developing countries.
But the Americans knew exactly what the game was. Many knew all
too clearly that Britain, which was preaching free trade to their
country, became rich on the basis of protectionism and subsidies.
Ulysses Grant, the civil war hero who was president between 1868 and
1876, remarked that "within 200 years, when America has gotten out of
protection all that it can offer, it too will adopt free trade". How
prescient - except that his country did rather better than his
prediction.
The fact is that rich countries did not develop on the basis of the
policies and institutions they now recommend to developing countries.
Virtually all of them used tariff protection and subsidies to develop
their industries. Once they became rich, these countries started
demanding that the poorer countries practise free trade and introduce
"advanced" institutions - if necessary through colonialism and unequal
treaties. Friedrich List, the leading German economist of the mid-19th
century, argued that in this way the more developed countries wanted
to "kick away the ladder" with which they climbed to the top and so
deny poorer countries the chance to develop.
In the past two decades developed countries have exerted
enormous pressures on developing countries to adopt free trade,
deregulate their economies, open their capital markets, and adopt
"best-practice" institutions such as strong patent laws. During this
period, a marked slowdown has occurred in the growth of the developing
countries. How do we address this failure?
First, the conditions attached to bilateral and multilateral
financial assistance to developing countries should be radically
changed. It should be accepted that the orthodox recipe is not
working, and also that there can be no "best-practice" policies that
everyone should use.
Second, the WTO rules should be rewritten so that the developing
countries can more actively use tariffs and subsidies for development.
Third, improvements in institutions should be encouraged, but this
should not be equated with imposing a fixed set of Anglo-American
institutions on all countries, nor should it be attempted in haste, as
institutional development is a lengthy and costly process.
By being allowed to adopt policies and institutions that are more
suitable to their conditions, the developing countries will be able to
develop faster. This will also benefit the developed countries in the
long run, as it will increase their trade and investment opportunities.
That the developed countries cannot see this is the tragedy of our
time.
Ha-Joon Chang teaches at the University of Cambridge