Yes, says Ha-Joon Chang in this month’s Prospect—at least for infant industries in developing countries. Against what he calls the “neoliberal orthodoxy”—privatisation of state assets, limited government, liberalised trade and so on—Chang argues that poor countries should be allowed to make use of protectionist tools like trade tariffs, controls on foreign investment and loose intellectual property regulations—exactly as today’s wealthy countries have done throughout history.
Read Chang’s essay here, and leave your comments below.
The problem here is that simply allowing developing countries the ability to put tariffs and other measures into effect doesn’t necessarily mean they will do it. In fact, part of the reason their doors are wide open to foreign direct investment is because they find an overwhelmingly large source of revenue from it. Protectionism worked when the system was one of emerging internationality. We’re in a global system now, so I see little potential for it to work. Try convincing multinational corporations that they should pull out their investments and refrain from more. Try telling corrupt governments to give up a great source of revenue. You’re going to hear little practical sympathy.
A better approach is how to improve FDI in such a way that increases benefits for the global poor. Multinational corporations have far more potent capabilities for promoting change than these corrupt, developing governments. I suggest that people go out and read the book “Capitalism at the Crossroads.” The book explicates this argument far better than I can in this short post. But the basic argument is that business is better equipped to effectively improve the lives of the global poor than any government, IGO, or NGO out there. Rethinking business is a less revolutionary and far more practical approach than this return to protectionism. Thinking of business as sustainably creating value for all stakeholders serves both business and stakeholders in the long run. That’s the solution we need.
I disagree with Adam Smith’s namesake here. I side with our Korean author on this one. Barely twenty years ago, India had vibrant villages and a thriving sub-economy that would pour benefits into the central economic pool, thereby driving the nation forward slowly and with upheavals galore (I grant you that). The events of today are a whole different ball game. Multi-National Corporations circling villages and suburbs like vultures, searching for farmers and other local traders already hard hit by government policy decisions and hectic privatisations, offering them a “decent price” for their lands and hoarding acre after acre until a pre-determined figure is reached; the next step is a press conference during which a Special Economic Zone (SEZ) is proposed at the hoarded land, for the development of the very farmers and traders that they dispossessed of their lands through the offering of a “decent price”.
Josh, trade in India is nasty. Across the country, around each of the Tier 1, 2 and 3 cities, there are Multi-National Companies performing the same honorable tasks time and again. Of course it is legal. Of course it is protected by law. The companies ensured exactly such a policy at the central government level prior to sinking their teeth in. Josh, trust me, I work for an MNC that does this for a business across the country, and I promise you, the modus operandi rarely varies. Hapless farmers, local traders and other land owners are summarily rounded up and offered this notorious “decent price”. The decent price is way below the market average, as usual.
Such villagers, having never seen large quantities of cash, even at such low prices for their lands, have no issues selling them. What happens after that is similar to the fate that would befall any poor individual who is given free money to bail him out of trouble. He will spend it on drinks and food and then be back on the streets to beg again for more free money, worse off than before. The entire constitution of such an individual will change. Similarly, any influx of such huge amounts of money into a farmer’s/villager’s household will cause enormous upheaval to that household. Some may be wise and invest, but most will just thank their lucky stars and squander the wealth and end up being worse off, with no fixed assets/land to fall back on.
The MNCs are not evil, josh. They have just one motto. Profit. Societies may thrive on their obsession with profits and opportunism for money making, but too much of it can also ruin societies. Some amount of foreign direct investment can be allowed, no doubt, but not in retail for heavens sake. Or Real Estate/Construction. Or Special EXIM zones. These are opportunities that citizens of the said countries should be allowed to take and grow and learn. Of course the process will be tough and prolonged, but allowing foreign competition will not make them any better when they are just about starting off. if anything, It will only kill them off.
So, selective protectionism and a certain amount of subsidising will certainly help even out the hurt sentiments of the general public at large and serve as a salve for the wounds that they carry. Also, it will provide us with an opportunity in the meanwhile to look at how other countries fare with their OUT AND OUT Free Trade Liberalisation. After all, what is the tearing hurry anyway? We are a society of human beings first. Stocks and shares come later. Let us save a few souls first. Business can wait.
Therefore,
The article ignores the fact that protection of developing industries has failed far more often than it has worked, and set countries back in some instances. Take the Brazilian computer industry for instance. For years, Brazil attempted to develop it’s own personal computer design, with it’s own software industry, which was incompatible with Windows and Macintosh designs. The result was stagnation, and the computer equivalent of the east German Trabant. Those designs are now on the technological scrap heap.
A similar thing happened with France’s protected ‘minitel’ version of the internet. The fact that it was set up by the government and protected caused France to delay opening up to the real internet, and minitel is now so much history.
You can look all over the world and find examples of attempts to protect of ‘infant industries’ NOT working and ending up with a stagnant, regressed, industry in comparison to a rapidly advancing one outside.
Governments, are no better at picking technological “winners” than the average investor is at picking stocks. The success of east asia, it seems to me, is largely due to the fact that at the time (the 60s) America was going through a massive economc boom, which created a huge export market for these countries, which then had little domestic demand. Hence the effect of protection was probably rather small, since there was not much demand for American-made cars or electronics in East Asian countries during the period this was going on.
I agree with Josh Smith that the globalised nature of today’s economic system means protectionism will not have the same effects it had in the late 18th and 19th centuries. However, I think the salient point here is that the playing field is not in fact level at all. It’s true that wealthy countries, in particular the United States, have been advocating trade liberalisation for devoloping nations since the end of World War 2 (and before that, in the case of the British Empire), but they have not necessarily been following their own rules. When a nationalised industry in a Latin American or African country goes bust as a result of direct competition with some multinational corporation or other, neoliberal economists shrug and repeat the standard platitudes about the market deciding. When the American automobile industry is in trouble, the US government has no compunction about bailing them out, and wealthy European nations continue to provide massive subsidies to their agricultural sectors in order to make them ‘competitive’ with farmers in poorer countries. Who’s going to stop them? The WTO?
Ha-Joon Chang’s account of wealthy nations “kicking away the ladder” is accurate, but incomplete. As well as preventing developing nations from attaining industrial parity and economic independence, the neoliberal consensus is intended to act as a form of protectionism for the economies and industries of the wealthiest countries in the world. A level playing field is not in the interests of the corporate power centers of the United States and Western Europe, and hence they exercise their influence over both government and international economic policies to make sure those on the wrong side of the poverty line stay there, thus ensuring the supply of raw materials and cheap labor does not dwindle. Protectionism is a right the powerful grant to themselves and deny others. A world in which a global free market actually existed would be very interesting indeed, but we certainly do not live in one today.
Three cheers for this article.
One note about the comments. Comments tend to say, “We now live in a globalized world..blah…blah.” It is supposed to be taken as a truism that this is a “globalized” world of trade, rather than ask, “How did it get that way. And is it good for the workers, of the world.
The answer is that a globablized world economy is only good for the globalized companies who can increase profits by manufacturing at the lowest wages available across the globe, and selling at the highest profits in developed countries. Corporate profits as a perecent of GNP are up by about 40% in the last decade, while workers wages have remained stagnant in the US.
As for benefiting poorer nations, NAFTA was supposed to increase the wages of Mexicans when American factories moved there, but did nothing of the sort. Mexican wages actually fell. Then the factories moved to China.
Let me put it more simply, there are things that less developed countries may need to import because of lack of technical expertise or lack of economies of scale. But these should be few and far between.
For example, Jamaica cannot make its own trucks. It does not have the expertise or economies of scale to have a truck manufacturing industry. But must it import shoes. Certainly, it can manufacture them. But because Jamaica is richer than many countries of the world, shoes can be made and imported from elsewhere.
A globalist would say, import the shoes, damn the workers. But a nationalist, would say keep the money in the country.
Globalism tends to raise the incomes of the rich, or raise the return to capital, while nationalism tends to flatten the returns, giving more the workers and raising the living standard of the nation.
The example of Toyota and cars was also in England, where England refused to mass import China from China. It imported enough to stimualte demand and at the same time immitated and developed its own industry, hence Wedgewood, Doulton and other such makers of plates and saucers.
What a country can and cannot do is highly dependent on the resouces of the country. But the point is that the trade policy must be directed toward increasing the wealth of the country to be distributed to the workers and citizens of the country, not the wealthy elites.
If you want you can check out my book America First: Why America Must End Free Trade, End Outsourcing, Close Open Borders. It is on Amazon.com.
Exactly how the US went from a protectionist country to a free trade country is in the book.
paul streitz
pstreitz@optonline
I believe that classical economists would say that developed economies developed in spite of, rather than because of, protectionism.
The greatest benefits of freeing trade go to the country reducing barriers, so it follows that liberalisation need not be reciprocal.
I can therefore accept Ha-joo Chang’s argument that developed countries should not insist on developing countries liberalising their own imports as a condition. I believe that they would be better off doing so - perhaps slowly, to give local industries time to adjust - but that is their decision.
Incidentally, I agree with Paul Steitz that saying globalisation is inevitable is a very weak argument. We can reject it if we wish. North Korea has, for example, done so. Countries still have freedom - subject to what they have agreed to in international agreements - and are quite entitled to sit out the globalisation dance. Of course, they must accept the consequences, which I believe would be economic decline.
It easy to preach from glass house. All western expert preach to developing countries do this, avoid that, but they donot know the ground reality.
Iam from India, in 1991 we accepted advice of world bank and open our economicy. 16 years are over, what Indian get?Yes there are some changes there is boom of syber coolis,and call centre western investment is there but only stock market.
Our politicans are always blind followers, they have no independent thinkiny faculty.Before open market they mimicry Russion system now they intimating China`s free zone. Only free market is never sufficent , we must understand psyche of people , and must use that psyche for development. mimicrying alway bring doom.
ken nielsen
Ken Nielsen says “developed economies developed in spite of, rather than because of, protectionism.”
This is absolutely not true. What we have is a distorted view of economic history propagated by free trade advocates. The biggest of these is Milton Friedman, who ignores American economic history and falsely distorts world economic history. In his book, Capitalism and Freedom he attributes a cause of the Great Depression as the Smoot-Hawley Tariff. However, in his book the monetary history of the United States, he nowhere mentions tariffs as a cause, rather than the restrictive monetary policy of the United States.
Ha-Joon Chang mentions developing economies. But there is no evidence that any developed country, ie rich, is better off with Free Trade. Alexander Hamilton concentrated on a developing economy because that was the country in which he lived. But there is no innate reason why protectionism is not good for a developed, wealthy economy.
The countries that have grown the fastest since WWII have been those that have practiced protectionism, while giving lip service to free trade. These include Taiwan, Japan, China, etc. While those who have suffered enormous trade deficits are those that are committed to free trade.
Protectionism reduces the value of capital and raises the value of labor. Stagnation of workers wages in the United States is the result of free trade and massive immigration.
Free Trade and Communism are different sides of the same coin, utopian economics. Under Communism/Free Trade, after a brief period of the total destruction of existing economies the workers will be better off. In the case of communism, there will be dictatorship of the proletariat, in the case of free trade, there will be the dictatorship of capitalism. Of course, empirical observation says this is not the case. Only the wealthy get wealthier, be they capitalist firm owners, or communist bureaucrats. But that does not matter to utopian, Communist/Free Trade economics.
A rationale society does best for what the interest of the members of the society in total, not a specific group (primarily the wealthy). Protectionism does that. Free Trade and Communism claim to, but the real world effects are just the opposite: an increasing concentration of wealth among the wealthies.
paul streitz
First off, let me just say that this article is fantastic.
I really think Paul Streitz really hits the nail on the head with his comparison of free trade versus protectionism. The fact is that free trade does little more than increase the coffers of the rich at the expense of the poor, both at a national and international level. While this article focuses specifically on the negative effect free trade has on developing nations, it is crucial that we remember that it also has the potential to harm the citizens of the very countries who promote it. For example, neoliberal orthodoxy has done little to better the American job market and, in fact, has made it substantially worse due to pitiable immigration policies and outsourcing (among other things), despite the United States spending untold billions spreading the gospel of free trade across the globe to poorer nations. I think the testimony of fellow commenter Ramesh Raghuvanshi, about his native country, India, provides an excellent case of what happens when a theory/policy is introduced and promulgated by those with power when no empirical testing has been conducted to confirm whether or not that theory/policy is longitudinally viable – it can (and has) created international havoc. But, the unadulterated reality of the situation is just this: those who advance free trade (e.g., the United States, Britain, etc.) know full well its dreadful effects but work tirelessly to broaden its reach throughout the world because in doing so they maintain the dominant hierarchy that was established years ago when they themselves employed protectionism, the very same flavor of economic policy that put them on the top in the first place.
I am sure that no minds will be changed in this - or probably any other - free trade v protection debate.
My own views were formed, not by reading Friedman or any other economic writer, but by experience of managing businesses around Asia and by observation of the past 30 years of history.
To me, the spread of what has been called globalisation - freer trade and investment and the liberalisation of many economies - has corresponded with great increases of wealth and reduction in poverty.
Also, the opening of many US markets as a result of multi-lateral trade rounds culminating in WTO as it now is, as well as bilateral arrangements like NAFTA, have corresponded with a great strengthening on the US economy with a long period of growth and low unemployment.
One of the lessons I learned in business was that if things are going well, whatever you are doing, keep doing it and, just maybe, do more of it.
The article simply gives an example of protectionism which apparently wasn’t disastrous. So what? Who in the govt had the right to force farmers, et al. to buy inferior and price inflated goods? Do these dictatorial ends justify the means? Are they no different then the horrific policies of Indian and Soviet potectionism?
What would of have been the resultant world with freer capiltal movement? Who knows, but there is little too just it would have been a less prosperous USA. Unless of course, one cherry picks some bad scenarios.
Doug
In response to Doug Schmitt:
I would say that an elected government has far more right to regulate the trade practices of its own citizens than non-elected international institutions such as the WTO have to enforce deleterious policies upon populations that do not want them. The sentiment you are expressing is anarcho-capitalist in nature (or classically liberal, if you want to put it that way), and that’s fine, but we now live in a world in which the sources of the vast majority of tyranny and terror are no longer national governments but international business interests, who are accountable to no-one and are concerned for nothing but their profit margins. To insist upon an economic system in which all actors large or small enter the marketplace as equals is to ignore the realities of power inequality that inevitably arise in any system in which institutions like governments, corporations and international trade organisations exist. We may wish these institutions did not exist, but the fact is they do and any just policy must be formulated accordingly.
I concur with MS. Klein.Free trade is a sine qua non of life.Government can help with trade adjustment assistance and such.Those nations have to capitalize on their comparative advvantages.Jagdish Bhagwati and Paul Krugman have the right notions on how those nations can compete.We should here from them here.
hear
Response to Skeptic Griggsy:
I disagree that free trade is “a sine qua non” of life. I think that the term “free trade” is simply propaganda, a euphamism whose real meaning is properly understood by the mandarins of corporate globalisation to be “free access to cheap labour and resources for the wealthy, exploitation and domination for the poor”.
The whole idea of “comparative advantage” is a joke when the entire neoliberal agenda is geared towards removing control of a country’s industries and resources from its people and placing them in the hands of transnational corporate interests. Unlike “free trade”, comparative advantage actually exists. However, the “advantages” inevitably end up lining the pockets of ultra-wealthy plutocrats and the local elites who are on their payroll. Meanwhile, the wages and living standards of working people stagnate or decline. This is not only true for developing countries, but also for the first world. Just take a look at the declining real wages and increasing job insecurity that have defined the last twenty-five years of US labour history.
“Free trade” is not the same as freedom. The latter is the real “sine qua non”. The former, as it is currently employed in public discourse, is just doublespeak.
I was very pleased to read the article of Mr Ha-Joon Chang: to see clearly set what I confusedly sense and to read it in a near-mainstream quality press.
I happen to currently work as a doctor in a privately-owned for profit [American] hospital in China. At the same time I spent my early career with medical NGOs and received further education in the public medical system of my native [European] country and now enrolled in a public health course. Perhaps for these reasons, I am very much sensitised to the matter of trade and development.
In the area of medicine, the proponents of liberalization have spent a great deal of time, money, lobbying and political infiltration of international organizations to impose their view on the world stage: we have seen a progressive change of lead and responsibility on health systems organization from WHO to the World Bank in the recent years, with the acknowledgement that those old ideas of community participation and public involvement of health systems were obsolete and had to be replaced by more efficient, privately own, competitive, providers. This was done in the line of a general distrust of everything related to government intervention after the reign of conservative government in UK and USA, the stagflation of the eighties and the announced collapse of the USSR. The progressive changes advocated for health cares in the past decade have had mixed results at best in the various poor countries where it was applied. Ironically, those policies pushed by elites mostly from developed countries did not have to be applied in the effectively administered health system of richer countries. Changes would become the condition for being granted World Bank loans.
What is most striking is that these policies and conditions posed by international bodies governed by the biggest contributing countries are not based on any evidence, or at least not in the specific context to which they apply. In other term, it is ideology. Ideology should be channelled through democratic sanction. It is not so at the global level.
Despite mounting literature on the topic, there are still strong advocates for an unregulated investor-based market in health care. Even Americans acknowledge that their system, with the highest spending in health care in the world is inefficient (though much freer than its European counterpart for example and where public money goes to investor-based structures) and wastes taxpayers money – or, put otherwise, diverts precious resources from the sicker, (almost invariably the) poorer citizen.
The strengthened patent system in the pharmaceutical area has probably the same effect as to reinforce the supremacy of those companies (European and North American) by giving them virtual monopoly on their market. This is no good for the poorer who have to buy them under patents (some medicine are necessity [inelastic demand] goods by excellence.) Patents in the pharmaceutical industry are claimed to be a necessary evil to cover the investment cost of molecule development (huge.) What is the cost of the monopoly that patents create on top of the de facto financial monopoly pharmaceutical companies already have? What is the intellectual opportunity cost of these monopolies: are western big firms the best potential innovators and what does the world loose in not using (and not fostering) intellectuals of less wealthy nations?
Patents are another example of experimental economics for which big industrial organizations get reasonable assurance to make major profit in the short run. How do we know the effect on inventors’ creativity of allowing huge market-capitalised firms to hold and buy patents? How do we know if a patent should not be granted to physical persons instead of firms (suggested answer: we don’t know, we have made this choice for good reasons)?
Contrary to what many people may think, nobody knows for sure the consequences of an all free trade scheme in all the areas of the human economy. And it is even more likely that nobody can foresee its long-term consequences on the shaping of our world. More fundamentally, is anybody aware of our ultimate goal in following the current normative economic prescription? In medicine the current world economic practice would be considered experimental at best: typically, the American Food and Drug Administration – to draw a analogy with medicine- would not approve it, and no doctor would not dare to prescribe it for fear of litigation. Would the various fiercest “free trade” gurus in World Bank, FMI and WTO know that they one day might be held accountable for their decisions, the situation could be different. As for the most influential countries, they seem to build a military power scaled to their market appetite.
The current trend clearly stands in favour of big industrial conglomerate that have the power and latitude to influence the political agenda, particularly in the United States. TRIPS is the result of such an influence and is now openly criticized by very few mainstream people. Major decisions on the world’s fate are taken by unaccountable groups of the society, far from any parliamentary debate, and remotely concerning people having no voice in their own country.
Another consequence of the dangers described in very clear terms by Mr Ha-Joon Chang might be a decreased world economic, intellectual and ultimately cultural diversity. Would it suffice to think about it for setting a goal (and evaluation method) in our economic hunt for profit?
What is discussed in this article is very true. Great job! The author is courageous to challenge the norm. It has given us a lot of insights into this issue.
Let us not forget that Ha-Joon Chang, in his article, makes sure to point out that he is not opposed to trade per se, but only to the set of neoliberal policies collectively referred to as the Washington Consensus. This is a very important distinction to make. Ha-Joon Chang understands that the benefits from trade are real, but I think some of the commentators who have posted messages here have forgotten this.
The so-called Japanese (or East Asian) model of economic development, although it involves a lot of government intervention and protectionism, ultimately depends upon trade. Growth in Japan, South Korea, Taiwan, and now China, was and is export-driven. Yes, their governments picked winners and implemented strong protectionist policies to guide the development process, but if the Americans had not been willing to buy their goods, there would have been no growth and tens of millions of emerging middle class Asians would still be living in abject poverty!
Some of the commentators here have used the word ‘nationalism’ to describe the protectionist policies that they advocate not only for developing countries but also for the developed world. Indeed, nationalism is the correct word, and not only economic nationalism, but also social/cultural/philosophical nationalism. If the United States had seriously restricted Asian imports in order to ‘protect American jobs’ (i.e. if they had banned Japanese car imports, rather than simply limit them), then they would have condemned the Japanese to poverty. It would take a strident American nationalist to claim that this would be justified because Americans ‘deserve’ to be wealthy and Japanese people don’t.
Trade is like a prisoner’s dilemma. When people say that they want to restrict trade, what they really mean is that they want to restrict imports. There is always a temptation (particularly for large and influential markets like the USA) to try to restrict imports while continuing to export goods abroad. But if everybody restricts imports, then to whom can you export?! Such a situation would be bad for the developoed world, but even worse for the poor countries who need to be able to exploit foreign buying power.
That’s why proponents of protectionist policy in the developed world should be careful what they wish for. Ha-Joon Chang understands this: selective protectionism has worked for less-developed countries precisely because they were able to sell their protected goods to the rich countries. If no one is willing to buy, then the gains from trade will be gone and no one will be better off.
Were it so simple that protectionism could solve the problems of economic development. Unfortunately, the problems are much more forbidding and the solutions complex and elusive. If protectionism was the answer, India should have grown much faster than it has since the lowering of tariffs over the past decade or so.
Protection is only one element in the equation because, unlike developed countries, countries lower down the scale do not enjoy the protection afforded by intellectual property rights to help them recover initial investment, made in conditions of uncertainty. But in bear mind that poor infrastructure, fiscal deficits and assorted red tape are a larger avoidable cost in most poor countries than help from obverse protection.
Good governance is also imperative, which means security for investment and property rights. This vital condition is absent in societies characterised by instability and mismanagement by the State, which our Korean author takes as a given.
Finally, a lot of the protection really harmful to the poor of the world is designed to keep out their production from developed countries. The European common agricultural policy (and US protection to sugar producers, for example) are some of the most damaging things the rich do to the poor.
Hope you do not agree with the nonsense that lousy journalist wrote. Journalists love being clever and unconventional. It feels so naughty and exciting to defy the economic laws. I’m surprised I actually finished the article because that was the biggest collection of economic hogwash I’ve ever seen. The worst part was probably this “and Japan would have remained the third-rate industrial power it was in the 1960s—on the same level as Chile, Argentina and South Africa”. That is plain old false, I know for a fact that South Africa (due to political reasons i.e. apartheid) pursued a very isolationist, protectionist policy of autarky. Argentina and other South American counties have also been great fans of input substitution, alas they made no progress and had to adopt an open approach in the 1980s.
Why did it work for Japan but not South Africa and Argentina? Can we prove “causality”? We can not infer that Japanese miracle happened due to its protectionist policies, there are millions of other factors that could have caused it. One of which being American technologies: Japan had access to these technologies, but South Africa and the countries of South America did not.
Also the author claims it was a good thing that “Britain’s average industrial tariff rate was in the region of 40-50 per cent, compared with 20 per cent and 10 per cent in France and Germany respectively.” The tariffs were so high because Britain pursued the policies of Mercantilism, which by the way goes against all economic logic. Ricardo was highly critical of British tariff policies at the time and even got elected to Parliament to voice his frustrations
Finally protecting infant industries sounds like a policy, but it is a trap. There is a ton of influential literature out there (Paul Krugeman is the leader) that clearly proves the difficulty and the information problems involved in choosing which industries to protect. If one could easily know which of the infant industries one can develop a comparative advantage in, then it would be easy and beneficial. But it is impossible to tell which industry is worth protecting and which is not. The Japanese were just very lucky with Toyota, it is an exception not the rule.
Hope everyone stays true to Ricardo.
Ha-Joon Chang is not a journalist. He is Reader in the Political Economy of Development at Cambridge University.
I find it difficult to understand why some people are so stubborn in the face of the facts. The strength of Chang’s argument is that he is able to put forward general as well as anecdotal evidence in favour of protectionism. Simply saying that ‘Toyota was a special case’ is just nonsense. All Japanese car manufacturers were protected. Now they rule the world. Individual failures like Brazil’s computer industry and France’s Minitel are drops in the ocean. In no way do these two cases of government support negate the infant-industry argument. This would be a bit like saying the failure of Enron proves that all American companies are corrupt.
No respondent here has been able to dispute Chang’s general evidence that there has been an inverse relationship between liberalisation and growth in every major developing region of the world during the last two-and-a-half decades. Africa liberalised; it got poorer. Latin America liberalised; it stagnated. East Asia maintained protectionist measures; it boomed. And Chang’s evidence does not stop there. He shows clearly that protectionism helped the major developed economies to grow. To say that growth in the UK and US happened ‘despite’ protectionism is like saying the American economy grew so fast ‘despite’ Wall Street being in New York.
Countries that have retained the tools to be able to shape the landscape of their economies during development have mostly grown richer. Those that have thrown away the tools to influence the complexion of their economies have tended to struggle. Just as a business person wouldn’t surrender the right to buy supplies from or to sell products to whoever they wanted, or to hire and fire workers, so a country shouldn’t abandon the ability to tax incoming goods or subsidise existing production.
This is not to make any claim one way or the other about ‘globalisation’. This is a related, but separate argument. International economic integration is clearly doing a lot of good, but equally it can be managed for the better, and creates losers. Chang isn’t ‘anti-globalisation’, whatever that means. He is simply pointing out a fairly undisputable truth: that countries which sensibly protected some of their own markets prospered, and that the poor world isn’t being allowed to follow this strategy.
Yo estoy de acuerdo con el argumento general de Ha-Joon Chang. Al igual de lo que ocurrió en los países (hoy) ricos, en los países llamados “dependientes” o “subdesarrollados” las primeras etapas de la industrialización se dieron en ámbitos altamente proteccionistas. Se asegura, con todo, tomando como ejemplo a los países latinoamericanos, que esas políticas no dieron resultado, y que por eso fueron suplantadas en los años ´80 por políticas liberales, o neoliberales. Existe en este argumento un error de interpretación. En los países latinoamericanos coexisten dos fuerzas sociales en lucha hegemónica: para decirlo simplemente, las burguesías industriales y las burguesías agrarias. Las primeras son proteccionistas, las segundas son librecambistas. Aún con las ineficiencias relativas que una industria protegida pudiera generar, todos los índices económicos muestran claramente que estos países crecieron sorprendentemente entre los años ´50 y finales de los ´70. El estancamiento derivó de la aplicación de las recetas liberales. ¿Pero por que ocurriría esto? Porque los gobiernos no son neutrales perseguidores del “bien común”, sino parciales contendientes en pro de una u otra fuerza hegemónica. Los gobiernos que aplicaron políticas liberales beneficiaron ampliamente a grupos específicos de las economías latinoamericanas: si las mayorías se empobrecían, bueno, ¿que le podría importar eso a gobiernos favorables a las clases ricas? Nada.
Como podrá advertirse de este breve recuento, mi única objeción no va contra el argumento del economista coreano, sino hacia una cierta ingenuidad, bastante típica de los economistas, acerca de como implementar un determinado set de políticas. Sólo gobiernos avalados por movimientos políticos interesados en la construcción de economías industriales podrían estar interesados en impulsar y sostener políticas proteccionistas.
Valery Sokolovski,
Unfortunately for your argument, the South American countries were forced into the “open approach”. Their growth rates have halved from a healthy 3% to under 1.5% since the change.
Let’s not forget South Korea. Imports were near enough banned and any corporate infringement of this law was punishable by death. With the hard earned foreign currency from exports, machinery for heavy industrialisation was bought; it was at this time that shipbuilding began and the country remains number one in the world in this industry. Imports were just not allowed: people wore pirated, internally made goods such as “Nice” sneakers or “Nike” (with two swooshes) sneakers as well as home-grown tobacco. Before such measures of protection, Samsung (of mobile phones and home electronics fame) mainly exported fruit and fish.
Samsung, LG, Daewoo, Hyundai, the film industry…they were all under protection. Of course, liberalists only see what happened in the 90s, don’t they? Did they live to see the oppressive hand help to develop a country more than the invisible one?
Of course “Japan had access to these [American] technologies”; despite import embargos, so did South Korea. The country was the pirating capital of the world – they took apart IBM computers to copy components and designs, they forced FDI (foreign direct investment) into tiny areas of the country where their researchers could plagiarise and develop for the national industries. Korea lied, cheated and stole. It was sneaky and hid behind its sky-high tariffs and tiny import quotas, building an industry and technology that was capable of competing with the ‘big boys’.
By the way, comparative advantage would have emerged, true. Only problem is, comparative advantage promotes status quo. Japan would have found its niche as a cheap car producer, and stayed there. The Lexus could clearly not have been conceived. It would have been bought by Ford or some other American firm. It would have been squashed; or at best, a minor subsidiary.
Remember that not all firms are successful to begin with. Nokia was in the red for 17 years before it made any profit, and it was supported by the government.
By the way, this article has been further developed and been placed inside Chang’s new book. ‘Bad Samaritans’ published by Random House. Compelling read…pretty much answers all the critics in this thread.
An excelent article!
A full lie is better than a half truth…
Protecting infant industries is not a sufficient condition, however, it is a necessary condition for economic development!
Trade is certainly different from free trade!
Education, not only schooling, but “civil responsability” behavior education, encoraging families to invest in longer education, what means individual sacrifice, denoucing corruption, basic health, basic sewage, basic housing, learning how to deal with money, savings and credit, freedom of speech and responsible press,(…)
(…) there are so many issues that are necessary, but without all of them so many suffer so much!
When, everyday, you see so many begging on the streets, so many children playing tricks for a few coins…
The slums are continuosly growing and urban violence seems to be an inevitable consequence…
How can people lie about the real effects of free trade?
Certainly, they remind me the recent film “Thank you for smoking”!
Do they believe in life after death and eternal suffering?
Ha Joong Chang’s article says everything that has to be said about ‘free trade’. How correct he is can be appreciated only if one comes from the country that fell victim to globalization dogma. The consequences of free trade and globalization on an underdeveloped or half-developed country are so obvious that the first question one has to ask is ‘why does globalization spreads so efficiently’? And the answer to this is in fact trivial. It spreads because of absolute corruption of political elite which remains elite even in the circumstances when all power (political and in running the economics of the country) effectively ends up in the hands of corporate vultures in banking or industrial sectors.
I live in one such European country which was unacceptable to the European community (not EU!) because of its ‘nationalistic’ policies. Now, after 95% of banking sector has been sold to foreign banks country became ‘acceptable’ but unable to finance the most basic development projects. Country has quite famous production of heavy duty electric equipment (power generation) but it took two years to secure the loan for development of new type of city electric trains. European Development Bank was more than ready to provide the funds but ONLY if the manufacturer would be Siemens! Local manufacturer was cheaper but EBRD would not provide loan to them! The intensity of lobbying and attempts of corruption by European ‘biggies’ that was going on behind the scene defies any logic.
Another example: the country has some pretty sophisticated small arms manufacturing. The manufacturer developed a new type of hand gun which won the competition when US law enforcement agencies were on the lookout for a new weapon. Potentially, the contract value was in the range of $100 MM. The company started looking for a small credit of about $5MM to purchase the equipment for new production. What happens now is quite illuminating: the manufacturer approached a LOCAL bank which was in the hands of an Italian banking group. The LOCAL bank refused to provide required money. They quite openly admitted that they cannot support production which competes with production in the country from where the bank is coming from. In other words, local production would compete with Italian Beretta!
This is reality; not Krugman’s or Friedman’s free-trade ‘hogwash’.
The same country of mine has totally decimated local retail business because everybody likes to be in the sweet business of retailing. However, while local corrupt politics builds all infrastructure for a foreign shopping mall including an access road, the owner of the mall openly refuses to rent any space in the mall to the local retail chains! Why? Because he is allowed to. Because it is cheaper to sell Nike trainers from sweatshops in Bangladesh than locally made shoes.
Globalization is absolutely nothing more than a new form of colonization; ever more insatiable expression of corporate greed and pilfering of everybody’s resources in the name of ‘development’. It spreads by corruption and corruption only, even if it is corruption of the people’s minds.
I think Nike’s are going to the retro look now for the more casual crowd. Their athletic line is ugly, but I like the retro looking ones.
Just a little reminder of the “sense” of protectionism:
The United States collects more tariff money from Cambodia than from Britain.
Americans bought $1.96 trillion worth of imported goods last year. On this, the Customs Bureau collected $26 billion in tariff money.
Overall, therefore, the tariff rate is a low “trade-weighted” average of 1.3 percent. But most of this money — about $13.5 billion — comes from a narrow swathe of household goods in which one finds most of America’s higher tariffs.
These include $9.5 billion on clothes; $1.9 billion on shoes; $1 billion on luggage, purses, and wallets; $0.7 billion on towels, rugs, and linens; $0.7 billion more on sporting goods, plates, glasses, clocks, watches, and silverware. These products total $131 billion in imports, or less than 7 percent of all imports; but they raise nearly 60 percent of tariff money.
Some people seem to be paying attention to the cost to American consumers:
In the Affordable Footwear Initiative, Reps. Joe Crowley (D-NY), Kevin Brady (R-TX), and Nancy Boyda (D-KS) seek to scrap tariffs on low-priced sneakers and shoes not made in the United States.
Source: Progressive Policy Institute
Now, consider.
$11.4 billion in duties on clothes and shoes.
Most of the highest duties on products from low-cost (poor) countries, which logically means that the products themselves are destined for Wal-Mart rather than Saks.
In other words, PROTECTIONISM IS ANTI-POOR.
.
So, the next time you take a protectionist to lunch, try him medium rare, with a nice pepper sauce.
I agree.
The problem is that economics is not compulsory at any level of school, and despite the fact that economists have understood comparative advantage for quite a while, most people have no conception of what it is or how it works. “Common sense” can easily be wrong, and much of economics is counterintuitive.
Oh, to clarify, I agree with the previous poster, not the original article.
Protectionism does more harm than good. Those who pay for the protection to local industries are common citizens, usually the poorest. Does someone has quantified how much has been the cost of protectionist policies versus the benefits for consumers? How much do the consumers of Korea and Japan paid -or abstain from consuming- for Samsung and Toyota could become competitive enterprises? How much have paid and continue paying consumers for U.S. subsidies to sugar and European subsidies to banana? How much have Central American consumers paid during the three and a half decades of protectionism since 1950? Who benefited and will continue benefiting from subsidies and high tariffs? I think that consumers never benefited from such policies. The beneficiaries were a handful of business groups that nurtured a caste of millionaires.
The difference between Japan and Korea with Latin America, for example, is that in the first tow countries protection was aimed at building capacities for export, while in Latin America it was designed to replace imports and avoid competition in the local market.
Another key difference is related with the “type” of capitalism in which countries evolved, categorized by Baumol, Litan and Schramm in his book “Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity”. In Latin America has prevailed oligarchic capitalism, “in which the bulk of power and wealth is monopolized by a small group of individuals and families”, while in Korea, Japan, Taiwan and other East Asian countries there was a mixture of state-guided capitalism, “in which the government tries to guide the market, mainly to support specific industries that it expects to become winners” and big-firm capitalism, “in which the most significant economic activities are carried out by established giant enterprises”. According to the authors, in the United States has prevailed a mixture of the latter type of capitalism together with what they call entrepreneurial capitalism, “in which a significant role is played by small, innovative firms”.
Finally, protectionism is a bad idea to implement in societies where prevail low levels of education and a culture contrary to progress, because such policies end stunting economic and technological development, favouring small groups well connected to power and harming the majority. This has been the history in Africa, Latin America and other underdeveloped regions.
Regarding the influence of education and cultural factors in economic development and policy effectiveness the works by Lawrence Harrison and Samuel P. Huntington are illustrative as well as the book of Francis Fukuyama “Trust: The Social Virtues and the Creation of Prosperity.” From a Latin American and less academic perspective, the influence of both factors in the poor economic performance in this region is well addressed in several books by Alvaro Vargas Llosa, Plinio Mendoza and Carlos Alberto Montaner.