[R-G] [BillTottenWeblog] Tom Friedman's Folly

Sun Feb 10 16:38:32 MST 2008

The Lies Behind 'Free Trade'

by Chalmers Johnson

Truthdig (January 24 2008), AlterNet (February 05 2008)

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, Bad Samaritans: The Myth of Free Trade and the Secret
History of Capitalism (Bloomsbury Press, 2007)
____________________

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 Company), 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, et cetera), 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 six to eight percent in the Low Countries, eight to twelve percent
in Germany and Switzerland, and around twenty 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 forty percent tariff on manufactured imports into the United
States was an established fact. Hamilton provided the blueprint for US
economic policy until the end of the Second World War. The 19th and
early 20th century US tariffs of forty to fifty 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 thirty percent right up to the 1990s,
neither American nor Chinese protectionism inhibited foreign direct
investment but rather seemed to stimulate it. With the US 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 US government actually paid
for fifty to seventy 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 sixty 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 General Mobutu and Indonesia under General 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 sixteen billion pounds sterling a year. This
amounts to more than one 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 US
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 US 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 ten 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 US
Copyright Term Extension Act extended the period of copyright protection
from the life of the author plus fifty years to the life of the author
plus seventy years. The Disney Corporation 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 (2000), The Sorrows of Empire: Militarism, Secrecy,
and the End of the Republic (2004), and Nemesis: The Last Days of the
American Republic (2008).

http://www.truthdig.com/arts_culture/item/20080124_chalmers_johnson_on_the_myth_of_free_trade/

http://www.alternet.org/story/75645/

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