Social Democracy for the 21st Century: A Realist Alternative to the Modern Left: Ha-Joon Chang on the History of Protectionism

From Ha-Joon Chang’s 23 Things they Don’t Tell you about Capitalism:

“Here are the profiles of two developing countries. You are an economic analyst trying to assess their development prospects. What would you say?

Country A: Until a decade ago, the country was highly protectionist, with an average industrial tariff rate well above 30 per cent. Despite the recent tariff reduction, important visible and invisible trade restrictions remain. The country has heavy restrictions on cross-border flows of capital, a state-owned and highly regulated banking sector, and numerous restrictions on foreign ownership of financial assets. Foreign firms producing in the country complain that they are discriminated against through differential taxes and regulations by local governments. The country has no elections and is riddled with corruption. It has opaque and complicated property rights. In particular, its protection of intellectual property rights is weak, making it the pirate capital of the world. The country has a large number of state-owned enterprises, many of which make large losses but are propped up by subsidies and government-granted monopoly rights.

Country B: The country’s trade policy has literally been the most protectionist in the world for the last few decades, with an average industrial tariff rate at 40–55 per cent. The majority of the population cannot vote, and vote-buying and electoral fraud are widespread. Corruption is rampant, with political parties selling government jobs to their financial backers. The country has never recruited a single civil servant through an open, competitive process. Its public finances are precarious, with records of government loan defaults that worry foreign investors. Despite this, it discriminates heavily against foreign investors. Especially in the banking sector, foreigners are prohibited from becoming directors while foreign shareholders cannot even exercise their voting rights unless they are resident in the country. It does not have a competition law, permitting cartels and other forms of monopoly to grow unchecked. Its protection of intellectual property rights is patchy, particularly marred by its refusal to protect foreigners’ copyrights.

Both these countries are up to their necks in things that are supposed to hamper economic development – heavy protectionism, discrimination against foreign investors, weak protection of property rights, monopolies, lack of democracy, corruption, lack of meritocracy, and so on. You would think that they are both headed for developmental disasters. But think again.

Country A is China today – some readers may have guessed that. However, few readers would have guessed that Country B is the USA – that is, around 1880, when it was somewhat poorer than today’s China. Despite all the supposedly anti-developmental policies and institutions, China has been one of the world’s most dynamic and successful economies over the last three decades, while the USA in the 1880s was one of the fastest-growing – and rapidly becoming one of the richest – countries in the world.

So the economic superstars of the late nineteenth century (USA) and of today (China) have both followed policy recipes that go almost totally against today’s neo-liberal free-market orthodoxy.

How is this possible? Hasn’t the free-market doctrine been distilled out of two centuries of successful development experiences by today’s two dozen rich countries? In order to answer these questions, we need to go back in history. ….

When reminded of the protectionist past of the US, free-market economists usually retort that the country succeeded despite, rather than because of, protectionism. They say that the country was destined to grow fast anyway, because it had been exceptionally well endowed with natural resources and received a lot of highly motivated and hard-working immigrants. It is also said that the country’s large internal market somewhat mitigated the negative effects of protectionism, by allowing a degree of competition among domestic firms.

But the problem with this response is that, dramatic as it may be, the US is not the only country that has succeeded with policies that go against the free-market doctrine. In fact, as I shall elaborate below, most of today’s rich countries have succeeded with such policies.2 And, when they are countries with very different conditions, it is not possible to say that they all shared some special conditions that cancelled out the negative impacts of protectionism and other ‘wrong’ policies. The US may have benefited from a large domestic market, but then how about tiny Finland or Denmark? If you think the US benefited from abundance of natural resources, how do you explain the success of countries such as Korea and Switzerland that had virtually no natural resources to speak of? If immigration was a positive factor for the US, how about all those other countries – from Germany to Taiwan – that lost some of their best people to the US and other New World countries? The ‘special conditions’ argument simply does not work.”
Chang, Ha-Joon. 2011. 23 Things they Don’t Tell you about Capitalism, Thing 7: Free-market policies rarely make poor countries rich

Social Democracy for the 21st Century: A Realist Alternative to the Modern Left

Sunday, August 14, 2016

Ha-Joon Chang on the History of Protectionism

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