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Post-Autistic Economics Network |
Post-Autistic Economics Review Kicking Away the Ladder: Ha-Joon Chang (Cambridge University, UK) 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 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 40) 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 3% 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@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. SUGGESTED
CITATION: Ha-Joon Chang,
“Kicking Away the Ladder”, post-autistic economics review, issue no. 15, September 4, 2002, article 3. http://www.btinternet.com/~pae_news/review/issue15.htm |