Archive for February, 2008

Free Traders & Neo Liberals Agenda : Myth or Reality.

5 February 2008

Free traders & Neo Liberals have today swayed the educated opinion so completely that little need or inclination is felt for independent thinking & investigation. Dogmas have struck deep roots. In this essay Chalmers Johnson introduces the book “Kicking Away the Ladder: Development Strategy in Historical Perspective” by Ha-Joon Chang, a Cambridge economist. The book systematically analyses the core myths & goes on to expose for what they are : ‘myths’. Chang is also a historian of economics.

1. Myth 1 : Free trade & level playing field created economic prosperity in Korea, Japan in latter half of 20th century & USofA, U.K., in mid 19th century onwards.

2. Myth 2 : Corruption fails World Bank, IMF & now WTO advice. Zaire under General Mobutu went to dust with standard of living falling to 1/3rd while Indonesia under General Suharto tripled it during same period. Both leaders were notoriously corrupt. Corruption is, of course, a problem, but to say that it is the reason for the spectacular failures of neoliberal economic programs is unconvincing.

3. Myth 3 : Culture is a key determinant of economic success. Max Weber in 1904 identified the Confucian/Buddhist countries of China and Japan as economically backward because they did not have the Protestant ethic. Weber would have to eat his words today. Culture simply does not work as an explanation for economic success.

4. Myth 4 : Level playing field is must for economic growth & prosperity. Not true. It leads to unfair competition when the players are not equal or near equals.

5. Myth 5 : Intellectual Property Rights & patents regime encourages innovation. Not true? Often it acts as a barrier to it.

Usually I do not publish other people’s articles on my blog, but I found this way too important to publish in full. It is also way too counterintuitive to current received wisdom. I found one error in subsidy for dairy industry in Europe that is claimed to be GBP 1 per cow per day or a total of GBP 16 billion and this gives a cow population of 43 million for Europe, an unlikely figure.

Ha-Joon Chang is a Cambridge economist who specializes in the abject poverty of the Third World and its people, groups, nations, and empires, and their doctrines that are responsible for this condition. He won the Gunnar Myrdal Prize for his book “Kicking Away the Ladder: Development Strategy in Historical Perspective” (2002), and he shared the 2005 Wassily Leontief Prize for his contributions to “Rethinking Development in the 21st Century.” The title of his 2002 book comes from the German political economist Friedrich List, who in 1841 criticized Britain for preaching free trade to other countries while having achieved its own economic supremacy through high tariffs and extensive subsidies. He accused the British of “kicking away the ladder” that they had climbed to reach the world’s top economic position. Chang’s other, more technical books include “The Political Economy of Industrial Policy” (1994) and “Reclaiming Development: An Economic Policy Handbook for Activists and Policymakers” (2004).

His new book is a discursive, well-written account of what he calls the “Bad Samaritan,” “people in the rich countries who preach free markets and free trade to the poor countries in order to capture larger shares of the latter’s markets and preempt the emergence of possible competitors. They are saying ‘do as we say, not as we did’ and act as Bad Samaritans, taking advantage of others who are in trouble.” Bad Samaritans is intended for a literate audience of generalists and eschews the sort of exotica that peppers most economic writing these days — there is not a single simultaneous equation in the book and many of Chang’s examples are taken from his own experiences as a South Korean born in 1963.

Ha-Joon Chang’s life is conterminous with his country’s advance from being one of the poorest on Earth — with a 1961 yearly income of $82 per person, less than half the $179 per capital income in Ghana at that time — to the manufacturing powerhouse of today, with a 2004 per capita income of $13,980. South Korea did not get there by following the advice of the Bad Samaritans. Chang’s prologue contains a wonderful account of how post-Korean War trade restrictions and governmental supervision fostered such projects as POSCO (Pohang Iron and Steel Co.), which began life as a state-owned enterprise that was refused support from the World Bank in a country without any iron ore or coking coal and with a prohibition on trade with China. Now privatized, POSCO is the world’s third largest steel company. This was also the period in which Samsung subsidized its infant electronics subsidiaries for over a decade with money made in textiles and sugar refining. Today Samsung dominates flat-panel TVs and cell phones in much of East Asia and the world.

Chang remembers quite clearly that as a student “We learned that it was our patriotic duty to report anyone seen smoking foreign cigarettes. The country needed to use every bit of foreign exchange earned from its exports in order to import machines and other inputs to develop better industries.” He is frankly contemptuous of New York Times columnist Thomas Friedman’s best-seller The Lexus and the Olive Tree (2000) and its argument that Toyota’s Lexus automobile represents the rich world brought about by neoliberal economics whereas the olive tree stands for the static world of no or low economic growth. The fact is that had the Japanese government followed the free-trade economists back in the early 1960s, there would have been no Lexus. Toyota today would be, at best, a junior partner to some Western car manufacturer or, worse, have been wiped out.

In Chang’s conception, there are two kinds of Bad Samaritans. There are the genuine, powerful “ladder-kickers” working in the “unholy trinity” of the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO). Then there are the “ideologues — those who believe in Bad Samaritan policies because they think those policies are ‘right,’ not because they personally benefit from them much, if at all.” Both groups adhere to a doctrine they call “neoliberalism.” It became the dominant economic model of the English-speaking world in the 1970s and prevails at the present time. Neoliberalism (sometimes called the “Washington Consensus”) is a rerun of what economists suffering from “historical amnesia” believe were the key characteristics of the international economy in the golden age of liberalism (1870-1913).

Thomas Friedman calls this complex of policies the “Golden Straitjacket,” the wearing of which, no matter how uncomfortable, is allegedly the only route to economic success. The complex includes privatizing state-owned enterprises, maintaining low inflation, shrinking the size of the state bureaucracy, balancing the national budget, liberalizing trade, deregulating foreign investment, making the currency freely convertible, reducing corruption, and privatizing pensions. It is called neoliberalism because of its acceptance of rich-country monopolies over intellectual property rights (patents, copyrights, etc.), the granting to a country’s central bank of a monopoly to issue bank notes, and its assertion that political democracy is conducive to economic growth, none of which were parts of classical liberalism. The Golden Straitjacket is what the unholy trinity tries to force on poor countries. It is the doctrinal orthodoxy taught in all mainstream academic economics departments and for which numerous Nobel prizes in economics have been awarded.

In addition to being an economist, Ha-Joon Chang is a historian and an empiricist (as distinct from a deductive theorist working from what are stipulated to be laws of economic behavior). He notes that the histories of today’s rich countries contradict virtually all the Golden Straitjacket dicta, many of which are logically a result rather than a cause of economic growth (for example, trade liberalization). His basic conclusion: “Practically all of today’s developed countries, including Britain and the US, the supposed homes of the free market and free trade, have become rich on the basis of policy recipes that go against neo-liberal economics.” All of today’s rich countries used protection and subsidies to encourage their manufacturing industries, and they discriminated powerfully against foreign investors. All such policies are anathema in today’s economic orthodoxy and are now severely restricted by multilateral treaties, like the WTO agreements, and proscribed by aid donors and international financial organizations, particularly the IMF and the World Bank.

Chang offers some fascinating vignettes of men and books that were infinitely more important in the economic development of the rich countries than Adam Smith’s The Wealth of Nations. These include a precis of a virtually unknown book by Daniel Defoe, A Plan of the English Commerce (1728), on Tudor industrial policy in developing England’s woolen manufacturing industry. As a result of many of Defoe’s ideas, manufactured woolen products became Britain’s most important export industry. Chang continues with a short life of Robert Walpole, the chief architect of the mercantilist system. By 1820, thanks to Walpole‘s protectionist policies, Britain‘s average tariff on manufactured imports was between 45 and 55 percent, whereas such tariffs were 6-8 percent in the Low Countries, 8-12 percent in Germany and Switzerland, and around 20 percent in France.

Turning to the United States, Chang focuses on Alexander Hamilton, the first American secretary of the treasury and the man who coined the term “infant industry.” Although he did not live to see it, by 1820 Hamilton‘s 40 percent tariff on manufactured imports into the United States was an established fact. Hamilton provided the blueprint for U.S. economic policy until the end of the Second World War. The 19th and early 20th century U.S. tariffs of 40 to 50 percent were then the highest of any country in the world. Throughout this same period, it was also the world’s fastest growing economy. Much like contemporary China, whose average tariff was over 30 percent right up to the 1990s, neither American nor Chinese protectionism inhibited foreign direct investment but rather seemed to stimulate it. With the U.S. abandonment of overt protectionism after it became the world’s richest nation, it still found measures to advance its economic fortunes beyond what market forces could have achieved. For example, the U.S. government actually paid for 50 to 70 percent of the country’s total expenditures on research and development from the 1950s through the mid-1990s, usually under the cover of defense spending.

The Third World was not always poor and economically stagnant. Throughout the golden age of capitalism, from the Marshall Plan (1947) to the first oil shock (1973), the United States was a Good Samaritan and helped developing countries by allowing them to protect and subsidize their nascent industries. The developing world has never done better, before or since. But then, in the 1970s, scared that its position as global hegemon was being undermined, the United States turned decisively toward neoliberalism. It ordered the unholy trinity to bring the developing countries to heel. Through draconian interventions into the most intimate details of the lives of their clients, including birth control, ethnic integration, and gender equality as well as tariffs, foreign investment, privatization decisions, national budgets, and intellectual property protection, the IMF, World Bank, and WTO managed drastically to slow down economic growth in the Third World. Forced to adopt neoliberal policies and to open their economies to much more powerful foreign competitors on unequal terms, their growth rate fell to less than half of that recorded in the 1960s (1.7 percent instead of 4.5 percent).

Since the 1980s, Africa has actually experienced a fall in living standards — which should be a damning indictment of neoliberal orthodoxy because most African economies have been virtually run by the IMF and the World Bank over the past quarter-century. The disaster has been so complete that it has helped expose the hidden governance structures that allow the IMF and the World Bank to foist Bad Samaritan policies on helpless nations. The United States has a de facto veto in both organizations, where rich countries control 60 percent of the voting shares. The WTO has a democratic structure (it had to accept one in order to enact its founding treaty) but is actually run by an oligarchy. Votes are never taken.

Because of the shortcomings of neoliberalism, the main international development bureaucracies as well as much of the academic economics establishment have been busy trying to find plausible scapegoats or excuses. One of the most transparent was Paul Wolfowitz’s emphasis on poor-country corruption during his short tenure as president of the World Bank. He propounded the increasingly popular view that the World Bank gave good advice that failed because Third World leaders were corrupt and subverted its implementation. The problem with this idea is, as Chang puts it, “Most of today’s rich countries successfully industrialized despite the fact that their own public life was spectacularly corrupt.” He has in mind places like the late 19th century United States and post-World War II East Asia, about which Chang as a South Korean speaks with insights from the inside, and China today.

Among the conundrums encountered in trying to argue that corruption has subverted neoliberalism are the cases of Zaire (yesterday, the Congo) under Gen. Mobutu and Indonesia under Gen. Suharto. Both Mobutu and Suharto were flagrantly corrupt, murderous military dictators of the sort often preferred by the United States, but with one major difference — whereas Zaire’s living standards fell threefold during Mobutu’s rule, Indonesia‘s rose by more than the same amount during Suharto’s rule. The explanation seems to be that in Indonesia, the money from corruption mostly stayed inside the country in the hands of Suharto’s numerous relatives, who used some of it to create jobs and incomes. In Zaire, the proceeds from corruption went straight into Swiss banks and other hidden foreign accounts. Corruption is, of course, a problem, but to say that it is the reason for the spectacular failures of neoliberal economic programs is unconvincing.

Rather than acknowledging that free trade, privatization, and the rest of their policies are ahistorical, self-serving economic nonsense, apologists for neoliberalism have also revived an old 19th century and neo-Nazi explanation for developmental failure — namely, culture. Chang believes that this reflects the popularity of Samuel Huntington’s thesis that we are experiencing a “clash of civilizations” or Francis Fukuyama’s contention that trust extending beyond family members critically affects economic development. Fukuyama argues, astonishingly, that the absence of such trust in the cultures of China (the fastest growing economy on Earth today), France, Italy, and (to some extent) Korea makes it difficult for them to run large firms, which are key to modern economic development. This is not so different from the 19th century German economist and sociologist Max Weber, who in 1904 identified the Confucian/Buddhist countries of China and Japan as economically backward because they did not have the Protestant ethic.

Chang argues that culture simply does not work as an explanation for economic success. Extremely broad categories such as “civilization,” “Christian,” or “Muslim” obscure more than they reveal, and the modern histories of Germany, Japan, China, and many other countries suggest that Protestant-work-ethic-type cultures are the results of economic development, not their cause. In the early 19th century, the British endlessly generalized about Germany and Germans, calling them “a dull and heavy people” and “indolent,” saying “the Germans never hurry,” they are a “plodding, easily contented people … endowed neither with great acuteness of perception nor quickness of feeling,” they are “not distinguished by enterprise or activity,” they are “too individualistic and unable to cooperate with each other,” they are “overly emotional,” and “the [German] tradesman and shopkeeper take advantage of you wherever they can, and to the smallest imaginable amount rather than not take advantage of you at all. … This knavery is universal.”

It is discouraging to see this kind of thought rampant again in economic discourse, this time directed against the poor people of Africa, Latin America, and elsewhere. Commentators who denigrate the Philippines as East Asia’s only Catholic and therefore Latin American-type culture forget that only a half-century ago it was the second richest country in Asia (after Japan). Cultural explanations offer powerful support for the List/Chang proposition that economically successful nations are almost pathologically afraid of competitors coming up from below and therefore try to block their progress by kicking away the ladder. It is time to recognize, particularly in the English-language economic press, that a “level playing field” leads to unfair competition when the players are unequal. We have no trouble recognizing that a boxing match between people with more than a couple of pounds difference in weight is unfair. Why should we accept that the United States and Honduras should compete economically on equal terms?

One of the strengths of Chang’s new book lies in the half-dozen lucid chapters on particular, often rather technical aspects of development and international trade. These add up to a jargon-free primer on contemporary economic thought leavened with a sound knowledge of history. The best of these are on trade liberalization, foreign investment, public versus private enterprises, patents and copyrights, and macroeconomics. The most interesting of these are on trade liberalization and what today are rather ostentatiously called “intellectual property rights.”

We live in an allegedly enlightened age of free trade. Nonetheless, European citizens support their dairy industry with subsidies and tariffs to the tune of 16 billion pounds sterling a year. This amounts to more than 1 pound per cow per day, when half the world’s people live on less. The pattern is repeated with regard to a vast range of agricultural commodities grown in rich, developed countries. The U.S. subsidizes corn and exports it to Mexico, where it is the staple diet of most of the people. These exports, however, drive small Mexican farmers into bankruptcy and encourage their illegal immigration into the United States, where a racist backlash is directed against them. In many cases, the American proponents of farm subsidies are one and the same people who stir up hatreds against Mexican farm workers. Japan is one of the world’s richest countries, with a remarkably even per capita income distribution, but it still lavishly subsidizes its extremely inefficient rice growers and prevents the import of rice that could easily compete on price with domestic rice. This system helps perpetuate the one-party rule of the Liberal Democratic Party by mobilizing rich, protected farmers, who vote for the conservatives.

What’s wrong with such practices? All countries have domestic political interests, and successful politicians cater to them. The problem is the hypocrisy surrounding “free trade” and the lies that distort political rhetoric in virtually all economically advanced countries. According to Chang, “Belief in the virtue of free trade is so central to the neo-liberal orthodoxy that it is effectively what defines a neo-liberal economist. You may question (if not totally reject) any other element of the neo-liberal agenda — open capital markets, strong patents, or even privatization — and still stay in the neo-liberal church. However, once you object to free trade, you are effectively inviting ex-communication.” Under the Anglo-American-dominated World Trade Organization, a great deal of trade liberalization has taken place, but it has virtually all come at the expense of infant industries or cash crops in developing countries and has enriched exporters and consumers in rich countries. Not surprisingly, the system allows for protection and subsidies much more readily in areas where the rich countries want them and rejects any exceptions for developing countries. This is the main reason for the current revolt by virtually all Latin American countries against further U.S. interference in their economic policymaking.

Reduction of tariff revenues also plays havoc with national budgets in poor countries. Because they lack efficient tax collection capabilities and because tariffs are the easiest taxes to collect, developing countries rely heavily on them. Add to this lower levels of business activity and higher unemployment that results from IMF-ordered trade liberalizations, which reduce income tax revenue. When such countries are then put under further IMF pressure to reduce their budget deficits, falling revenues mean severe cuts in spending, often eating into vital areas like education, health, and physical infrastructure, damaging long-term growth.

Neoliberal theorists believe that when it comes to golden straitjackets “one size fits all” — except for those countries rich enough to afford a private tailor. The chief effect of the golden straitjacket has been not to promote growth but to turn healthy countries into basket cases. “In the long run,” writes Chang, “free trade is a policy that is likely to condemn developing countries to specialize in sectors that offer low productivity growth and thus low growth in living standards. This is why so few countries have succeeded with free trade, while most successful countries have used infant industry protection to one degree or another.”

Another salient aspect of the neoliberal canon has a much less hoary history than free trade. The idea of the state intervening to grant a monopoly to an inventor or a creative artist to exploit his or her device is relatively new and was once thought to be contrary to the idea of liberalism. Chang observes, “The technological ‘arms race’ between backward countries trying to acquire advanced foreign knowledge and the advanced countries trying to prevent its outflow has always been at the heart of the game of economic development.” During the 18th century, this competition took on a new dimension with the emergence of modern industrial technologies that had much greater potential for productivity growth than traditional technologies. The result was a vicious international competition to recruit skilled foreign workers, machine smuggling, and industrial espionage. The origins of patents, copyrights, and protection of trademarks are to be found in Britain’s attempts to protect its advanced technologies by erecting legal barriers against their outflow. The other industrializing countries in Europe and the United States had to violate those laws in order to acquire superior British technologies.

The first measure to protect IPRs (intellectual property rights) was a 1719 English ban on the migration of skilled workers. The law made it illegal to recruit experienced workers for jobs abroad — known as “suborning.” Emigrant workers who did not return home within six months of being warned would lose their right to lands and goods in Britain and their citizenship would be revoked. This was followed by a new act in 1750 prohibiting the export of “tools and utensils” in the wool and silk industries, extended by the Tools Act of 1785 to the export of many different types of machinery. The development of science in conjunction with industry meant that a lot of disembodied knowledge could be written down in a language that could be understood by anyone with appropriate training. Once an idea is written down in general scientific and engineering language, it becomes much easier to copy. It thus became more important to protect the ideas themselves than the workers or machines employing them. Beginning with some German states in the 16th century and with Britain in 1623 with the Statute of Monopolies, governments granted 10 years of protected monopoly to inventors of “new arts and machines.” Britain introduced the first copyright law in 1709 and the first trademark law in 1862.

It is not obvious that providing incentives to inventors and accepting the social costs of monopolies increase innovation or do anything more than enrich corporations who can file endless patent infringement suits and slow down change by making frivolous but patentable minor changes in old techniques. According to Chang, “The patent lobby talks nonsense when it argues that there will be no new technological progress without patents.” For example, nonprofit organizations, such as universities, subsidize a great deal of research. Several classical students of innovation, such as the economist Joseph Schumpeter, discounted the importance of patents. Schumpeter believed that the natural if short-lived monopoly that comes with invention was more than enough. One thing is certain: Extending the term of protection for existing work, which is advocated by all the Bad Samaritan rich countries, cannot create new knowledge.

The United States is the most serious protectionist. In 1998, the U.S. Copyright Term Extension Act extended the period of copyright protection from the life of the author plus 50 years to the life of the author plus 70 years. The Disney Corp. led the fight for this extension since the copyright on Mickey Mouse, created in 1928, was due to expire. As a result the new law became known in some circles as the Mickey Mouse Protection Act.

Despite the enormous sums paid to lawyers for work on patent law, it should be understood that as a practical matter patents are important in only three industries — computer software, entertainment, and the pharmaceutical industry. But they are a critical stumbling block for economic development. Some 97 percent of all patents and the vast majority of all copyrights and trademarks are held by economically advanced countries, which use them to deny medicines, textbooks, and computers to underdeveloped countries, exploit epidemics such as HIV/AIDS to extract excess profits, and kick away the ladder for countries trying to catch up. As Chang concludes, “The most detrimental impact [of the patent system] lies in its potential to block knowledge flows into technologically backward countries that need better technologies to develop their economies. Economic development is all about absorbing advanced foreign technologies.” Among the best things we could do today to help the Third World would be to shorten the period of protection, drastically raise the originality bar, and make compulsory licensing and imports of generics easier.

With “Bad Samaritans,” Chang has succinctly and comprehensively exposed the chief structures of economic imperialism in the world today. What is now required is the leadership to undermine and dismantle the barriers that keep so much of the world so poor.

Chalmers Johnson, president of the Japan Policy Research Institute and professor emeritus at the University of California, San Diego, is the author of numerous books, including “Blowback: The Costs and Consequences of American Empire,” “The Sorrows of Empire: Militarism, Secrecy, and the End of the Republic,” and “Nemesis: The Last Days of the American Republic.”