Bad Samaritans

Ha-Joon Chang is not widely known, even among economists, in the United States, but he is a rock star in his native Korea. He is not mentioned in the index or the bibliography of the recent neo-liberal tract, Why Nations Fail, by Acemoglu and Robinson. But on a recent trip to Busan, the Republic of Korea’s second largest city on the southern coast, I stopped beside Haeundae Beach to take in the scene. I began a conversation quite quickly (in English, my Korean is rudimentary) with two Korean businessmen and somehow, when the conversation came around to the state of the world’s economy, I mentioned that I was reading Chang’s 2007 book, Bad Samaritans. At first the Koreans didn’t recognize the name, but that was because I had used the Westernized word order for his name, Ha-Joon Chang. “Oh,” the one guy said, “Chang Ha-Joon! I am reading that book too.”

Chang is currently a professor in the Faculty of Economics at Cambridge University (Cambridge on the Cam). You can find his mini-biography on his blog here: http://hajoonchang.net/my-background/. He is the author of a number of texts (he lists 14 books on his blog) in the economics of development, including the recent work, 23 Things They Don’t Tell You about Capitalism. For a quick summary of these 23 things you might look here: http://www.huffingtonpost.com/ian-fletcher/a-review-of-ha-joon-chang_b_840417.html.

Bad Samaritans, first published in 2007, is a devastating critique of the neo-liberal theory of development. At the end of the prologue Chang lists the following heterodox positions that he will argue:

  • Free trade reduces freedom of choice for poor countries
  • Keeping foreign companies out may be good for them in the long run
  • Investing in a company that is going to make a loss for 17 years (Nokia) may be an excellent proposition
  • Some of the world’s best firms are owned and run by the state
  • ‘Borrowing’ ideas from more productive foreigners is essential for economic development
  • Low inflation and government prudence may be harmful for economic development
  • Free market and democracy are not natural partners
  • Countries are not poor because their people are lazy; their people are ‘lazy’ because they are poor

The resulting book, while perhaps not as ‘cool’ as the 23 Things book, is full of tongue-in-cheek humor backed up with well-informed factual argument. The book includes examples from development stories around the globe, but especially from his native Korea. The theories of the neo-liberal visionaries are devastatingly criticized in the book, but for the most part he does not attack them by name. Rather, he describes examples of policies implemented by the World Bank and International Monetary Fund (IMF) which have been informed by neo-liberal development theory and points out how these policies have often led to the opposite outcome from what their proponents claim for them. An exception to this rule is Thomas Friedman, neo-liberal journalist, whose book The Lexus and the Olive Grove is isolated for criticism in Chapter 1 as embodying the fictitious history of neo-liberal development theories, as opposed to the real history of less-than expected success or outright failure.

For me the most revealing story in the book comes in the early going in Chapter 2 in which Chang reviews the history of how today’s rich countries became rich. He conclusively shows that this was not by following the free trade policies that have been advocated by the World Bank and IMF to developing countries in the past forty years.

Chang resurrects a long forgotten work in economics by Daniel Defoe, the author of the famous character of Robinson Crusoe. Defoe had a colorful career besides his life as an author of literature. He was a businessman, tax collector, political commentator, and spy for both Tory and Whig governments. He was also an economist. Defoe’s book on economics, A Plan for the English Commerce (1728), tells the story of how the Tudor monarchs, Henry VII and Elizabeth I, used “protectionism, subsidies, distribution of monopoly rights, government-sponsored industrial espionage and other means of government intervention to develop England’s woolen manufacturing industry – Europe’s high-tech industry at the time.” Defoe’s character, Robinson Crusoe, is often used as an example by neo-liberal economists of homo economicus, the rational self-interest seeker who drives the development of free market economies. But Defoe’s actual work on economics shows “that it was not the free market but government protection and subsidies that developed British woolen manufacturing.” This is opposite of the story told by Acemoglu and Robinson. They give credit to the abandonment of protectionism as the spur to Britain’s growth, but it doesn’t occur to them that without that protection, Britain’s growth wouldn’t have gotten off the ground.

After the Napoleonic Wars when the protectionist policies of the Tudors had been able to establish British manufacturers as the most efficient in the world, these manufacturers recognized that free trade was now in their interest. The manufacturers agitated in favor of the abolition of the Corn Laws that kept low cost grains from being imported to feed the industrial workers of the New Britain. It is at this juncture in the history of the industrial revolution in Britain that David Ricardo, economist, politician, and stock-market player, originated the theories of free trade that are parroted by neo-liberal economists today.

Ricardo’s theory of comparative advantage “argued that trade between two countries makes sense when one country can produce everything more cheaply than another. Although this country is more efficient in producing everything than the other, it can still gain advantage by specializing in things in which it has the greatest cost advantage over its trading partner.” Chang admits that Ricardo’s theory is correct “within its narrow confines.” However, when one country is technologically backward compared to another, “it takes time and experience to absorb new technologies, so technologically backward producers need a period of protection from international competitions during this period of learning. . . . Ricardo’s theory is, thus seen, for those who accept the status quo but not for those who want to change it.”

A perfect example of this is the United States in the nineteenth century. Adam Smith had argued that the Americans should not develop manufacturing. Thomas Jefferson agreed. But thanks to Alexander Hamilton, who became America’s first Treasury Secretary at the age of 33, a different policy was followed. Hamilton’s Report on the Subject of Manufactures from 1791 presents a rationale for what became the program for development of industry in the United States. The core of this 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.” Following the issuing of Hamilton’s report to Congress the average tariff on foreign manufactured goods was raised from 5 percent to 12.5 percent, but this was far short of his recommendations. But after Hamilton’s death (after the famous duel at Weehawken with Aaron Burr) his program was adopted in full. After the War of 1812, the US Congress raised tariffs to an average of 25 percent. Once elected in 1860, Lincoln raised industrial tariffs to the highest levels so far in US history. This was justified by the expenses of the Civil War, but tariffs on manufactured goods remained at the 40 to 50 percent level until the First World War, the highest of any country in the world at the time. How many Americans realize this fact about their history?

And despite having the highest tariffs in the world, the US in the nineteenth century was the fastest growing economy in the world. Free trade economists have argued that this was in spite of protectionism, but Chang points out that the same story has been repeated over and over again in the century that followed; by Germany, Sweden, France, Finland, Austria, Japan, Taiwan, and Korea.

Another example of a cherished neo-liberal policy story where the facts look much different from the theory is told in his Chapter 7 on financial prudence. Low inflation is gospel for neo-liberalism. “Inflation is bad for growth – this has become one of the most widely accepted economic nostrums of our age.” But during the 1960s and 1970s while Brazil’s average inflation rate was 42 percent per year, its per capita income grew at 4.5 percent per year. During the period when Brazil embraced neo-liberal policies between 1996 and 2005, its inflation rate dropped to 7.5 percent per year, but its per capita growth rate also dropped to an average of 1.5 per cent per year. A similar story played out in Korea, which had inflation rates close to 20 percent in the 1960s and 1970s while its economy was growing at ‘miracle’ rates of 7 percent per year. Chang insists that “I am not arguing that all inflation is good. . . . But there is a logical jump between acknowledging the destructive nature of hyperinflation and arguing that the lower the inflation rate, the better.” The inflation rate does not have to be in the 1 -3 percent range for economic growth to occur. The examples of Brazil and Korea show this.

There is much else in this book which debunks long cherished apparent truths of neo-liberal development economics: the story of Finland’s refusal to permit significant foreign investment in their country; the story of the Pohang Iron and Steel Company (POSCO), which grew to be the third largest steel company in the world (in 2008), but started as a state-owned (Korean) enterprise; the story of the economic success of Singapore with its state-owned premier airline and a host of government-linked enterprises in telecom, power, transport, semi-conductors, shipbuilding, engineering, shipping, and banking. All of these stories (and others) are worth reading.

You can hear Chang talking to Amy Goodman in 2009 about Bad Samaritans here: http://www.democracynow.org/2009/3/10/economist_ha_joon_chang_on_the. He comes across as either extremely naive in the ways of US politics or completely deadpan in his reply to Amy’s question that the proper response to the financial crisis of 2008 would have been to nationalize the US banking sector. He gives very reasonable arguments why this should have been done and points out that many countries have had successful growth with essentially public ownership of banking; for example, France. He doesn’t seem to realize how crazy we really are. Apparently he hasn’t been watching Fox News.

About Randal Samstag

Randal has an undergraduate degree in political philosophy, but has a graduate degree in engineering and has earned his bread for 30 years working on municipal and community water supply and wastewater collection and treatment systems in the US, Caribbean, Latin America, and Asia.
This entry was posted in Economics. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s