Do As We Say, Not As We Do

by Ha-Joon Chang

Ha Joon Chang talks to David Wearing about international development and free-market hypocrisy

First published: 28 March, 2010 | Category: Corporate power, Economy, Foreign policy

Ha-Joon Chang is one of the world's leading development economists. Currently a Reader in the Political Economy of Development at the University of Cambridge, he has served as a consultant to the World Bank, the Asian Development Bank and the European Investment Bank as well as to Oxfam and various United Nations agencies. He is the author of a number of critically acclaimed books, including ‘Kicking Away the Ladder: Development Strategy in Historical Perspective’, and ‘Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism’. In an in-depth interview with NLP's David Wearing, he discussed the damaging effect of neo-liberal economics on the world's poorer countries, and Britain's record on international development.

Looking back over economic history, which policies have been successful in helping national economies to develop, and which have been less successful, or harmful?

The point to start from is the widespread myth that it's through free trade and free market policies that countries develop. Now some people admit that there are exceptions like Japan and South Korea, but think that those are exceptions that prove the rule. They believe that, starting from 18th century Britain, down to 19th century USA, Germany, Sweden to today's China and India, it is free market policies that have driven economic success. Actually if you look at history without that rose-tinted lens, you find that successful development "“ from 18th century Britain to present day China - has been based on a mixture of some elements of free markets but also very importantly some elements of state intervention. These include, trade protectionism, subsidies to what were considered to be nationally important but privately unprofitable enterprises, regulation on foreign investment (so that foreign investors would transfer technology, buy from local suppliers, do not import overly obsolete technology), and so on. What you find is that the policies that the rich countries used to get rich themselves are almost the polar opposite of what they're recommending to the developing countries today.

In the 18th and early 19th centuries, Britain was one of the most protectionist economies in the world. Contrary to what you might hear from the Economist magazine or the Wall Street Journal, Britain didn't invent free trade. If anything, it invented protectionism. And throughout most of the 19th century, and up until the Second World War, the United States was literally the most protectionist country in the world. The most important theory justifying protectionist policies in developing countries, known as the "œinfant industries" argument - the argument that the governments of economically backward countries need to nurture and develop their infant industries until they grow up and can compete with superior competitors from abroad "“was invented by none other than Alexander Hamilton, the first ever Finance Minister, or what they call the Treasury Secretary, of the United States.

You find example after example defying the free market myth. I'm not saying that there was an identical set of policies that all countries used in order to develop. They had to use what was suitable for them, depending on their size, their different strengths and weaknesses, and so on. But basically, if you observe the historical pattern, countries need, at the beginning of their development, policies that can create the opportunity for domestic firms to learn new technologies, accumulate knowledge and steadily raise their productivity, protected from competition from superior producers based in more economically developed countries.

It's not just in the history of the now-developed, rich countries but also in the weaker and poorer countries where you observe this pattern. Developing countries have done best where they have used policies that are well suited to their needs, like protection, regulation, subsidies and state ownership. Now I'm not saying that all this was a resounding success. There were failures. But the truth of the matter is that per capita income in the developing countries grew much faster in the 1960s and 70s under those protectionist, interventionist policies than it has done either before, when those countries were colonies and basically had to accept free trade and no government intervention, or after when they were forced to adopt free-market, free-trade policies through the IMF/World Bank structural adjustment programmes, the bilateral free trade agreements and what have you.

I'm not trying to idealise what went on in the developing countries in the 60s and 70s, but those supposedly bad policies produced outcomes which were far superior to what free market, free trade policies produced, not just in terms of equity, but also in terms of economic growth since the 1980s. In the late 70s and early 80s when all these free market policies were implemented the argument was to say, "œLook, you're worrying far too much about income distribution. Let's liberalise the economy so that more able people can maximise wealth creation and then we can share it out later".

A rising tide lifts all boats?

That's right. Exactly. So you'd expect that even if income distribution is getting worse and some people are stuck in relative poverty you'd think that overall growth at least would have risen, but this is not the case. Actually growth rates have fallen after all these policies were implemented. So these policies that are promoted by the rich countries, and by the rich people in many developing countries, are actually doing great damage to the economies of poorer nations.

Can you explain the various ways in which developed nations are able to influence and wield power over the economic policies of poorer countries?

Well there are many channels. First of all, they have a very strong hold over poorer countries through the conditions attached to their bilateral aid policies. In the last couple of decades they have also done this through bilateral agreements on trade and investment, which basically restrict what developing countries can do to protect their producers.

And of course the rich countries control the major international financial organisations like the World Bank, the IMF, the Asian Development Bank, and the Inter-American Development Bank. The loan and grant programmes of those organisations also put a lot of conditions on what developing countries can do. For example, especially in the 1980s and early 90s, developing countries in Africa and Latin America were forced to liberalise their trade, open up their banking industry to foreign investors, and sell their state owned enterprises. They were having balance of payments crises, and when the IMF lends you money, the condition is that you have to reform your economy to prevent these things from happening again. Therefore you need to liberalise trade and de-regulate your markets. And then of course since 1995 you've had the World Trade Organisation, which has put restrictions on what countries can do in terms of protection and subsidies and so on.

So you have this collection of organisations and international treaties that constrain what the developing countries can do through financial pressure and international rule-making. And of course all these are basically controlled by the rich countries. Most glaringly in the IMF and the World Bank where it is one-dollar-one-vote, you have voting rights according to the share of capital you put in, and basically the rich countries control the majority of the votes so they can do what they want. In the WTO it is more complicated because it runs on the principle of one-country-one-vote, and the rich countries know when they put something to vote that they could be numerically overwhelmed. So they say, "œwe have work through consensus", and then organise informal meetings "“ known as green room meetings "“ where they basically invite a few of the developing counties that they cannot ignore like India and Brazil, in the process alienating the weaker developing countries. And of course when it comes to weaker developing countries they can always bully them. They can say, "œwell, we're reviewing our aid policy, we see you've been moving to more protectionist policies and we don't like that".

So there's a whole web of institutions and organisations that give this enormous power to the rich countries. And on top of that of course you have intellectual power. The world media is controlled basically by the free market approach. Especially in economics, but also in other subjects, higher education is dominated by Anglo-American universities where basically they only teach free market economics. And these are not isolated ivory towers. The top PhD programmes in the US and UK supply the people who work in the World Bank and the IMF. In some cases they have almost a direct line to some developing country governments. The best example is the so-called "˜Chicago Boys' in Chile. When Pinochet came to power there was a group of free market economists trained in the University of Chicago who came in and implemented those policies. That was an extreme example, but even in other countries when you meet their top officials they tend to be people who were educated in the US and the UK.

To put it in perspective, this is of course better than the days of colonialism, when countries were either formal colonies or subject to unequal treaties which deprived them of policy autonomy. But there remains such a web of money and power and intellectual influence binding these developing countries that unless you are very powerful like India or China or Brazil, you dare not go against what the people who control these things say.

If the policies pushed on developing countries by developed nations, through the IMF and the WTO, are historically proven not to aid development, then why are these policies promoted? Who benefits from this state of affairs?

That's the famous Latin expression, isn't it? "œCui bono"? "œWho benefits?" Well there are lots of people. There's the multinational companies that get to buy the state-owned companies of developing countries at a bargain price because the countries are pressured to sell quickly and at any cost. There's the general commercial interests in the rich countries that want a bigger market share in the developing countries. There's the financial interests in the rich countries which want to buy up the local banks or speculate against local currencies. There's the free market ideologues who benefit from this.

In terms of their reputation, prestige and so on?

Yes, that's right. You get to meet the President of Chile or whatever government, and so on. But the sad thing is that there are also many people in the rich countries who support these policies without actually directly benefitting from any of it. Many of them have genuinely good intentions towards the developing countries, but they've been persuaded by this ideology. They want to help, but since every expert says that it's through free trade, free market policies that these countries can develop, they go along with that. They might even see it as "˜tough love'. So even as developing economies scream, with the people saying "œyou are destroying our jobs, depriving people of their livelihood", the well-intentioned people will say "œwell, it's sad to see, but you need this adjustment to get yourselves back on your feet".

So there's this intellectual hegemony as well as economic and political power?

Exactly, yes. That's actually the frustrating thing. I mean it isn't as if every person supporting these policies does so because they'll then be able to say "œmy company's profit will go up by x or my salary will go up by y, if we implemented these policies".

Also, seen from a broader perspective, it's not as if these policies are beneficial for anyone in the rich world in the long run. In the short term, of course, it's better to be able to break down these protectionist walls and take a bigger slice of the developing country market. But the trouble is that these polices make developing countries grow more slowly in the longer term. You can do a simple thought-experiment here. Imagine Deng Xiaoping had been persuaded by Milton Friedman, and in 1978 implemented a Russian-style big-bang reform. China would have been lucky to have grown very much after that. In reality, as a result of gradualist reform policies and maintenance of huge amounts of protectionism, state subsidies and control, the Chinese economy has become something like ten times bigger since then. Now if China had just liberalised everything in 1978, an American company could have taken 100% share of a given Chinese market, but that 100% would be smaller than a 11-12% share of what the same market is actually worth today.

But of course the corporate world in the rich countries is driven by this short term thinking, because of the nature of the stock market, and they want instant results, even if it's not in their long term enlightened self-interest. If they could see beyond their noses they would realise that pushing these countries to adopt these policies is not even good for them, if you take the 20-25 year perspective. But unfortunately that's not done.

Is there a sense in which the decisive factor in successful development is power and autonomy, rather than state intervention vs the free market? The states that have developed their economies have done so by deciding for themselves the mixture of interventionist and liberal measures that suit their own needs at any given time. Those that have not developed are the ones which have had policy prescriptions imposed on them by external actors: policies that have served the interests of those external actors rather than of the developing country itself. Do you believe that is a fair assessment?

First of all I would say that there is no such thing as a totally free-market economy. It's a myth that there can be such a thing as a free market. All markets are founded on some regulation. You restrict who can participate. Children cannot participate in the labour market in the rich countries. You restrict what can be traded. You cannot buy and sell people any more, which you used to be able to do a couple of centuries ago. So in that sense all markets have state intervention, and for that reason it's a mistake to see free markets and states as dichotomous

It's a mixture

That's right. There'll always be a mixture. When you look at what countries actually do, everywhere there's a mixture of markets and state. The difference is in the balance across countries, which depends on what they want to do, what they can do, what their moral values are and so on. In Europe people accept that health should be publically provided, whereas in America even some people who would benefit from that are against it for ideological reasons.

In the end the freedom to choose may be more important than the exact policy mix, although I would say that some policies are more likely to succeed than others. If you're a developing country you probably have a better chance with protectionist, interventionist policy than you would have with free market policies. But that's not an absolute statement. There are always exceptions. All countries have different conditions. So in that sense the freedom to choose is probably more important.

There's a paradox here. Because when it comes to domestic policy issues, the free market people are adamant that people have to have the freedom to choose. If they want to eat unhealthy food, for example, then that's their choice and the government shouldn't tell them otherwise. But when the same people talk about developing countries….

...then they're paternalists.

Yeah. Complete paternalists. "œWe know what's good for you. Even if you don't like it we'll make you do it, by international treaties, loan conditionalities "“ we are showing you tough love". Now I'm not against having some very broad international rules. If the WTO says you can't have 300% tariff then fine. But at the moment the Doha round proposal from the rich countries says developing countries have to reduce their industrial tariffs to below 10%, and this doesn't give them any freedom of choice. I really find this double standard staggering. When it comes to domestic policy, they say "œgive people freedom to choose", but when it comes to developing countries they're saying "œno, these guys aren't good enough to choose for themselves. We need to choose for them, and force them to do things when they object".

I wanted to ask you about Britain's role in particular. New Labour’s development policies since 1997 seem to have a fairly good reputation, but from your account of how rich countries have shaped the development agenda to suit their interests, at the expense of the poorer nations, and given the leading role Britain has in institutions like the IMF, it sounds like that reputation may not be fully deserved.

Yes, I would agree with that.

So, what’s your assessment of New Labour’s record in this area?

I would give credit to the Labour government for keeping the development issue alive in the international arena. Fundamentally, the Americans are not interested in the development agenda, the Japanese are too timid, the Italians couldn't care less, the countries that really do care about development, like the Scandenavian countries, are too small to make any big impact. So among the major countries, only Britain has been making a noise about this, and I give the Labour government credit for that. But unfortunately, the understanding of what is really going to help developing countries is faulty, in terms of Labour's policies, because "“ with some of the rough edges smoothed out "“ they basically go along with the free trade, free market orthodoxy, and they're not doing anything fundamental to change that.

I don't want to dismiss their efforts in bringing about, for example, the HIPC initiative in debt reduction for highly indebted poor countries. Increased aid, debt cancellation - that's all fine. But these can only play supporting roles. The main thrust of development policy has to be domestic investment, training, productivity growth, and there's nothing in the dominant development agenda "“ even the slightly more progressive kind that New Labour has been pushing "“ that will help these countries to do that. So for example, the way they see international trade, through this free trade paradigm, is to say, "œok, its unjust for us to protect our agriculture so that Kenya and Uganda can not export their way out of poverty". Well, at one level that sounds great. But lowering agricultural subsidies and protection in the rich countries is not going to help the developing countries very much because the subsidies and tariffs are concentrated on products that these countries already produce; wheat, dairy, meat etc. Most developing countries are not able to export these things. Even according to the World Bank estimates, the main beneficiaries of agricultural liberalisation in the rich countries will be other rich countries with strong agricultural sectors like America, Australia, New Zealand, Canada. Only Brazil and Argentina in the developing world are expected to benefit significantly from these changes. Otherwise, its not going to help the developing countries very much.

More importantly, all these reductions in agricultural protections and subsidies in the rich countries are supposed to be a quid pro quo for a reduction in industrial tarrifs in the developing countries. That's the central element in the Doha development round. And it sounds great, saying "œok, you guys are better at agriculture, we're better at industry, so we'll liberalise our agriculture, you liberalise you're industry, and we'll all benefit". As I said, in the short run, very few developing countries are actually going to benefit from it. But the bigger worry is that in the long run, this is going to prevent developing countries from moving up the technological ladder, so to speak.

If anything, it'll lock things in place.

Yes, it forces them back into agriculture because we're not allowing them to develop their industries. So in so far as that is the central element in the broader agenda, pushing for more foreign aid is like standing by watching and not doing anything while someone's being beaten up, and then later on giving them a cup of tea and a band-aid.

If the Labour government really wants to help the developing countries then it needs to rethink its development policies. Let me put it bluntly. Letting the Kenyans export more cut flowers and the Ugandans export more French beans is not going to help these countries develop. No country has developed through that route, and unless that central part of the development agenda is rethought, pushing for a bit more aid here and a bit of debt relief there isn't fundamentally going to change anything.

You mentioned the way New Labour has kept international development on the agenda, and I suppose one effect of that has been the Conservatives' new found concern for the issue under David Cameron. What do you make of their new policies?

When you look at the Conservative Party website you find that they now have a section on "œOne World Conservatism", as opposed to "œOne Nation Conservatism", so yes, it is positive that the Conservatives have bought into the New Labour development agenda. But its essentially the same agenda, so my earlier criticisms apply in the same way. We need to rethink the central features of development policy. No country is going to develop through foreign aid alone. They have to stand on their own feet, and if you implement policies that make it impossible for them to do that, then no wonder you find yourself having to keep giving them money.

Finally, I wanted to ask you about the effects of the financial crash on the neo-liberal consensus. It does appear to be a dogma that's largely impervious to evidence, perhaps mainly because its one that serves power. I mean, as you said, these liberalisation policies failed disastrously in the 70s and 80s, and yet the rich countries carried on pushing them nonetheless. So, do you see any evidence of neo-liberal ideas being seriously re-thought, following the events of autumn 2008? Or is the thinking in places like the World Bank and the IMF carrying on pretty much as normal?

Well in the short run there's simply too much money, too much power and too much intellectual prestige at stake for anything to change radically. In the immediate aftermath of the crash some people like Alan Greenspan and Jack Welch came out with their confessionals, and at that time there seemed to be a possbility of change, but even then I wasn't convinced. I expected that once things calmed down these people would retract what they'd said, or other people would dismiss them, and that's what's happened.

Look at the timidity that governments have shown, especially in dealing with the bankers whose companies have been saved with taxpayers money. Applying capitalist principles, now that the British government owns a majority stake in Royal Bank of Scotland, they could say to these executives, "œnow you will work for nothing for three years". Why not? But the power of money is too strong for that to happen.

However, in the long-run, I'm an optimist. Two hundred years ago a lot of people thought it was perfectly legitimate to buy and sell people. A hundred years ago they put women in prison for asking for the vote. Fifty years ago the founding fathers of the developing nations were being hunted down as terrorists by the British and the French. And only 20 years ago Margaret Thatcher says that someone who thinks that there'll be black majority rule in South Africa one day is living in cloud cuckoo land. So things can change, but I'd say, don't hold your breath. It might take 10, 20, 30 years. A lot depends on how well people organise, what kinds of demands they make and so on. How things will progress is not a foregone conclusion either way, but it will take time. Resistance to changes will be very strong, and organising the offensive, if you like, will take a lot of effort.

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