04 April 2010 By Ha-Joon Chang 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 “infant 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, “Look,
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, “we 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,
“well, 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? “Cui
bono”? “Who 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 “you are destroying our jobs,
depriving people of their livelihood”, the
well-intentioned people will say “well, 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 “my 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. “We 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 “give people freedom to choose”, but when it
comes to developing countries they’re saying “no,
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,
“ok, 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 “ok,
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 “One World
Conservatism”, as opposed to “One 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, “now 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
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