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Has the 'free market' ideology been the route to prosperity in the Western world?

By Aseem Shrivastava

If rich countries had followed free market policies in the initial stages of economic growth, they would never have become rich in the first place. The evidence is too overwhelming to deny (see 'Kicking Away the Ladder').

World rulers today want corporate markets, not free markets. Free markets are what they are trying to get rid of.

Shouldn't developed countries be forbidden by the WTO to subsidise their agriculture so heavily in order to falsely maintain the illusion of comparative advantage, when in fact the developing countries are comparatively far more efficient in the production of food (even if the productivity of labour in a far less mechanised agriculture is much lower in the poor countries)? In all fairness, especially keeping in view the large proportion of their population that lives by agriculture, shouldn't developing countries have a greater right to subsidise their agriculture and protect their markets than the wealthy countries?

Unfortunately, the rules that have been imposed on the poor nations of the world make all this most unlikely. Without a radical challenge to the undemocratic character of international multilateral institutions - especially the IMF and World Bank (dominated as they are by the Western powers) - it is hopeless to expect fairness in economic matters.

Kicking away the ladder?

By Ha- Joon Chang 

"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-directed) 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.

"...Between the Civil War and the Second World War, the USA was literally the most heavily protected economy in the world....

"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 strategically used tariffs, subsidies, cartels, and state support for R&D to develop key industries, especially textile, steel, and engineering...

"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 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 teaches at 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, 2002.

 

'Do as we say, not as we have done'

"Occasionally, America has experimented with free-market ideology and deregulation -- sometimes with disastrous effects. President Reagan's deregulation of the savings and loan associations led to bank failures that contributed to the recession of 1991. 

"Those in Mexico, Brazil, India and other emerging markets should be told a different message: do not strive for a mythical free-market economy, which has never existed. Do not follow the encomiums of US special interests because, although they preach free markets, back home they rely on the government to advance their aims.

"Instead, developing economies should look carefully, not at what the US says, but at what it did in the years when it emerged as an industrial power, and what it does today. There is a remarkable similarity between those policies and the activist measures pursued by the highly successful East Asian economies over the past two decades."

-- Joseph Stiglitz, Nobel Laureate in Economics, 2001, and the author, most recently, of Making Globalisation Work. He was also Bill Clinton's main Economic Advisor. http://www.guardian.co.uk/comment/story/0,3604,1073042,00.html

 

The IMF, the World Bank and SAPs

"Chile was the guinea pig of a free market paradigm that was foisted on other third world countries beginning in the early-1980s through the agency of the International Monetary Fund and the World Bank. Some 90 developing and post-socialist economies were eventually subjected to free-market, 'structural adjustment'. From Ghana to Argentina, state participation in the economy was drastically curtailed, government enterprises passed to private hands in the name of efficiency, protectionist barriers on Northern imports were eliminated wholesale, restrictions on foreign investment were lifted, and, through export-first policies, the domestic economy was more tightly integrated into the capitalist world market.

"Structural adjustment policies (SAPs), which set the stage for the accelerated globalisation of developing country economies during the 1990s, created the same poverty, inequality, and environmental crisis in most countries that free-market policies did in Chile, minus the moderate growth of the post-Friedman-Pinochet phase. As the World Bank chief economist for Africa admitted, "We did not think the human costs of these programmes could be so great, and the economic gains so slow in coming." So discredited were SAPs that the World Bank and IMF soon changed their names to 'Poverty Reduction Strategy Papers' in the late-1990s.

"Yet free-market and structural adjustment policies have been institutionalised so thoroughly that, despite their being now universally seen as dysfunctional, they continue to reign."

-- Walden Bello, Professor of Sociology at the University of the Philippines and executive director of the Bangkok-based institute Focus on the Global South. http://www.zmag.org/content/showarticle.cfm?SectionID=10&ItemID=11491

InfoChange News & Features, January 2007