Free Trade Doctrine Takes a Hit
By Steve Abraham at Aug 30, 2010
Bad Samaritans: The Myth of Free-Trade and the Secret History of Capitalism, by Ha-Joon Chang. 2008. Bloomsbury Press.
Free trade stifles economic development in poor countries, and disproportionately benefits the rich, powerful countries. It was rampant protectionism, state-owned or -subsidized enterprises, other government assistance, and copying or theft of ideas, instead of adherence to intellectual property protection, that allowed nearly all of today’s powerful economies to develop to their positions of power. So argues Cambridge economist Ha-Joon Chang in his 2008 book “Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism”.
The book is a partial non-chronological history of economic development, explaining first how two of the largest economic empires of the last 500 years, Britain and the United States, contrary to the dogma of neoliberal free-marketeers (Chang’s “Bad Samaritans”), developed economically using militant protectionism to keep their infant industries from failing in competition with larger, more sophisticated industries of other nations.
(In Britain) ...Tudor monarchs, especially Henry VII and Elizabeth I, used protectionism (often high import tariffs), subsidies, distribution of monopoly rights, government-sponsored industrial espionage and other means of government intervention to develop England’s woollen manufacturing industry - Europe’s high-tech industry at the time.
Henry VII... increased the tax on the export of raw wool... to encourage further processing of the raw material at home. ...(H)e also banned the export of unfinished cloth... His son, Henry VIII, continued the policy...
(British Prime Minister Robert Walpole’s 1721 Navigation Act, dubbed, according to Chang, by free-market godfather Adam Smith “the wisest of all the commercial regulations of England”) aimed to protect British manufacturing industries from foreign competition, subsidize them and encourage them to export. Tariffs on imported foreign manufactured goods were significantly raised... Manufacturing exports were encouraged by a series of measures, including export subsidies.
These policies are strikingly similar to those used with such success by the ‘miracle’ economies of East Asia, such as Japan, Korea, and Taiwan, after the Second World War
As for the United States:
When the War of 1812 broke out (sic) the US Congress immediately doubled tariffs from the average of 12.5% to 25%. The war also made the space for new industries to emerge by interrupting the manufactured imports from Britain and the rest of Europe.... By 1820, the average tariff rose further to 40%, firmly establishing (Alexander) Hamilton’s programme (of domestic infant industry protection).
(Hamilton’s core idea that) a backward country like the US should protect ‘industries in their infancy’ from foreign competition and nurture them to the point where they could stand on their own feet... provided the blueprint for US economic policy until the end of the Second World War.
It wasn’t until the protected industries had developed to a level where they could effectively compete with (or dominate) their rivals that trade barriers were lowered and markets opened up. Thus, since countries were instituting freer trade around the time they were arriving as economic powerhouses, it became easy to erroneously believe that free trade caused economic dominance.
Chang proceeds to impugn most major facets of free-market doctrine. The theory of comparative advantage, essentially that countries should stick to producing what they produce most efficiently, only works when the involved parties are satisfied with the status-quo, as the powerful usually are and the weak usually aren’t. Major modern titans of industry Toyota and Nokia, two examples highlighted by Chang, would’ve never succeeded had Japan and Finland, respectively, not shunned free market comparative advantage practices and protected both companies for decades before they were able to successfully produce high-quality products.
Excessive protection of intellectual property (IP) is criticized. Chang first argues that sharing, spying, and theft of ideas was a hallmark of economic development in the past. Today, IP protection is enforced to an extent that effectively punishes developing countries that need the knowledge, by raising the cost to obtain such know-how, and further concentrates power for the already-advanced countries in a better position to innovate right now and benefit from the high-cost and deeper supply of protected intellectual property.
Chang also illustrates flaws in the idea that privately-owned enterprises enjoy inherent advantages over state-owned enterprises (SOEs). He points out that many of the flaws identified by critics of SOEs can also exist in private companies, they are not simply inherent to enterprises under state ownership. Inefficiency and bureaucratic rigmarole are hallmarks of many giant private businesses.
He also argues that SOEs can be successful, pointing to state-owned Singapore Airlines: “Often voted the world’s favourite airline, it is efficient and friendly. Unlike most other carriers, it has never made a financial loss in its 35-year history.”
Inflation is an exaggerated boogie-man. Certainly in nations where annual inflation reaches astronomical percentages, it is disastrous. The history of developed nations shows that annual inflation of up to around 40% can sometimes occur in desirable conditions of development because incomes are growing at comparable rates. The International Monetary Fund, however, often imposes inflation rates in the small single-digits on countries under its influence, somtimes forcing comparably slow income growth.
No one should conclude that Chang is completely dismissive of free-trade and its features he criticizes. In each discussion, Chang is careful to point out simply that orthodox neo-liberal approaches to economic development are deeply flawed. There is no one-size-fits-all approach. It simply needs to be pursued with awareness of how it occurred in modern developed nations and the particular circumstances of each developing country. Practically all of today’s advanced economies developed by means that contradict the neo-liberal prescription.
The book is engaging. It can not be easy to draft an argument against such a popular and pervasive doctrine in a way that authoritatively challenges it, while making the doctrine itself and the book’s criticisms accessible to a mass audience. Chang has accomplished this. As he broaches each facet of neoliberalism discussed in the book, he takes 1-2 pages to summarize them, usually in a way that makes the neoliberal argument discussed sound convincing. Then he dismantles it.
The cruelty of the attempts to institute free-trade doctrine around the world can be acute, devastating just to read about (we don’t even want to imagine what living through it can be like): read about the overthrow of Salvador Allende in Chile in 1973 and the subsequent reign of Augusto Pinochet, or the cruelty of the civil war that raged in El Salvador thanks to the aid supplied to the brutal Salvadoran government by the neoliberal acolytes in the Reagan administration (Mark Danner’s “The Massacre at El Mozote” is necessary reading for any American), or almost anything written by Noam Chomsky. Such readings are important to appreciate the true human cost of the forced institution of such policies. They can also make you want to hang yourself.
Chang’s book is different. Despite describing powerful neo-liberals as “Bad Samaritans”, Chang’s book largely avoids bleak polemics or demonization of specific individuals. He favors instead engrossing stories to develop his points, such as recounting “The double life of Daniel Defoe” (the title of his 2nd chapter). Defoe, it turns out, was not only the author of classic stories such as “Robinson Crusoe”, but also a spy. He wrote an almost completely unknown, but, according to Chang, very informative book about the economic development of Great Britain which details the country’s protectionist policies.
Chang also keeps his reader’s interest with wit. One of his other chapter’s titles is “My six-year-old son should get a job”, in which he illustrates the absurd notion of an undeveloped country’s industries (infant industries) having to compete at an even level with industries of powerful nations. He reminds us that in boxing, weight classifications are sometimes divided into ranges of only a few pounds per class (according to Wikipedia, at 129 lbs. you box as a Featherweight, at 131 lbs. as a super Featherweight, at 135 lbs. as a lightweight).
The relatively light-hearted approach seems to be the result of an optimistic attitude that many powerful bad samaritans are not actually working with the intent of suffocating weak nations. It would be easy, knowing the history of neo-liberalism in the last 30 years, to think he’s naive. Chang is an accomplished economist, however, having worked with the World Bank, the Asian Development Bank, Oxfam, and agencies of the United Nations (also according to Wikipedia). There is little reason to doubt that he has worked with plenty of neo-liberals in that time. One would hope this makes his optimistic view informed.
Chang is also South Korean. Growing up in that country over its decades of economic ascent probably also informs his belief in the possibility that dramatic change can happen. Chang certainly hints at such a mentality when he recalls his personal experiences.
Given the volumes of theory, the decades of manpower, and the popularity heaped on neo-liberal economics, and that Chang does not spend much time in this book quibbling with the idea that free-trade may be appropriate in some circumstances, perhaps among economic equals, it is likely too much to call “Bad Samaritans” a complete and irrefutable dismantling. It’s observations are powerful, though. To the extent that his history of economic development in today’s major nations is a fair picture, his critiques of neo-liberalism seem accurate.