I have a six-year-old son. His name is Jin-Gyu. He lives off me, yet he is quite capable of making a living. I pay for his lodging, food, education, and health care. But millions of children of his age already have jobs. Daniel Defoe figured out in the 18th century that children are able to earn a living from the age of four.
Moreover, working might do Jin-Gyu’s character a world of good. Right now he lives in an economic bubble with no sense of the value of money. He has zero appreciation of the efforts his mother and I make on his behalf, subsidising his idle existence and cocooning him from harsh reality. He is over-protected and needs to be exposed to competition, so that he can become a more productive person. Thinking about it, the more competition he is exposed to and the sooner this is done, the better it will be for his future development. It will whip him into a mentality that is ready for hard work. I should make him quit school and get a job. Perhaps I could move to a country where child labour is still tolerated, if not legal, to give him more choice in employment.
I can hear you say I must be mad. Myopic. Cruel. You tell me that I need to protect and nurture the child. If I drive Jin-Gyu into the labour market at the age of six, he may become a savvy shoeshine boy or even a prosperous street hawker, but he will never become a brain surgeon or a nuclear physicist — that would require at least another dozen years of my protection and investment. You argue that, even from a purely materialistic viewpoint, I would be wiser to invest in my son’s education than gloat over the money I save by not sending him to school. After all, if I were right, Oliver Twist would have been better off pick-pocketing for Fagin, rather than being rescued by the misguided Good Samaritan Mr. Brownlow, who deprived the boy of his chance to remain competitive in the labour market.
Yet this absurd line of argument is in essence how free-trade economists justify rapid, large-scale trade liberalisation in developing countries. They claim that developing country producers need to be exposed to as much competition as possible right now, so that they have the incentive to raise their productivity in order to survive. Protection, by contrast, only creates complacency and sloth. The earlier the exposure, the argument goes, the better it is for economic development.
Incentives, however, are only half the story. The other is capability. Even if Jin-Gyu were to be offered a 20-million-pound reward or is alternatively threatened with a bullet in his head, he would not be able to rise to the challenge of brain surgery, had he quit school at the age of six. Likewise, industries in developing countries will not survive if they are exposed to international competition too early. They need time to improve their capabilities by mastering advanced technologies and building effective organisations.
Naturally, the protection I provide to Jin-Gyu should not be used to shelter him from competition forever. Making him work at the age of six is wrong, but so is subsidising him at the age of forty. Eventually he should go out into the big wide world, get a job, and live an independent life. He only needs protection while he is accumulating the capabilities to take on a satisfying and well-paid job.
Of course, as happens with parents bringing up their children, protection of ‘infant industries’ can go wrong. Just as some parents are over-protective, governments can cosset infant industries too much. Some children are unwilling to prepare themselves for adult life, just as infant industry support is wasted on some firms. In the way that some children manipulate their parents into supporting them beyond childhood, there are industries that prolong government protection through clever lobbying. But the existence of dysfunctional families is hardly an argument against parenting itself. Likewise, cases of failures in infant industry protection cannot discredit the strategy per se. The examples of bad protectionism merely tell us that the policy needs to be used wisely.
The Ten-Dollar Bill and the Secret History of Capitalism
The argument that new industries in relatively backward economies need protection and nurturing before it can compete with their superior foreign rivals is known as the ‘infant industry’ argument. It was first systematically developed by someone whose face most readers would have seen without realising whose identity — it is Alexander Hamilton, whose portrait adorns the ten-dollar bill.
Hamilton became the first finance minister (treasury secretary) of the US in 1789, at the outrageously early age of 33. Two years later, he submitted his Report on the Subject of Manufactures to the US Congress. In it, he expounded his view that the country needed a big programme to develop its industries. The core of his idea was that a backward country like the US should protect its ‘industries in their infancy’ from foreign competition and nurture them to the point where they could stand on their own feet. Hamilton proposed a series of measures to achieve the industrial development of his country, including: protective tariffs and import bans; subsidies; export ban on key raw materials; import liberalisation of and tariff rebates on industrial inputs; prizes and patents for inventions; regulation of product standards; and development of financial and transportation infrastructures. Although Hamilton rightly cautioned against taking these policies too far, they are nevertheless a pretty potent and ‘heretical’ set of policy prescriptions. Were he the finance minister of a developing country today, the IMF and the World Bank would certainly have refused to lend money to his country and would be lobbying for his removal from office.
In recommending such a course of action for his young country, the impudent 35-year-old finance minister with only a liberal arts degree from a then second-rate college (King’s College of New York, now Columbia University) was openly going against the advice of the world’s most famous economist, Adam Smith. Like most European economists at the time, Smith advised the Americans not to develop manufacturing. He argued that any attempt to ‘stop the importation of European manufactures’ would ‘obstruct instead of promoting the progress of their country towards real wealth and greatness’.
Many Americans — most notably Thomas Jefferson, secretary of state at the time and Hamilton’s arch-enemy — agreed with the great economist. Quite reasonably, they argued that it is better to import higher-quality manufactured products from Europe with the proceeds that the country earned from exporting agricultural product, rather than trying to produce second-rate manufactured goods. Consequently, Congress only half-heartedly accepted Hamilton’s recommendation and raised average tariff rate from 5% to 12.5%.
However, following the Anglo-American War in 1812, the US started shifting to a protectionist policy, and by 1820, the average industrial tariff rose further to 40%, firmly establishing Hamilton’s programme. By the 1830s, its industrial tariff rate became literally the highest in the world and remained so until the Second World War, when its manufacturing supremacy became absolute.
The US may have been the first country to theorise infant industry protection, but the practice had already existed before . The first country to practice it on a large scale is, surprisingly, Britain — a country commonly believed to be the inventor of free trade.
Declaring that ‘nothing so much contributes to promote the public well-being as the exportation of manufactured goods and the importation of foreign raw material’ through the King’s address to Parliament in 1721, Robert Walpole, the first British prime minister, launched a series of policies that protected and nurtured British manufacturing industries against superior competitors in the Low Countries (Belgium and the Netherlands), the then centre of European manufacturing. The Walpolean policies lasted for the next century. Between Walpole’s time and the 1830s, when Britain started to reduce its tariffs (although it did not move to free trade until the 1860s), Britain’s average industrial tariff rate was in the region of 40-50%, against 20% and 10% in France and Germany respectively, countries that we today associate with trade protectionism.
Britain and the US, the two supposed homes of free trade, may have been the most ardent — and most successful — practitioner of infant industry protection, but they are not exceptions. Virtually all of today’s rich countries used deliberate policy measures to protect and nurture their infant industries before they became rich.
Except for the Netherlands and (until the First World War) Switzerland (more on them later), they all used tariff protection, although none of them as extensively as Britain and the US. Even when overall protection was relatively low, some strategic sectors could get very high protection. For example, during the late 19th and the early 20th century, while maintaining a relatively moderate average industrial tariff rate (5-15%), Germany accorded strong tariff protection to strategic industries like iron and steel. During the same period, Sweden also provided high protection to its newlyemerging engineering industries, although its average tariff rate was 15-20%. In the first half of the 20th century, Belgium maintained moderate levels of overall protection (around 10% average industrial tariff rate), but heavily protected key textile sectors (30-60%) and the iron industry (85%).
Tariffs were not the only tool of trade policy used by the rich countries in the past. When deemed necessary for the protection of infant industries, most of them banned imports and imposed import quotas. They also gave export subsidies — sometimes to all exports (Japan and Korea did that) but often to specific items (for example, in the 18th century, Britain gave export subsidies to gunpowder, sailcloth, refined sugar, and silk). Some of them also gave a rebate on the tariffs paid on the inputs used for exports, in order to encourage exports. Many believe, as I used to myself, that this measure was invented in Japan in the 1950s, but it was in fact invented in Britain during the 17th century.
It is not just in the realm of international trade that the historical records of today’s rich countries go against the free-market orthodoxy.
When they were at the receiving end, most of them discriminated against foreign investors. In the 19th century, the US had restrictions on foreign investment in banking, shipping, mining, and logging. The restrictions were particularly severe in banking. For example, throughout the 19th century,non-resident shareholders could not vote and only American citizens could become directors in a national (as opposed to state-level) bank. In the 1880s, the New York state government even introduced a law that banned foreign banks from engaging in — well — ‘banking business’ (such as taking deposits and discounting notes or bills). Surprising? Not really, when you consider that the Bankers’ Magazine wrote in 1884 that ‘[i]t will be a happy day for us when not a single good American security is owned abroad and when the United States shall cease to be an exploiting ground for European bankers and money lenders’.
Some other countries went further than the US. Japan severely restricted foreign direct investment, closing off most industries and imposing 49% ownership ceilings in other industries until the 1970s. Korea followed this model closely until it was forced to liberalise foreign investment after the 1997 financial crisis. Finland went a step further and officially classified all firms with more than 20% foreign ownership as ‘dangerous enterprises’ between the 1930s and the 1980s. Even countries that did not have such draconian controls put formal and informal conditions on what foreign firms could do. Most typically, they were required to buy more than a certain share of inputs from domestic suppliers, known as ‘local contents requirement’.
Despite their current support for privatisation of state-owned enterprises in developing countries, many developed countries built their industries through state ownership. At the beginning of their industrialisation, Germany and Japan set up state-owned enterprises in key industries — textile, steel, and shipbuilding. In the case of France, the reader may be surprised to learn that all those French household names like Renault (automobiles), Alcatel (telecommunications equipment), St. Gobain (glass and otherbuilding materials), Thomson (electronics), Thales (defense electronics), Elf Aquitaine (oil and gas), Rhone-Poulenc (pharmaceuticals;merged with the German company, Hoechst to form Aventis, which is now part of Sanofi-Aventis) used to be state-owned enterprises (and some, like Renault and Thales, still are partially state-owned). Finland, Austria, and Norway also developed their industries through extensive state-ownership after the Second World War. Taiwan has achieved its economic ‘miracle’ with a SOE-sector that is, producing 16% of GDP, more than one-and-half times the international average (which is about 10%). Singapore’s SOE-sector, producing 22% of GDP, is one of the largest in the world and includes many world-class firms, like Singapore Airlines.
As mentioned earlier, the Netherlands and (until the First World War) Switzerland did not use much tariffs or subsidies. But they deviated from today’s free-market orthodoxy in a very important way — they refused to protect patents. Switzerland, despite its aggressive stance today on pharmaceutical patents, did not have any patent law until 1888 — nearly a century after countries like France (1791) and the US (1793) introduced it. Its 1888 patent law did not protect chemical (and thus pharmaceutical) inventions. Only under pressure from Germany, from which it was liberally ‘borrowing’ chemical technologies, did it introduce patents for chemical processes (but not chemical substances, as it was the case with Germany and most other countries at the time). The Netherlands abolished its 1817 patent law in 1869, on the ground that patents create artificial monopolies that go against their principle of free trade and free competition (they indeed do, although many of today’s free-trade economists fail to see this point). It did not re-introduce a patent law until 1912, by which time Philips was firmly established as a leading producer of light bulbs, whose technology it ‘borrowed’ from Thomas Edison.
Even countries that had a patent law were lax in protecting the intellectual property rights — especially those of foreigners. In most countries, including Britain, Austria, France, and the US, patenting of imported invention was explicitly allowed. When Peter Durand took out a patent in 1810 in Britain for canning technology, using the Frenchman Nicolas Appert’s invention, the application explicitly stated that it was an ‘invention communicated to me by a certain foreigner’, a then common proviso used when taking out a patent on a foreigner’s invention.
‘Borrowing’ ideas was not simply done in relation to inventions that could be patented. There was also extensive counterfeiting of trademarks in the 19th century — in a manner similar to what was subsequently done by Japan, Korea, Taiwan, and today China. In 1862, Britain revised its trademark law, the Merchandise Mark Act, with the specific purpose of preventing foreigners, especially the Germans, from making counterfeit English products. The revised Act required the producer to specify the place or country of manufacture as a part of the necessary ‘trade description’. The law underestimated German ingenuity, however — the German firms came up with some brilliant evasive tactics. For example, they placed the stamp indicating the country of origin on the packaging instead of on the individual articles. Or they would place the stamp indicating the country of origin where it was practically invisible. The 19th century British journalist Ernest Williams, who wrote a whole book on German counterfeiting, ‘Made in Germany’, documents how: ‘One German firm, which exports to England large numbers of sewing-machines, conspicuously labeled ‘Singer’ and ‘North-British Sewing Machines’, places the Made in Germany stamp in small letters underneath the treadle. Half a dozen seamstresses might combine their strength to turn the machine bottom-upwards, and read the legend: otherwise it would go unread’.
Copyrights were also routinely violated. Despite its currently gung-ho attitude towards copyrights, the US refused to protect foreigners’ copyrights in its 1790 copyright law. It signed the international copyright agreement (the Berne Convention of 1886) only in 1891. At the time, the US was a net importer of copyright materials and saw the advantage of protecting only American authors. For another century (until 1988), it did not recognize copyrights on materials printed outside the US.
Bad Samaritans: Kicking Away the Ladder and Historical Amnesia
The picture is clear. The rich countries have got where they are today through nationalistic policies, like protection, subsidies, state ownership of enterprises, severe regulation of foreign investment, and weak protection of foreigners’ intellectual property rights.
Despite this history, over the past two and half decades, the rich countries have been recommending to, or even forcing upon, developing countries policies that go directly against their historical experience. Through International Monetary Fund (IMF) and World Bank loan conditions as well as the conditions attached to their aids, the rich countries have imposed trade liberalization on developing countries. The World Trade Organisation (WTO) has significantly reduced tariffs and other trade restrictions in most developing countries. Rich countries are trying to reduce industrial tariffs of developing countries even more through new negotiations in the WTO, as well as bilateral and regional free-trade agreements. Most subsidies have been banned by the WTO — except ones that rich countries still use, such as subsidies on agriculture and research and development (R&D). The WTO has made most of restrictions on foreign investment, such as local contents requirement, illegal, while the IMF and the World Bank have constantly put pressure on developing countries to liberalize foreign investment. The WTO has also tightened intellectual property rights laws, essentially asking all but the poorest developing countries to comply with US standard of intellectual property rights protection — protection that even many Americans themselves consider excessive.
Why are they doing this? In 1841, a German economist, Friedrich List, criticised Britain for preaching free trade to other countries, while having achieved its 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: ‘[i]t is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him [italics added]’.
Today, there are certainly some people in the rich countries who preach free market and free trade to the poor countries in order to capture larger shares of the latter’s markets and to pre-empt 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.1 But what is more worrisome is that many of today’s Bad Samaritans do not even realise that they are hurting the developing countries with their policies. The history of capitalism has been so totally re-written that many people in the rich world do not even perceive the historical double standards involved in recommending free trade and free market to developing countries.
I am not suggesting that there is a sinister secret committee somewhere that systematically air-brushes undesirable people out of photographs and re-writes historical accounts. However, history is written by the victors and it is human nature to re-interpret the past from the point of view of the present. As a result, the rich countries have over time gradually, if often sub-consciously, re-written their own histories to make them more consistent with how they see themselves today, rather than as they really were — in much the same way that today people write about Renaissance ‘Italy’ (a country that did not exist until 1871) or include the French-speaking Scandinavians (Norman conqueror kings) in the list of ‘English’ Kings and Queens.
The result is that many Bad Samaritans may be recommending free-trade, free-market policies to the poor countries in the honest but mistaken belief that those are the routes that their own countries themselves took in the past to become rich. But they are in fact making the lives of those whom they are trying to help more difficult.
The developing countries have been doing very poorly during the last two and half decades despite adopting ‘good’ policies, like liberal foreign trade and investment and strong protection of patents. The annual per capita growth rate of the developing world has basically halved during the latter period, compared to the ‘bad old days’ of protectionism and government intervention in the 1960s and the 1970s. And even that is only because the average includes China and India, two fast-growing giants, which certainly liberalised their economies in many ways but refused to fully embrace the orthodox neo-liberal recipe.
Growth failure has been particularly noticeable in Latin America and Sub-Saharan Africa, where neo-liberal programmes were implemented more thoroughly than in Asia. In the 1960s and the 1970s, per capita income in Latin America was growing at 3.1% per year, slightly faster than the developing country average. Brazil especially was growing almost as fast as the East Asian ‘miracle’ economies. Since the 1980s, however, when the continent embraced neo-liberalism, Latin America has been growing at less than 1/3 the rate of the ‘bad old days’. Even if we discount the 1980s as a decade of adjustment and take it out of the equation, per capita income in the region during the 1990s grew at basically half the rate of the ‘bad old days’ (3.1% vs. 1.7%). Between 2000 and 2005, the region has done even worse; it virtually stood still, with per capita income growing at only 0.6% per year. As for Sub-Saharan Africa, its per capita income grew relatively slowly even in the 1960s and the 1970s (1.6% a year). But since the 1980s, the region has seen a fall in living standards. This record is a damning indictment of the neo-liberal orthodoxy because most of the Sub-Saharan African economies have been practically run by the IMF and the World Bank over the past quarter of a century.
Against the ‘Level Playing Field’
In pushing for free-market policies that make it more difficult for poor countries to use nationalistic policies, the Bad Samaritans have frequently deployed the rhetoric of the ‘level playing field’. They argue that developing countries should not be allowed to use extra policy tools for protection, subsidies, and regulation, as these constitute unfair competition. If they were allowed to do so, developing countries would be like a football team, the Bad Samaritans argue, attacking from uphill, while the other team (the rich countries) are struggling to climb the titlted playing field. Get rid of all protective barriers and make everyone compete on an equal footing; after all, the benefits of the market can only be reaped when the underlying competition is fair. Who can disagree with such a reasonable sounding notion as the ‘level playing field’?
I do — when it comes to competition between unequal players. And we all should — if we are to build an international system that promotes economic development. A level playing field leads to unfair competitionwhen the players are unequal. When one team in a football game is, say, the Brazilian national team and the other team is made up of my eleven-year-old daughter Yuna’s friends, it is only fair that the girls are allowed to attack downhill. In this case, a tilted, rather than a level, playing field is the way to ensure fair competition.
We don’t see this kind of tilted playing field only because the Brazilian national team is never going to be allowed to compete with a team of 11-year-old girls, and not because the idea of a tilted playing field is wrong in itself. In fact, in most sports, unequal players are not simply allowed to compete against each other — tilted playing field or not — for the obvious reason that it would be unfair.
Football and most other sports have age groups and gender separation, while boxing, wrestling, weightlifting and many other sports have weight classes. And the classes are divided really finely. For example, in boxing, the lighter weight classes are literally within two-or-three-pound (1-1.5-kilo) bands. How is it that we think a boxing match between people with more than a couple of kilos’ difference in weights is unfair, and yet we accept that the US and Honduras should compete on equal terms? In golf, to take another example, we even have an explicit system of ‘handicaps’ that gives players advantages in inverse proportion to their playing skills.
Global economic competition is a game of unequal players. It pits against each other countries that range from, as we development economists like to say, Switzerland to Swaziland. Consequently, it is only fair that we ’tilt the playing field’ in favour of the weaker countries. In practice, this means allowingthem to protect and subsidise their producers more vigorously and to put more strict regulations on foreign investment. These countries should also be allowed to protect intellectual property rights less stringently so that they can more actively ‘borrow’ ideas from more advanced countries. Rich countries can further help by transferring their technologies on favourable terms; this will have the added benefit of making economic growth in poor countries more compatible with the need to fight global warming, as rich country technologies tend to be far more energy efficient.
The Bad Samaritan rich countries may protest that all this is ‘special treatment’ for developing countries. But to call something special treatment is to say that the person receiving it is also obtaining an unfair advantage. Yet we wouldn’t call stair-lifts for wheelchair users or Braille text for the blind ‘special treatment’. In the same way, we should not call the higher tariffs and other means of protection additionally made availablefor the developing countries ‘special treatment’. They are just differential — and fair — treatment for countries with differential capabilities and needs.
Last but not least, tilting the playing field in favour of developing nations is not just a matter of fair treatment now. It is also about providing the economically less advanced countries with the tools to acquire new capabilities by sacrificing short-term gains. Indeed, allowing the poor countries to raise their capabilities more easily brings forward the day when the gap between the players is small and thus it becomes no longer necessary to tilt the playing field.
What Is Right and What Is Easy
Suppose I am right and that the playing field should be tilted in favour of the developing countries. The reader can still ask; what is the chance of the Bad Samaritans accepting my proposal and changing their ways?
It may seem pointless to try to convert those Bad Samaritans who are acting out of self-interest. But we can still appeal to their enlightened self-interest. Since neo-liberal policies are making developing countries grow more slowly than would otherwise do, the Bad Samaritans themselves might be better off in the long run if they allowed alternative policies that would let developing countries grow faster. If per capita income grows at only 1% a year, as it has in Latin America over the past two decades of neo-liberalism, it will take seven decades to double the income. But if it grows at 3%, as it did in Latin America during the period of import substitution industrialisation, income would increase by 8 times during the same period of time, providing the Bad Samaritan rich countries with a vastly bigger market to exploit. So it is actually in the long-term interest of even the most selfish Bad Samaritan countries to accept those ‘heretical’ policies that would generate faster growth in developing countries.
The people who are much harder to persuade 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. Self-righteousness is often more stubborn than self-interest. But even here there is hope. Once accused of inconsistency, John Maynard Keynes famously responded: ‘When the facts change, I change my mind — what do you do, sir?’ Many, although unfortunately not all, of these ideologues are like Keynes. They can change, and have changed, their minds, if they are confronted with new turns in real world events and new arguments, provided that these are compelling enough to make them overcome their previous convictions.
What should give us real hope is that the majority of Bad Samaritans are neither greedy nor bigoted. Most of us, including myself, do bad things not because we derive great material benefit from them or strongly believe in them, but because they are the easiest thing to do. Many Bad Samaritans go along with wrong policies for the simple reason that it’s easier to be a conformist. Why go around looking for ‘inconvenient truths’, when you can just accept what most politicians and newspapers say? Why bother finding out what is really going on in poor countries when you can easily blame it on corruption, laziness, or the profligacy of their people? Why go out of your way to check up on your own country’s history, when the ‘official’ version suggests that it has always been the home of all virtues — free trade, creativity, democracy, prudence, you name it?
It is exactly because most Bad Samaritans are like this that I have hope. They are people who may be willing to change their ways, if they are given a more balanced picture. This is not just wishful thinking. There was a period between the Marshall Plan (started sixty years ago in 1948) and the rise of neo-liberalism in the late-1970s, when the rich countries, led by the US, did not behave as Bad Samaritans. During this period, the rich countries allowed the poor countries to use nationalist policy measures as they saw fit and integrate with the global economy at their own pace.
The fact that rich countries did not behave as Bad Samaritans on at least one occasion in the past gives us hope. The fact that that historical episode produced an excellent outcome economically — for the developing world has never done better, either before or since — gives us the moral duty to learn from that experience.
1 The original story is that of the ‘Good Samaritan’ from the Bible. In that parable, a man who was robbed by highwaymen was helped by a ‘Good Samaritan’, despite the fact that the Samaritans were stereotyped as being callous and not above taking advantage of the others in trouble.
Ha-Joon Chang teaches economics at University of Cambridge. This article is based on Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, published by Bloomsbury Press, New York, in January 2008.