Monday, June 6, 2011

Ha-Joon Chang on the History of Capitalism

Ha-Joon Chang is an Korean economist, and a Reader in the Political Economy of Development at the University of Cambridge (UK).

He has done outstanding work on the history of economic development and infant industry protectionism:
Kicking Away the Ladder: Development Strategy in Historical Perspective, London, 2002.

Bad Samaritans: Rich Nations, Poor Policies, and the Threat to the Developing World, London, 2007.
Ha-Joon Chang demonstrates that many Western nations industrialized through infant industry protectionism. It is a complete myth that industrial development occurred through free trade and free markets in many Western countries.

This is a very interesting talk about his new book, 23 Things they Don’t Tell You about Capitalism (Allen Lane, London 2010).


  1. If we are going to use appeal to history, we could also just argue that the 17th to 18th century England managed to bring above normal wages and above normal living standards for its workers without a single shred of a welfare state, housing policy, priority sector lending policy, or universal adult franchise.

    Now would this be an appropriate argument against the above things? Of course not.

    Anyway, one of Ha Joon Chang's terrible arguments in one of his papers that I read was that because the Republic of India had a weighted average tarriff rate of 71% in the 1960s, it was a "free trade" country. Because this tarriff rate was lower than that of 19th century United States. A comparison that does not apply given that United States benefitted from large British foreign investment. India, on the other hand, was not a beneficiary of much foreign investment, given that it was very expensive and very risky to do business in such a Third World region as India. Not US, which had a much stronger body of property law inherited back from UK and much more convenient geographic position.

    A total apples-and-oranges comparison.

    Even if US had a very high tarriff rate, it was one of the least worst places to invest your money, while cost of capital in India has been in double digit rates for a long time. Of course US would enjoy better development, with or without protectionism.

    And calling a 71% weighted average tarriff a free trade level of protectionism is so absurd, it would indicate unimaginable confirmation bias from Ha Joon Chang. And it still does not consider that 71% tarriff on highly price elastic capital equipment is different from a 150% tarriff on a price inelastic consumer good, such as clothing and textiles.

    I am frequently astonished by the selective use of facts by leading protectionists, who often happen to be either corporate lobbyists (Ian Fletcher) or billionaire plutocrats (Ross Perot) or professors from the most ideological universities ever known (Cambridge professor Chang). Pure. Confirmation. Bias.

  2. His argument is still sound. India had lower tariffs and no wide-spread industrial plan, like America had. What Ha-Joon Chang says is that contrary to free-market propaganda, America used a lot of protectionism and built up its educational system and so on first. And it wasn't just America, but Taiwan, South Korea, Japan, and other countries that did as well.

    Furthermore, nobody invested in India because it was a weak country. After democratic reform in 1949 they pushed through a privatize plan (Watkins) that privatized most industries and 10 years later half of the people were in poverty. A famine occurred during this time and Truman refused to send any aid, such as grain. After this, they did not take Ha-Joon Chang prescriptions but played around with supply-side economics for the next several decades, losing more people every 8 years than the Great Chinese Famine.

    The most ideological school is the Austrian school of economics which fits data to pre-conceived theories.


  3. Prateek,

    This is the second time you've cited this unnamed paper in criticizing Chang's work. For the sake of discussion, please name it or give us a clue somehow.

    There are lobbyists, plutocrats and professors from ideological schools on the free- traders' side too.

  4. Prof. Chang is great. If I may ask, which economic school could he be said to belong to? His own words seems to indicate that he takes a "dog's breakfast" approach to economics, borrowing and assimilating ideas from all kinds of schools of thought, from Hayek to Marx. However, from what I can see he is perhaps closest to the Institutionalist School.

  5. This one, argosyjones.

    There are some other relevant things to this particular post and links will be found below at the bottom.

    SuccessfulBuild, I am astonished by what you have just posted. India starting from 1950 had implemented Five Year Plans that were meant to determine the entire scope of industrial policy down from small textile industries to heavy industries like steel. It had nationalised the Imperial Bank of India in 1950, and the Five Year Plans had a policy of diverting credit towards the public sector, which largely included the major heavy industries. By the late 1960s, when banks were nationalised, they expanded the scope of the Credit Policy they had set out in the first Five Year Plan.

    Don't lecture me on this region - I have studied the economics of development of India since I was 13 years old, both in school and from varied non-school-based sources. Not even the hardest critics of privatization here have mentioned privatization in the 1950s having ever been implemented, and rather claim the nationalisation created benefits.

    India "privatized" everything? You are such a confirmation-bias ridden ideologue, such that I have never imagined, that I am wondering from where you keep throwing out your convenient fantasies. It's a whole different issue whether or not it was beneficial, whatever policy India pursued. You have to first establish what was the policy of the Indian government - and it was firmly on industrial policy and not on privatization. There were no nationalised industries that they had to privatize in the first place!

    What does Austrian School have to do anything and why are you telling me that? I have nothing to do with the Austrian School. I didn't mention it. Why change the topic?

    Cambridge IS one of the most ideological universities in the world, having produced a wide range of leaders in the Third World who implemented their professors' utopian ideas in their own country - ideas that were never implemented in Britain. Amartya Sen went from Trinity College to Delhi School of Economics with the sole purpose of justifying fellow British-educated Indira Gandhi's policies, and blocked the rise of even American educated New Keynesians such as Subramanian Swamy.

  6. Thanks, Prateek. I'll read it before commenting further.

  7. "The fact that the result has been some horrible mixture of state capitalism and moribund corporatism is usually attributed to incompetence and ineptitude on the part of the bureaucracy. The Indian American economist Jagdish Baghwati of Columbia University remarked that he agreed with the view that 'India's misfortune was to have brilliant economists: an affliction that the Far Eastern super-performers were spared.'... Judged with respect to an promoting the welfare of the Indian people those policies were ridiculously bad, to the point of stupidity. "

    "The planning and administration of the economic did not emerge full blown. The first five year plan (1951-55) called for the planned development of only a few industries, the ones that private industry had not developed for one reason or another. In the first five year plan the other industries were left to the market."

    "In combination with the industrial-licensing regime [the small company policy] has given India the worst of both worlds: too many small and inefficient companies at the bottom, too many large and monopolistic ones at the top. "

    Economic History of India:
    (Written by a Libertarian; Thayer Watkins)

    As we can see, the first five year plan left most industries to the market. It didn't work out and the government had to intervene to do something otherwise you would have had a continuation of the famines that occurred regularly prior to industrialization.

    When Ha-Joon Chang talks about industrial policy, he doesn't mean "moribund corporatism," nor does he mean a system where there are "only a few planned industries, with everything else left up to the market."

    And he certainly doesn't mean "ill designed programs that [the poor] themselves have to finance...."

    He means programs that are similar to the ones that built up America and the other industrialized countries. From my (non-ideological) perspective, it looks like India was experimenting with Reaganism (ill-designed protectionism, subsidies of preferred cronies, an increase of taxation on the poor, and a lower of revenues than they otherwise would have been). It certainly wasn't anything FDR designed, which helped the lower class and improved the standards of living for the American people while weakening corporatism.

  8. As for Sen, Sen's claim is not that its regulation destroyed India, but its inability to provide for the basic needs of its own people that caused so many deaths. The Indian government was trying to keep the corporations that did exist afloat and creating new corporations. It seems like the market failed to provide the necessary resources for survival.

    India is still a very poor country:

    "In a country like India, the direct beneficiaries of [programs that are designed to help the poor] are the corrupt officials who manage/distribute the funds, and the landlords and powerbrokers in the villages who have the ability to extract the benefits. Over 90% of the agricultural land is owned and cultivated by less than 5% of the rural population. In most villages, almost all the cultivable land is owned by a handful of people, and the remaining land is owned by the government and by the poor. The poor are unable to use their land for agriculture for lack of water resources, poor soil conditions, and unavailability of credit. Hence, they do not stand to gain directly from any of the government programs."

    "There are no easy answers. The real solution lies in the ownership and use of a permanent income generating asset by the poor: land. The poor people must be given the opportunity to own and develop land and gain the skills and capabilities necessary for cultivating high-value crops. "

    -- Dr. Abraham George at Wharton School of Business

    That sounds more like something Ha-Joon Chang would prescribe.

    Also interesting, India as a dumping ground: