[R-G] [BillTottenWeblog] Kicking Away the Ladder

[Bill Totten]

How the Economic and Intellectual Histories of Capitalism Have Been
Re-Written to Justify Neo-Liberal Capitalism

by Ha-Joon Chang (Cambridge University, UK)

Post-Autistic Economics Review (September 04 2002)


There is currently great pressure on developing countries to adopt a set
of "good policies" and "good institutions" - such as liberalisation of
trade and investment and strong patent law - to foster their economic
development. When some developing countries show reluctance in adopting
them, the proponents of this recipe often find it difficult to
understand these countries' stupidity in not accepting such a tried and
tested recipe for development. After all, they argue, these are the
policies and the institutions that the developed countries had used in
the past in order to become rich. Their belief in their own
recommendation is so absolute that in their view it has to be imposed on
the developing countries through strong bilateral and multilateral
external pressures, even when these countries don't want them.

Naturally, there have been heated debates on whether these recommended
policies and institutions are appropriate for developing countries.
However, curiously, even many of those who are sceptical of the
applicability of these policies and institutions to the developing
countries take it for granted that these were the policies and the
institutions that were used by the developed countries when they
themselves were developing countries.

Contrary to the conventional wisdom, the historical fact is that the
rich countries did not develop on the basis of the policies and the
institutions that they now recommend to, and often force upon, the
developing countries. Unfortunately, this fact is little known these
days because the "official historians" of capitalism have been very
successful in re-writing its history.

Almost all of today's rich countries used tariff protection and
subsidies to develop their industries. Interestingly, Britain and the
USA, the two countries that are supposed to have reached the summit of
the world economy through their free-market, free-trade policy, are
actually the ones that had most aggressively used protection and subsidies.

Contrary to the popular myth, Britain had been an aggressive user, and
in certain areas a pioneer, of activist policies intended to promote its
industries. Such policies, although limited in scope, date back from the
14th century (Edward III) and the 15th century (Henry VII) in relation
to woollen manufacturing, the leading industry of the time.  England
then was an exporter of raw wool to the Low Countries, and Henry VII for
example tried to change this by taxing raw wool exports and poaching
skilled workers from the Low Countries.

Particularly between the trade policy reform of its first Prime Minister
Robert Walpole in 1721 and its adoption of free trade around 1860,
Britain used very dirigiste [state-controlled] trade and industrial
policies, involving measures very similar to what countries like Japan
and Korea later used in order to develop their industries. During this
period, it protected its industries a lot more heavily than did France,
the supposed dirigiste counterpoint to its free-trade, free-market
system. Given this history, argued Friedrich List, the leading German
economist of the mid-19th century, Britain preaching free trade to less
advanced countries like Germany and the USA was like someone trying to
"kick away the ladder" with which he had climbed to the top.

List was not alone in seeing the matter in this light. Many American
thinkers shared this view. Indeed, it was American thinkers like
Alexander Hamilton, the first Treasury Secretary of the USA, and the
(now-forgotten) economist Daniel Raymond, who first systematically
developed the infant industry argument. Indeed, List, who is commonly
known as the father of the infant industry argument, in fact started out
as a free-trader (he was an ardent supporter of German customs union -
Zollverein) and learnt about this argument during his exile in the USA
during the 1820s.

Little known today, the intellectual interaction between the USA and
Germany during the 19th century did not end there. The German Historical
School - represented by people like Wilhelm Roscher, Bruno Hildebrand,
Karl Knies, Gustav Schmoller, and Werner Sombart - attracted a lot of
American economists in the late 19th century. The patron saint of
American Neoclassical economics, John Bates Clark, in whose name the
most prestigious award for young (under forty) American economists is
given today, went to Germany in 1873 and studied the German Historical
School under Roscher and Knies, although he gradually drifted away from
it. Richard Ely, one of the leading American economists of the time,
also studied under Knies and influenced the American Institutionalist
School through his disciple, John Commons. Ely was one of the founding
fathers of the American Economic Association; to this day, the biggest
public lecture at the Association's annual meeting is given in Ely's
name, although few of the present AEA members would know who he was.

Between the Civil War and the Second World War, the USA was literally
the most heavily protected economy in the world. In this context, it is
important to note that the American Civil War was fought on the issue of
tariff as much as, if not more, on the issue of slavery. Of the two
major issues that divided the North and the South, the South had
actually more to fear on the tariff front than on the slavery front.
Abraham Lincoln was a well-known protectionist who cut his political
teeth under the charismatic politician Henry Clay in the Whig Party,
which advocated the "American System" based on infrastructural
development and protectionism (thus named on recognition that free trade
is for the British interest). One of Lincoln's top economic advisors was
the famous protectionist economist, Henry Carey, who once was described
as "the only American economist of importance" by Marx and Engels in the
early 1850s but has now been almost completely air-brushed out of the
history of American economic thought. On the other hand, Lincoln thought
that African Americans were racially inferior and that slave
emancipation was an idealistic proposal with no prospect of immediate
implementation - he is said to have emancipated the slaves in 1862 as a
strategic move to win the War rather than out of some moral conviction.

In protecting their industries, the Americans were going against the
advice of such prominent economists as Adam Smith and Jean Baptiste Say,
who saw the country's future in agriculture. However, the Americans knew
exactly what the game was. They knew that Britain reached the top
through protection and subsidies and therefore that they needed to do
the same if they were going to get anywhere. Criticising the British
preaching of free trade to his country, Ulysses Grant, the Civil War
hero and the US President between 1868-1876, retorted that "within 200
years, when America has gotten out of protection all that it can offer,
it too will adopt free trade". When his country later reached the top
after the Second World War, it too started "kicking away the ladder" by
preaching and forcing free trade to the less developed countries.

The UK and the USA may be the more dramatic examples, but almost all the
rest of the developed world today used tariffs, subsidies and other
means to promote their industries in the earlier stages of their
development. Cases like Germany, Japan, and Korea are well known in this
respect. But even Sweden, which later came to represent the "small open
economy" to many economists had also strategically used tariffs,
subsidies, cartels, and state support for R&D to develop key industries,
especially textile, steel, and engineering.

There were some exceptions like the Netherlands and Switzerland that
have maintained free trade since the late 18th century. However, these
were countries that were already on the frontier of technological
development by the 18th centuries and therefore did not need much
protection. Also, it should be noted that the Netherlands deployed an
impressive range of interventionist measures up till the 17th century in
order to build up its maritime and commercial supremacy. Moreover,
Switzerland did not have a patent law until 1907, flying directly
against the emphasis that today's orthodoxy puts on the protection of
intellectual property rights (see below). More interestingly, the
Netherlands abolished its 1817 patent law in 1869 on the ground that
patents are politically-created monopolies inconsistent with its
free-market principles - a position that seems to elude most of today's
free-market economists - and did not introduce another patent law until
1912.

The story is similar in relation to institutional development. In the
earlier stages of their development, today's developed countries did not
even have such "basic" institutions as professional civil service,
central bank, and patent law. It was only after the Pendleton Act in
1883 that the US federal government started recruiting its employees
through a competitive process. The central bank, an institution dear to
the heart of today's free-market economists, did not exist in most of
today's rich countries until the early 20th century - not least because
the free-market economists of the day condemned it as a mechanism for
unjustly bailing out imprudent borrowers. The US central bank (the
Federal Reserve Board) was set up only in 1913 and the Italian central
bank did not even have a note issue monopoly until 1926. Many countries
allowed patenting of foreign invention until the late 19th century. As I
mentioned above, Switzerland and the Netherlands refused to introduce a
patent law despite international pressure until 1907 and 1912
respectively, thus freely "stole" technologies from abroad. The examples
can go on.

One important conclusion that emerges from the history of institutional
development is that it took the developed countries a long time to
develop institutions in their earlier days of development. Institutions
typically took decades, and sometimes generations, to develop. Just to
give one example, the need for central banking was perceived at least in
some circles from at least the 17th century, but the first "real"
central bank, the Bank of England, was instituted only in 1844, some two
centuries later.

Another important point emerges is that the levels of institutional
development in today's developed countries in the earlier period were
much lower than those in today's developing countries. For example,
measured by the (admittedly highly imperfect) income level, in 1820, the
UK was at a somewhat higher level of development than that of India
today, but it did not even have many of the most "basic" institutions
that India has today. It did not have universal suffrage (it did not
even have universal male suffrage), a central bank, income tax,
generalised limited liability, a generalised bankruptcy law, a
professional bureaucracy, meaningful securities regulations, and even
minimal labour regulations (except for a couple of minimal and
hardly-enforced regulations on child labour).

If the policies and institutions that the rich countries are
recommending to the poor countries are not the ones that they themselves
used when they were developing, what is going on? We can only conclude
that the rich countries are trying to kick away the ladder that allowed
them to climb where they are. It is no coincidence that economic
development has become more difficult during the last two decades when
the developed countries started turning on the pressure on the
developing countries to adopt the so-called "global standard" policies
and institutions.

During this period, the average annual per capita income growth rate for
the developing countries has been halved from three percent in the
previous two decades (1960-80) to 1.5%. In particular, Latin America
virtually stopped growing, while Sub-Saharan Africa and most
ex-Communist countries have experienced a fall in absolute income.
Economic instability has increased markedly, as manifested in the dozens
of financial crises we have witnessed over the last decade alone. Income
inequality has been growing in many developing countries and poverty has
increased, rather than decreased, in a significant number of them.

What can be done to change this?

First, the historical facts about the historical experiences of the
developed countries should be more widely publicised. This is not just a
matter of "getting history right", but also of allowing the developing
countries to make more informed choices.

Second, the conditions attached to bilateral and multilateral financial
assistance to developing countries should be radically changed. It
should be accepted that the orthodox recipe is not working, and also
that there can be no "best practice" policies that everyone should use.

Third, the WTO rules should be re-written so that the developing
countries can more actively use tariffs and subsidies for industrial
development. They should also be allowed to have less stringent patent
laws and other intellectual property rights laws.

Fourth, improvements in institutions should be encouraged, but this
should not be equated with imposing a fixed set of (in practice, today's
- not even yesterday's - Anglo-American) institutions on all countries.
Special care has to be taken in order not to demand excessively rapid
upgrading of institutions by the developing countries, especially given
that they already have quite developed institutions when compared to
today's developed countries at comparable stages of development, and
given that establishing and running new institutions is costly.

By being allowed to adopt policies and institutions that are more
suitable to their conditions, the developing countries will be able to
develop faster. This will also benefit the developed countries in the
long run, as it will increase their trade and investment opportunities.
That the developed countries cannot see this is the tragedy of our time.
___________________

Ha-Joon Chang - hjc1001 at econ.cam.ac.uk - teaches in the Faculty of
Economics, University of Cambridge. This article is based on his new
book, Kicking Away the Ladder - Development Strategy in Historical
Perspective, which was published by Anthem Press, London, on 10 June 2002.

http://www.btinternet.com/~pae_news/review/issue15.htm

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