The Lies Behind 'Free Trade'

____________________ Ha-Joon Chang, "Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism" (Bloomsbury Press, 2007) ____________________ Ha-Joon Chang's life is conterminous with his country's advance from being one of the poorest on Earth - with a 1961 yearly income of $82 per person, less than half the $179 per capital income in Ghana at that time - to the manufacturing powerhouse of today, with a 2004 per capita income of $13,980. South Korea did not get there by following the advice of the Bad Samaritans. Chang's prologue contains a wonderful account of how post-Korean War trade restrictions and governmental supervision fostered such projects as POSCO (Pohang Iron and Steel Company), which began life as a state-owned enterprise that was refused support from the World Bank in a country without any iron ore or coking coal and with a prohibition on trade with China. Now privatized, POSCO is the world's third largest steel company. This was also the period in which Samsung subsidized its infant electronics subsidiaries for over a decade with money made in textiles and sugar refining. Today Samsung dominates flat-panel TVs and cell phones in much of East Asia and the world. Chang remembers quite clearly that as a student "We learned that it was our patriotic duty to report anyone seen smoking foreign cigarettes. The country needed to use every bit of foreign exchange earned from its exports in order to import machines and other inputs to develop better industries." He is frankly contemptuous of New York Times columnist Thomas Friedman's best-seller "The Lexus and the Olive Tree" (2000) and its argument that Toyota's Lexus automobile represents the rich world brought about by neoliberal economics whereas the olive tree stands for the static world of no or low economic growth. The fact is that had the Japanese government followed the free-trade economists back in the early 1960s, there would have been no Lexus. Toyota today would be, at best, a junior partner to some Western car manufacturer or, worse, have been wiped out. In Chang's conception, there are two kinds of Bad Samaritans. There are the genuine, powerful "ladder-kickers" working in the "unholy trinity" of the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO). Then there are the "ideologues - those who believe in Bad Samaritan policies because they think those policies are 'right', not because they personally benefit from them much, if at all". Both groups adhere to a doctrine they call "neoliberalism". It became the dominant economic model of the English-speaking world in the 1970s and prevails at the present time. Neoliberalism (sometimes called the "Washington Consensus") is a rerun of what economists suffering from "historical amnesia" believe were the key characteristics of the international economy in the golden age of liberalism (1870-1913). Thomas Friedman calls this complex of policies the "Golden Straitjacket", the wearing of which, no matter how uncomfortable, is allegedly the only route to economic success. The complex includes privatizing state-owned enterprises, maintaining low inflation, shrinking the size of the state bureaucracy, balancing the national budget, liberalizing trade, deregulating foreign investment, making the currency freely convertible, reducing corruption, and privatizing pensions. It is called neoliberalism because of its acceptance of rich-country monopolies over intellectual property rights (patents, copyrights, et cetera), the granting to a country's central bank of a monopoly to issue bank notes, and its assertion that political democracy is conducive to economic growth, none of which were parts of classical liberalism. The Golden Straitjacket is what the unholy trinity tries to force on poor countries. It is the doctrinal orthodoxy taught in all mainstream academic economics departments and for which numerous Nobel prizes in economics have been awarded. In addition to being an economist, Ha-Joon Chang is a historian and an empiricist (as distinct from a deductive theorist working from what are stipulated to be laws of economic behavior). He notes that the histories of today's rich countries contradict virtually all the Golden Straitjacket dicta, many of which are logically a result rather than a cause of economic growth (for example, trade liberalization). His basic conclusion: "Practically all of today's developed countries, including Britain and the US, the supposed homes of the free market and free trade, have become rich on the basis of policy recipes that go against neo-liberal economics". All of today's rich countries used protection and subsidies to encourage their manufacturing industries, and they discriminated powerfully against foreign investors. All such policies are anathema in today's economic orthodoxy and are now severely restricted by multilateral treaties, like the WTO agreements, and proscribed by aid donors and international financial organizations, particularly the IMF and the World Bank. Chang offers some fascinating vignettes of men and books that were infinitely more important in the economic development of the rich countries than Adam Smith's The Wealth of Nations. These include a precis of a virtually unknown book by Daniel Defoe, "A Plan of the English Commerce" (1728), on Tudor industrial policy in developing England's woolen manufacturing industry. As a result of many of Defoe's ideas, manufactured woolen products became Britain's most important export industry. Chang continues with a short life of Robert Walpole, the chief architect of the mercantilist system. By 1820, thanks to Walpole's protectionist policies, Britain's average tariff on manufactured imports was between 45 and 55 percent, whereas such tariffs were six to eight percent in the Low Countries, eight to twelve percent in Germany and Switzerland, and around twenty percent in France. Turning to the United States, Chang focuses on Alexander Hamilton, the first American secretary of the treasury and the man who coined the term "infant industry". Although he did not live to see it, by 1820 Hamilton's forty percent tariff on manufactured imports into the United States was an established fact. Hamilton provided the blueprint for US economic policy until the end of the Second World War. The 19th and early 20th century US tariffs of forty to fifty percent were then the highest of any country in the world. Throughout this same period, it was also the world's fastest growing economy. Much like contemporary China, whose average tariff was over thirty percent right up to the 1990s, neither American nor Chinese protectionism inhibited foreign direct investment but rather seemed to stimulate it. With the US abandonment of overt protectionism after it became the world's richest nation, it still found measures to advance its economic fortunes beyond what market forces could have achieved. For example, the US government actually paid for fifty to seventy percent of the country's total expenditures on research and development from the 1950s through the mid-1990s, usually under the cover of defense spending. The Third World was not always poor and economically stagnant. Throughout the golden age of capitalism, from the Marshall Plan (1947) to the first oil shock (1973), the United States was a Good Samaritan and helped developing countries by allowing them to protect and subsidize their nascent industries. The developing world has never done better, before or since. But then, in the 1970s, scared that its position as global hegemon was being undermined, the United States turned decisively toward neoliberalism. It ordered the unholy trinity to bring the developing countries to heel. Through draconian interventions into the most intimate details of the lives of their clients, including birth control, ethnic integration, and gender equality as well as tariffs, foreign investment, privatization decisions, national budgets, and intellectual property protection, the IMF, World Bank, and WTO managed drastically to slow down economic growth in the Third World. Forced to adopt neoliberal policies and to open their economies to much more powerful foreign competitors on unequal terms, their growth rate fell to less than half of that recorded in the 1960s (1.7 percent instead of 4.5 percent). Since the 1980s, Africa has actually experienced a fall in living standards - which should be a damning indictment of neoliberal orthodoxy because most African economies have been virtually run by the IMF and the World Bank over the past quarter-century. The disaster has been so complete that it has helped expose the hidden governance structures that allow the IMF and the World Bank to foist Bad Samaritan policies on helpless nations. The United States has a de facto veto in both organizations, where rich countries control sixty percent of the voting shares. The WTO has a democratic structure (it had to accept one in order to enact its founding treaty) but is actually run by an oligarchy. Votes are never taken. Because of the shortcomings of neoliberalism, the main international development bureaucracies as well as much of the academic economics establishment have been busy trying to find plausible scapegoats or excuses. One of the most transparent was Paul Wolfowitz's emphasis on poor-country corruption during his short tenure as president of the World Bank. He propounded the increasingly popular view that the World Bank gave good advice that failed because Third World leaders were corrupt and subverted its implementation. The problem with this idea is, as Chang puts it, "Most of today's rich countries successfully industrialized despite the fact that their own public life was spectacularly corrupt". He has in mind places like the late 19th century United States and post-World War II East Asia, about which Chang as a South Korean speaks with insights from the inside, and China today. Among the conundrums encountered in trying to argue that corruption has subverted neoliberalism are the cases of Zaire (yesterday, the Congo) under General Mobutu and Indonesia under General Suharto. Both Mobutu and Suharto were flagrantly corrupt, murderous military dictators of the sort often preferred by the United States, but with one major difference - whereas Zaire's living standards fell threefold during Mobutu's rule, Indonesia's rose by more than the same amount during Suharto's rule. The explanation seems to be that in Indonesia, the money from corruption mostly stayed inside the country in the hands of Suharto's numerous relatives, who used some of it to create jobs and incomes. In Zaire, the proceeds from corruption went straight into Swiss banks and other hidden foreign accounts. Corruption is, of course, a problem, but to say that it is the reason for the spectacular failures of neoliberal economic programs is unconvincing. Rather than acknowledging that free trade, privatization, and the rest of their policies are ahistorical, self-serving economic nonsense, apologists for neoliberalism have also revived an old 19th century and neo-Nazi explanation for developmental failure - namely, culture. Chang believes that this reflects the popularity of Samuel Huntington's thesis that we are experiencing a "clash of civilizations" or Francis Fukuyama's contention that trust extending beyond family members critically affects economic development. Fukuyama argues, astonishingly, that the absence of such trust in the cultures of China (the fastest growing economy on Earth today), France, Italy, and (to some extent) Korea makes it difficult for them to run large firms, which are key to modern economic development. This is not so different from the 19th century German economist and sociologist Max Weber, who in 1904 identified the Confucian/Buddhist countries of China and Japan as economically backward because they did not have the Protestant ethic. Chang argues that culture simply does not work as an explanation for economic success. Extremely broad categories such as "civilization", "Christian", or "Muslim" obscure more than they reveal, and the modern histories of Germany, Japan, China, and many other countries suggest that Protestant-work-ethic-type cultures are the results of economic development, not their cause. In the early 19th century, the British endlessly generalized about Germany and Germans, calling them "a dull and heavy people" and "indolent", saying "the Germans never hurry", they are a "plodding, easily contented people ... endowed neither with great acuteness of perception nor quickness of feeling", they are "not distinguished by enterprise or activity", they are "too individualistic and unable to cooperate with each other", they are "overly emotional", and "the [German] tradesman and shopkeeper take advantage of you wherever they can, and to the smallest imaginable amount rather than not take advantage of you at all. ... This knavery is universal". ... http://www.rense.com/general80/trade.htm

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