Bad samaritans: the myth of free trade and the secret history of capitalism 1596913991, 2007022958

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BAD SAMARITANS

THE MYTH OF

FREE TRADE AND THE SECRET HISTORY OF

CAPITALISM HA-JOON CHANG

U.S. $26.95

A fresh

voice

In

the

economics bursts Into the debate on globalization and economic justice, attacking field of

free-trade

head-on

in

dogma

a crisp, contrarian

history of global capitalism

With irreverent wit, an engagingly personal style, and

examples, Ha-Joon Chang

a battery of real-life

blasts holes in the

"World

Is Flat"

orthodoxy of Thomas

Friedman and other neo-liberal economists who argue that only unfettered tional trade

On

can

the contrary,

powers—from tive

lift

capitahsm and wide-open internastruggling nations out of poverty.

Chang shows,

today's

economic super-

the United States to Britain to his na-

South Korea— all attained prosperity by shameless

protectionism and government intervention in industry.

We

in the

wealthy nations have conveniently forgotten

this fact, telling ourselves a fairy tale

free trade

and

International zation

about the magic of

—via our proxies such as the World Bank,

Monetary Fund, and World Trade Organi-

— ramming policies

that suit ourselves

down

the

throat of the developing world.

Unlike typical economists

how economies ines the past:

are

supposed

what has

actually

who

construct models of

to behave,

Chang exam-

happened. His pungently

contrarian history demolishes one pillar after another of

free-market mythology. as sacrosanct

— but

We

treat patents

developed our

and copyrights

own

studiously copying others' technologies. centrally

planned economies

stifle

developing countries had higher

industries

We

growth

GDP

by

insist that

— but

many

growth before

they were pressured into deregulating their economies.

Digitized by the Internet Archive in

2011

http://www.archive.org/details/badsamaritansmytOOchan

Bad Samaritans

Bad Samaritans The Myth of Free Trade and the Secret History of Capitalism

HA-JOON CHANG

BLOOMSBURY PRESS

Copyright

All rights reserved.

No

part of this

©

2008 by Ha-Joon Chang

book may be used or reproduced

in

any manner whatsoever

without written permission from the publisher except in the case of brief quotations embodied in critical articles or reviews.

For information address Bloomsbury Press, 175 Fifth Avenue,

NY

York,

New

10010.

Published by Bloomsbury Press,

New York

Distributed to the trade by Holtzbrinck Publishers

All papers in

made from wood grown

used by Bloomsbury Press are natural, recyclable products

well-managed

forests.

The manufacturing processes conform

to the environmental regula-

tions of the country of origin.

Library of Congress Cataloging-in-Publication Data

Chang, Ha-Joon.

Bad Samaritans

:

the

myth of

free trade

and the p.

secret history of

capitaUsm

/

Ha-Joon Chang.

cm.

Includes bibliographical references and index.

ISBN-io 1-59691-399-1

(alk.

ISBN-13 978-1-59691-399-8 1.

Free trade.

2.

paper)

(alk.

Capitalism.

I.

paper) Title.

HF1713.C5185 2008 382

.71

—dC22

2007022958

First

published in Great Britain in 2007 by First U.S. Edition

13579

10

Random House

Business Books

2008

8642

Printed in the United States of America by Quebecor World Fairfield

Contents

Acknowledgements

ix

PROLOGUE Mozambique's economic miracle

How 1

to escape

The Lexus and the

olive tree revisited

Myths and facts about 2

The double

How 3

My Is

4

i

poverty

life

19

globalization

of Daniel Defoe

40

did the rich countries become rich?

six-year-old son should get a job

65

free trade always the answer?

The Finn and the elephant

84

Should we regulate foreign investment? 5

Man

exploits

man

103

Private enterprise good, public enterprise bad?

6

Windows Is it

122

98 in 1997

wrong

to 'borrow' ideas?

7 Mission impossible?

Can

i45

financial prudence go too far?

8 Zaire vs

160

Indonesia

Should we

turn our backs on corrupt

undemocratic countries?

and

9 Lazy Japanese

and thieving Germans

182

Are some cultures incapable oj economic development'?

EPILOGUE Sao Paulo, October 2037

Can

203

things get better?

Notes

223

Index

267

To Hee-Jeong

Acknowledgements

The

idea of writing an accessible

ment

that

Green

and

is

critical

few years ago.

a

book on

globalization

of the reigning orthodoxy

He convinced me on these

interesting things to say

first

that

I

together,

my

usually write

I

combining

for. Initially,

have some unusual

topics and, therefore, that

should put them together for an audience that the one

and develop-

came from Duncan

is

we were going

his long-time experience as

an

much

I

bigger than

book

to write the

NGO activist and

academic research, to produce something that has both a solid

academic foundation and campaign the head of research at

due

to his workload.

my own,

flair.

Oxfam and had later, when I

to

But

he very kindly read

all

In the event,

Duncan became

withdraw from the project

started to write the

the chapters of the

book

book on

(often

more

me with insightful comments, both substantively and editorially. He also graciously put up with me deeply ringing him up without warning to thrash out my ideas. than one version of them) and provided

I

thank him for his generosity, wisdom and patience.

When Duncan

withdrew, the project

rather aimlessly for a while.

more importantly,

known duced

became busy with other

was not easy

me

to Ivan Mulcahy,

my

make Then Richard Toye

to

to the relevant publishers.

to turn sible

it

I

provided

critical

had

treatise into a

drifted

things and,

my project

kindly introa vision

how

genuinely acces-

a lot of things in the art of writing for a

wider audience. His colleague Jonathan Conway also

and

the existence of

literary agent. Ivan

an undeveloped semi-academic

book and taught me

lost its propeller

at

input in shaping the project.

IX

Mulcahy

& Viney

BAD SAMARITANS In formulating the book, sions with Chris Cramer.

benefited tremendously from discus-

I

He

has always been a generous friend, but

the intellectual energy he invested in helping

exceptional even by his

me

introduced

comments on

my

to

own

me

shape

this

book was

high standards. Richard Toye not only

literary agent

but also provided very helpful

and some of the individual arguments

overall structure

of the book. Deepak Nayyar took time out from his busy schedule to

go through

my

initial

proposal and gave

comments. In developing the book,

Dean

sions with

I

me

a lot of sagacious

have also benefited from discus-

Baker, Jonathan di John, Barbara Harriss-White, Peter

Nolan, Gabriel Palma, Bob Rowthorn, Ajit Singh, Rosemary Thorp,

John Toye and Mark Weisbrot.

As

I

was writing the chapters,

number of people.

My sometime

chapters and gave

me

only read

all

Khalil,

Amy

and Sarah gave

me

co-author, Ilene Grabel, read

the

all

me

wonderful editorial advice but Beattie, Shailaja Fennell, Elias

and gave

Kangkook

Lee, Chris Pallas, Richard

read earlier versions of

some of

Schmale

the chapters

and

helpful suggestions.

The book would not have had

the richness of information without

the help of three very able research assistants.

was on

a

comments. Peter

Klatzkin,

Wood

comments from

received useful

very important feedback. Robert Molteno not

the chapters

also provided useful

I

call to

provide help with

data work. Hassan

Akram

all

Luba Fakrhutdinova

aspects of the book, especially

excavated a lot of wonderful historical

material for the culture chapter and also offered helpful

on some of the other finding material for a intellectual

chapters. Ariane

number of

McCabe

comments

did a great job in

chapters, especially the chapter

on

property rights, on which she also provided useful

comments. I would

also like to

thank Luiz de Andrade Filho and Kenia

Parsons for their assistance. I

for

would its

critical

also like to

thank the editorial team

at

Bloomsbury

Press

marvellous job. Peter Ginna, the editorial director, provided inputs in the shaping of the earlier draft and insightful advice

in the writing process. Katie

tated the

Henderson, the

whole process with impeccable

assistant editor, facili-

efficiency

and dedication.

Amy King and her team in the art department came up with a striking

ACKNOWLEDGEMENTS cover and Aly Mostel, the publicist, did a wonderful job in setting the stage for the launch of the book.

My daughter, Yuna,

and son, Jin-Gyu - unknowingly - helped

come up with some of patiently waited for

phase of the book. for her

my

the key analogies in the book.

They

return from an emotional exile in the

Finally,

I

would

like to

thank

my wife,

me also last

Hee-Jeong,

emotional and intellectual support. Throughout the whole

process of preparing for and writing the book, she had to put up with

an obsessed and unpleasant the early draft chapters to

complain that

does not quite

I

man

and made many

was using her

realise

(yet again!).

as

how many

an

She also read most of

incisive

comments. She used

intellectual

guinea pig, but she

of her comments were crucial in

shaping, rather than just improving,

my

book could not have been

dedicate the

written.

I

XI

arguments. Without her, the

book

to her.

PROLOGUE Mozambique's economic miracle

How

to escape

Mozambique Takes on

poverty

the Big Boys

Nuts and volts June 28^^ 2061 I

MAPUTO

From The Economist

print edition

Tres Estrelas announces a

new breakthrough

in fuel cell technology

In a carefully staged event to coincide with the country's independence

day on June

25^^,

Maputo-based Tres

Estrelas, the largest African busi-

ness group outside South Africa, unveiled a breakthrough technology for

mass production of hydrogen

into production in the ebullient

fuel cells.

autumn of

2063,'

'When our new

Mr Armando Nhumaio,

chairman of the company announced, 'we

on the big boys from Japan and the better value for

Tres Estrelas

USA by

money' Analysts agree

means hydrogen

fuel

is

plant goes

will

offering

that the

consumers much

new technology from

set to replace alcohol as the

source of power for automobiles. 'This

bound

is

the

be able to take

main

to pose a serious

challenge to the leading alcohol fuel producers, like Petrobras of Brazil

and Alconas of

Malaysia,' says

prestigious Energy

Economics Research

Western Cape, South Tres Estrelas has

beginnings.

Nelson Mbeki-Malan, the head of the Institute at the University of

Africa.

made its own

The company

rocket- fuelled journey

started out exporting

from humble

cashew nuts

in 1968,

seven years before Mozambique's independence from the Portuguese. It

then did well by diversifying into

sequently,

it

made

tractor for the

a bolder

move

textiles

and sugar

into electronics,

Korean electronics

giant,

refining.

first as

Samsung, and

a

Sub-

subcon-

later as

an

BAD SAMARITANS independent producer. But an announcement in 2030 that hydrogen production was to be

fuel cell

scepticism. 'Everyone thought

many

money

next venture generated considerable

we were

crazy,' says

Mr Nhumaio. 'The

for 17 years. Luckily, in those days,

we

outside shareholders requiring instant results.

We

fuel cell division bled

did not have

its

persisted in our belief that building a world-class firm requires a long

period of preparation.'

The company's rise symbolizes the economic miracle that is modern Mozambique. In war,

civil

1995, three years after the

Mozambique had

the poorest

literally

in the world.

rampant corruption and a sorry 33%

sions,

Mozambican

stiU

half that of the average Ghanaian,

country.

political divi-

literacy rate, after the

prospects

its

end of the

richest

With

civil

earned only $210 a year, just over

who was

earning $350. However,

Mozambique's economic miracle has transformed

since then,

one of the

bloody 16-year

With deep

ranged from dire to grim. In 2000, eight years war, the average

its

income of only $80 and was

a per capita

economy

end of

it

into

economies in Africa and a solid upper-middle-income

a bit of luck

and

sweat,

may

it

even be able to join the

ranks of the advanced economies in the next two or three decades.

'We grin

is

will

not

rest

on our

where technology changes one can expect

day.' After

fast.

Mr Nhumaio, whose

Product

to last long as the

innovation. Competitors

any

laurels,' says

reported to hide a steely determination. 'This

all,

his

life-cycles are short

may appear on

company has

the horizon out of

perhaps

it

and no

just

nowhere

sprung a nasty surprise on

manufacturer somewhere in Nigeria decide

move from

roguish

a tough industry

market leader based on only one

the Americans and the Japanese. Might a relatively

able to

is

unknown

fuel cell

that, if Tres Estrelas

was

the darkest shadows to the top of the tree, then

could too?

Mozambique may or may not succeed

in living

up

to

my fantasy.

what would your reaction have been, had you been told

But

in 1961, a

century before the Mozambican dream, that South Korea would, in

40 years' time, be one of the world's leading exporters of mobile phones, a cells

do

strictly science-fiction

at least exist today.

product

at that

time? Hydrogen fuel

MOZAMBIQUE

S

ECONOMIC MIRACLE

In 1961, eight years after the end of

fratricidal

its

war with North

Korea, South Korea s yearly income stood at $82 per person.

Korean earned

less

The average

than half the average Ghanaian citizen ($179).' The

Korean War - which,

incidentally, started on June 25, Mozambique's independence day - was one of the bloodiest in human history,

claiming four million

lives in just

over three years (1950-3). Half of

South Korea's manufacturing base and more than 75% of its railways were destroyed in the conflict. The country had shown some organizational ability

by managing

from the paltry 22% colonial masters,

level

its

in 1945

considered a basket case of developmental

USAID -

now -

Korea a 'bottomless

called

the

from

ruled Korea since 1910. But

report from

failure.

main US government pit'.

71% by

literacy ratio to

had inherited

it

who had

to raise

A

it

its

1961

Japanese

was widely

1950s internal

aid agency then, as

At the time, the country's main

exports were tungsten, fish and other primary commodities.

As for Samsung,'^ now one of the world's leading exporters of mobile phones, semiconductors and computers, the company started out as

an exporter of

fish,

vegetables

up

lines of business

in the mid-i950s.^

took

it

textiles that

all,

When

in

Korea Semiconductor in

its

had

set

own

1974,

no one

Samsung did not even manufacture colour declared its intention, in 1983, to take on

it

the big boys of the semiconductor industry from the

by designing

it

When it moved into the semiconductor industry

seriously. After

sets until 1977.

seven years before

rule. Until the 1970s, its

were sugar refining and

by acquiring a 50% stake

TV

fruit in 1938,

from Japanese colonial

Korea's independence

main

and

US and

Japan

chips, few were convinced.

Korea, one of the poorest places in the world, was the sorry country I

was born into on October

7 1963.

Today

I

am

a citizen of

wealthier, if not wealthiest, countries in the world.

During

one of the

my lifetime,

Samsung in Korean means Three Stars, as does my fictitious Mozambican firm, Tres The last sentence in my imaginary 2061 Economist piece is based on a real Economist article about Samsung, 'As good as it gets?' (January 13 2005), whose final sentence reads: 'Might a relatively unknown electronics manufacturer somewhere in *

Estrelas.

China decide of the

tree,

division of

that, if

Samsung was

then perhaps

it

able to

my fictitious Mozambican

the darkest shadows to the top

move from

could too?' The firm lost

17 years

money

is

during which the the

during which the electronics division of Nokia, founded in

fuel cell

same investment period i960, lost money.

BAD SAMARITANS per capita income in Korea has grown something hke 14 times, in

purchasing power terms.

It

took the

UK over two

centuries (between

US around one and

the late 18th century and today) and the

centuries (the 1860s to the present day) to achieve the

The material progress had

have seen in

I

my

40-odd years

same

is

result.^

though

as

born when George

started Hfe as a British pensioner

half

III

I

was on

the throne or as an American grandfather born while Abraham Lincoln

was president.

The house

I

was born and

lived in until

I

was

six

was

what was

in

then the north-western edge of Seoul, Korea s capital city

was one

It

of the small (two-bedroom) but modern homes that the government built with foreign aid in a

idated housing stock. heated, so

it

Yet

programme

toilet,

15

to

upgrade the country's dilap-

was made with cement bricks and was poorly

was rather cold

winter can sink to flushing

It

-

in winter

the temperature in Korea's

or even 20 degrees below zero. There was

no

of course: that was only for the very rich.

my family had some great luxuries that many others lacked, my father, an elite civil servant in the Finance Ministry who

thanks to

had

money while

diligently saved his scholarship

for a year.

We owned

magnetic pull on our neighbours.

coming young country,

dentist at St Mary's,

somehow used

TV

a black-and-white

to

was a big sports match on

fmd

TV

-

One

studying at Harvard

set,

which exerted

a

family friend, an up-and-

one of the biggest hospitals

in the

the time to visit us whenever there ostensibly for reasons totally unre-

would be contemplating bedroom to a plasma screen.

lated to the match. In today's Korea, he

upgrading the second family

A

cousin of mine

who had

TV

just

of Kwangju to Seoul came to

in the

moved from my

visit

father's native city

on one occasion and quizzed

mother about the strange white cabinet

in the living

refrigerator (the kitchen being too small to

room.

accommodate

It

it).

my

was our

My wife,

Hee-Jeong, born in Kwangju in 1966,

tells

me

would

meat

in the refrigerator of her

regularly 'deposit' their precious

mother, the wife of a prosperous doctor, as

if

that her neighbours

she were the manager

of an exclusive Swiss private bank.

A small cement-brick house with a black-and-white TV and a refrigmay not sound much, but it was a dream come true for my

erator

MOZAMBIQUE

ECONOMIC MIRACLE

S

who had Uved through

parents' generation,

the most turbulent and

deprived times: Japanese colonial rule (1910-45), the Second World

War, the division of the country into North and South Korea (1948) and the Korean War. Whenever I and my sister, Yonhee, and brother,

my mother would

Hasok, complained about food,

we

were. She

would remind us

that,

when

of her generation would count themselves lucky

Many

families could not afford them; even those

them

for fathers

heartbreak the age of rice

bowl

man

a

when five,

if

little

rice,

said that he

would

with a healthy appetite

feel better if

who

ten,

loves his beef,

US

War

his part,

had

my

father,

to survive as a

little

more than

army, soy sauce and

unknown

Years

in

2003, I

when

was on

I

was showing

leave

from Cambridge and

my friend and mentor, Joseph Stiglitz,

the Nobel Laureate economist, around the National Seoul.

We came

is all

Korea today.

later, in

staying in Korea,

chilli

he had to watch helplessly as his seven-year-

old younger brother died of dysentery, a killer disease then that

but

at

he could only hold a

was empty. For

it

black- market margarine from the

At the age of

to recall her

brother, starving during the Korean

in his hands, even if

spoilt

could reserved

and working older brothers. She used her

how

they had an egg.

who

secondary school student during the Korean War on

paste.

us

tell

they were our age, people

Museum

in

across an exhibition of beautiful black-and-white

photographs showing people going about their business

in Seoul's

middle-class neighbourhoods during the late 1950s and the early 1960s. It

was exactly how

I

remembered

and Joe were two young women

'How can

that be Korea?

It

my childhood.

Standing behind

in their early twenties.

One screamed,

looks like Vietnam!' There was

20 years' age gap between us, but scenes that were familiar to totally alien to her.

was I

I

turned to Joe and told him

development economist

as a

felt like

to have lived

me

how

less

than

me were

privileged'

I

through such a change.

an historian of mediaeval England who has actually witnessed

the Battle of Hastings or an astronomer

who

has voyaged back in time

to the Big Bang.

Our

next family house, where

I

lived

between 1969 and

1981, at the

height of Korean economic miracle, not only had a flushing toilet but also boasted a central heating system.

The boiler, unfortunately, caught

BAD SAMARITANS fire

soon

don't

we moved

after

you

tell

in

and almost burned the house down. I we were lucky to have one - most

this in complaint;

houses were heated with coal briquettes, which killed thousands of people every winter with carbon monoxide poisoning. But the story

does offer an insight into the state of Korean technology in that off, yet really

In 1970

I

started

primary school.

It

was

We

that

had

state

school next door had 90 children per

at

far-

so recent, era.

65 children in each class.

a second-rate private school

were very proud because the Years

class.

later, in

a seminar

Cambridge, a speaker said that because of budget cuts imposed by

Monetary Fund (more on this later), the average number of pupils per classroom in several African countries rose from 30-something to 40-something in the 1980s. Then it hit me just how the International

bad things had been was

class,

When

country had 40

I

chil-

that?' State

rapidly expanding urban areas were stretched to the

with up to 100 pupils per

sometimes

in the

childhood.

and everyone wondered, 'how do they do

some

schools in

my

Korean schools of

primary school, the poshest school

in

dren in a

limit,

in the

class

and teachers running double,

Given the conditions,

triple, shifts.

it

was

little

wonder

that

education involved beating the children liberally and teaching every-

method has obvious drawbacks, but

thing by rote. The

has managed to provide

at least six years'

at least

Korea

education to virtually every

child since the 1960s.

when

In 1972,

I

was

in Year 3

ground suddenly became

(US third grade),

a campsite for soldiers.

my

school play-

They were

there to

pre-empt any student demonstrations against the martial law being

imposed by the president of the country, (former) General Park Chung-Hee. Thankfully, they were not there friends.

We

Korean kids may be known

for

but constitutional politics were frankly a year-olds.

to take

on me and

my

our academic precocity,

little

bit

beyond us nine-

My primary school was attached to a university, whose rebel-

lious students

were the

soldiers' target. Indeed,

Korean university

students were the nation's conscience throughout the political dark

age of the military dictatorship and they also played the leading role in putting

an end to

After he had

it

come

in 1987. to

power

in a military

coup

in 1961,

General

MOZAMBIQUE Park turned

'civilian'

S

ECONOMIC MIRACLE

and won three successive

were propelled by his success

victories

economic miracle' through

in

elections. His electoral

launching the country's

his Five Year Plans for

Economic Develop-

ment. But the victories were also ensured by election rigging and political dirty tricks.

was due

to

end

his third term,

His third and supposedly

in 1974, but

Park just could not

term

final

let go.

he staged what Latin Americans

as president

Halfway through

call

an auto- coup'.

This involved dissolving the parliament and establishing a rigged

him

electoral system to guarantee

was

that the country could

to defend itself against told,

and

accelerate

its

ill

the presidency for

life.

His excuse

afford the chaos of democracy.

It

had

North Korean communism, the people were

economic development. His proclaimed goal

of raising the country's per capita income to 1,000

was considered overly ambitious, bordering on

US

by 1981

dollars

delusional.

President Park launched the ambitious Heavy and Chemical

programme in 1973. The first steel mill and modern shipyard went into production, and the first locally designed cars (made mostly from imported parts) rolled off the Industrialization (HCI)

the

first

production

lines.

New

firms were set up in electronics, machinery,

chemicals and other advanced industries. During this period, the country's per capita income grew phenomenally by

US

times, in

dollar terms,

between 1972 and

more than

five

1979. Park's apparently

delusional goal of $1,000 per capita income by 1981 was actually

achieved four years ahead of schedule. Exports grew even increasing nine times, in

US

dollar terms, between 1972

and

faster,

1979-'^

The country's obsession with economic development was reflected in

to report

our education.

We

learned that

anyone seen smoking foreign

it

was our

patriotic

fully

duty

The country needed

cigarettes.

to use every bit of the foreign exchange earned

from

its

exports in

order to import machines and other inputs to develop better industries. Valuable foreign currencies were really the blood and sweat of

our 'industrial tories.

soldiers' fighting the export

Those squandering them on frivolous

cigarettes,

were

'traitors'. I

in the country's fac-

things, like illegal foreign

don't believe any of my friends actually went

as far as reporting such 'acts of treason'.

when kids saw foreign

war

But

it

did feed the gossip mill

cigarettes in a friend's house.

The

friend's father

BAD SAMARITANS -

it

was almost invariably

commented on

men who smoked - would

an unpatriotic and therefore immoral,

as

if

be darkly not exactly

criminal, individual.

Spending foreign exchange on anything not

essential for industrial

development was prohibited or strongly discouraged through import bans, high tariffs

and

excise taxes (which

were called luxury consump-

tion taxes). 'Luxury' items included even relatively simple things, like

small cars, whisky or cookies.

when

remember the minor national euphoria

a consignment of Danish cookies

government permission travel

I

in the late 1970s.

was banned unless you had

do business or study abroad. As relatives living in the

elled to

Cambridge

US,

I

was imported under

special

For the same reason, foreign

explicit

government permission

a result, despite having quite a

had never been outside Korea

until

I

to

few

trav-

at the age of 23 to start as a graduate student there

in 1986.

This cookies.

was

is

not to say that no one smoked foreign cigarettes or ate

in circulation.

There was some smuggling, especially from Japan,

but most of the goods involved were things brought in semi-legally - from the numerous American army bases

Those American

soldiers

who

children running after

chewing gum or chocolates. Even

army goods were class families

still

in the

illegally

or

in the country.

fought in the Korean

remember malnourished Korean for

illicit

A considerable quantity of illegal and semi-legal foreign goods

War may

still

them begging

Korea of the 1970s, American

considered luxuries. Increasingly affluent middle

could afford to buy

M&M

chocolates and Tang juice

powders from shops and itinerant pedlars. Less afQuent people might go to restaurants that served boodae

chige, literally

'army base

stew'.

This was a cheaper version of the classic Korean stew, kimchee chige, using kimchee (cabbages pickled in garlic and

chilli)

but substituting

the other key ingredient, pork belly, with cheaper meats, like surplus

bacon, sausages and I

spam smuggled out of American army

longed for the chance to sample the

chocolates, biscuits

tins

bases.

of spam, corned beef,

and countless other things whose names

I

did not

even know, from the boxes of the American Army's 'C Ration' (the

canned and dried food ration

who was

for the battlefield).

A

maternal uncle,

a general in the Korean army, used to accumulate supplies

MOZAMBIQUE during joint

them

me

to

S

with his American colleagues and gave

field exercises

an occasional

as

wretched quality of their

ECONOMIC MIRACLE

& Mason

picnic hamper. But, then,

vanilla ice

cream had so

'no flavour', until

I

little

American

treat.

For

field rations.

was

I

vanilla in

it

soldiers cursed the

me they were like a Fortnum living in a

that

learnt English in secondary school. If that

case with a well-fed upper-middle-class child like me,

what

it

must have been

When went I

country where

thought vanilla meant

I

was the

you can imagine

like for the rest.

my father

to secondary school,

tronic calculator, a gift

my

beyond

gave

me

wildest dreams.

a Casio elec-

Then

it

was

probably worth half a month's wages for a garment factory worker,

and was

huge expense even

a

our education. Some 20 years

ment

for

my

later, a

and the

electronics technologies

in

father,

who

spared nothing on

combination of rapid developrise

in Korea's living

standards meant that electronic calculators were so abundant that they were given out as free

ended up kids are

good

Korea's

Many

girls

department

gifts in

as toys for toddlers (no,

I

stores.

don't believe this

Many of them is why Korean

at maths!).

economic 'miracle' was not, of course, without from poor

a job as soon as they

its

dark sides.

families in the countryside were forced to find

left

primary school

at the age

of

12

-

to get rid

money so that at least one brother could receive higher education. Many ended up as housemaids in urban middle-class families, working for room and board and, if they were lucky, a tiny amount of pocket money. The other girls, and the less of an extra mouth' and to earn

fortunate boys, were exploited in factories where conditions were

reminiscent of 19th-century 'dark satanic mills' or today's sweatshops in China. In the textile

and garment

industries,

which were the main

export industries, workers often worked 12 hours or more in very

hazardous and unhealthy conditions for low pay. Some factories reftised to serve toilet

soup

in the canteen, lest the workers should require

an extra

break that might wipe out their wafer-thin profit margins.

Conditions were better in the newly emerging heavy industries steel,

chemicals, machinery and so

on -

but, overall,

cars,

Korean workers,

with their average 53-4 hour working week, put in longer hours than just

about anyone

else in the

world

at the time.

BAD SAMARITANS Urban slums emerged. Because they were usually up mountains that comprise

a great deal of the

were nicknamed 'Moon Neighbourhoods', series

tiny

of the 1970s. Families of

room and hundreds

low

Korean landscape, they

after a

popular

TV

sitcom

or six would be squashed into a

five

of people would share one

standpipe for running water.

in the

Many

toilet

and

a single

of these slums would ultimately

be cleared forcefully by the police and the residents

dumped

in far-

flung neighbourhoods, with even worse sanitation and poorer road

make way

access, to

middle

new apartment

for

blocks for the ever-growing

the poor could not get out of the

class. If

enough (though

getting out of the slums

economy and

the rapid growth of the

was

new slums

at least possible,

the creation of

new

fast

given

jobs), the

urban sprawl would catch up with them and see them rounded up once again and

dumped

ended up scavenging

Few people

in

an even more remote place. Some people

main rubbish dump, Nanji

in the city's

Island.

outside Korea were aware that the beautiful public parks

surrounding the impressive Seoul Football Stadium they saw during the 2002

World Cup were

built literally

on top of the old rubbish

dump on the island (which nowadays has an ultra-modern eco-friendly methane-burning power

dumped

station,

which taps into the organic material

there).

In October 1979,

when

was

I

still

a secondary school student,

President Park was unexpectedly assassinated by the chief of his Intelligence Service,

tatorship

A

amid mounting popular discontent with

brief 'Spring of Seoul' followed, with hopes of

democracy welling

was brutally ended by the next military government of

it

General

Chun Doo-FIwan, which

armed popular uprising

May

his dic-

and the economic turmoil following the Second Oil Shock.

up. But

of

own

that

seized

power

after the

two-week

was crushed in the Kwangju Massacre

1980.

Despite this grave political setback, by the early 1980s, Korea had

become

a solid

middle-income country, on a par with Ecuador,

Mauritius and Costa Rica. But

perous nation we

among meant

know

today.

it

was

One

us high-school students was 'I

still

'I've

have had an experience out of 10

far

removed from the pros-

of the slang expressions

common

been to Hong Kong', which

this world'.

Even today, Hong

MOZAMBIQUE Kong

is still

ECONOMIC MIRACLE

S

considerably richer than Korea, but the expression reflects

the fact that, in the 1960s or the 1970s,

was three

to four times greater than

When I went

to university in 1982,

Hong

my 1

Kong's per capita income

country's.

became

interested in the issue

of intellectual property rights, something that

even more hotly

is

debated today. By that time, Korea had become competent enough to

copy advanced products and rich enough life

come up with

to

it

was

and

international patents, copyrights

Today, Korea it

ranks

is

among the

five

granted annually by the lived

on

US

made by

not sophisticated

to develop

and own

'inventive' nations in the

nations in terms of the

world -

number of patents

Patent Office. But until the mid-1980s

'reverse engineering'.

that were

still

finer things in

and trademarks.

one of the most top

want the

original ideas

(music, fashion goods, books). But

enough

to

it

My friends would buy 'copy' computers

small workshops, which would take apart

machines, copy the parts, and put them together.

It

IBM

was the same with

trademarks. At the time, the country was one of the 'pirate capitals'

of the world, churning out fake Nike shoes and Louis Vuitton bags in

huge

quantities.

Those who had more

settle for near-counterfeits.

delicate consciences

There were shoes that looked

would

like

Nike

but were called Nice, or shoes that had the Nike swoosh but with an extra prong. Counterfeit goods were rarely sold as the genuine article.

Those who bought them were

perfectly aware that they were buying

make

a fashion statement, rather than to

fakes; the point

was

to

mislead. Copyrighted items were treated in the

same way. Today, Korea

exports a large and increasing quantity of copyrighted materials (movies,

TV

soaps, popular songs), but at the time imported music

(LP records) or films (videos) were so expensive that few people could afford the real thing.

which we

We grew up listening to pirate rock'n' roll records,

called 'tempura

was so bad

it

sounded

ground. As for foreign

most

students.

in English

I

records',

because their sound quality

someone was deep-frying in the backbooks, they were still beyond the means of

Coming from

invest in education,

books

shop

as if

did have

were pirated.

Cambridge without those

a well-off family that

was willing

to

some imported books. But most of my I

could never have entered and survived

illegal

books.

u

BAD SAMARITANS By the time

was finishing

I

the late 1980s, Korea had

The

no reason

graduate studies at Cambridge in

was that European countries stopped

surest proof of this

demanding

my

become a soHd upper-middle-income country.

that Koreans get an entry visa.

to

want

even joined the

Most of us by then had

to emigrate illegally anyway. In 1996, the country

OECD

(Organisation for Economic Co-operation and

Development) - the club of the

rich countries

to have 'arrived', although that euphoria

financial crisis that engulfed

rules'

it

Korea in 1997. Since that financial

Whatever

and the

its

its

is

a story for

'free

recent problems have been, Korea's

decades have been truly spectacular.

in

It

and a half

has gone from being one of

terms of per capita income.^

exports included tungsten ore, fish and wigs

become

a high-tech

market

economic growth

resulting social transformation over the last four

and Slovenia

crisis,

high standards,

later.

the poorest countries in the world to a country

has

own

has over- enthusiastically embraced the

model. But that

itself

was badly deflated by the

the country has not been doing as well by

mainly because

- and declared

on

A

a par with Portugal

country whose main

made with human

powerhouse, exporting

stylish

hair

mobile phones

TVs coveted all over the world. Better nutrition and health care mean that a child born in Korea today can expect to live 24 years longer than someone born in the early 1960s (77 years instead and

flat-screen

of 53 years). Instead of 78 babies out of 1,000, only

five

babies will die

within a year of birth, breaking far fewer parents' hearts. In terms of these life-chance indicators, Korea's progress into Switzerland.^

How

has this 'miracle'

For most economists, the answer

succeeded because It

it

is

is

as if Haiti

had turned

been possible?

a very simple one.

Korea has

has followed the dictates of the free market.

has embraced the principles of sound

money

(low inflation),

small government, private enterprise, free trade and friendliness

towards foreign investment. The view

is

known

as

neo-liberal

economics. Neo-liberal economics

is

an updated version of the

economics of the 18th-century economist followers.

It first

economic view

emerged

in the 1960s

Adam

Smith and

his

and has been the dominant

since the 1980s. Liberal economists of the 18th

12

liberal

and the

MOZAMBIQUE

S

ECONOMIC MIRACLE

19th centuries believed that unlimited competition in the free market

was the best way to

perform with

to organise

maximum

judged harmful because

an economy, because

efficiency.

it

forces everyone

Government intervention was

reduces competitive pressure by restricting

it

the entry of the potential competitors, whether through import controls or the creation of monopolies. Neo-liberal economists support certain things that the old liberals did not

forms of monopoly (such

- most notably

as patents or the central bank's

certain

monopoly

over the issue of bank notes) and political democracy. But in general

they share the old a

enthusiasm for the

liberals'

few 'tweaks' in the wake of a whole

series

free market.

And despite

of disappointing results

of neo-liberal policies applied to developing nations during the past quarter of a century, the core neo-liberal agenda of deregulation,

and opening up of international trade and investment has remained the same since the 1980s. privatization

In relation to the developing countries, the neo-liberal agenda has

been pushed by an

alliance of rich

US and mediated by

country governments led by the

the 'Unholy Trinity' of international economic

- the International Monetary World Bank and the World Trade Organisation

organizations that they largely control

Fund (IMF), (WTO). The their

home

the rich

governments use

adopt neo-liberal

policies.

This

is

sometimes

that lobby, but usually to create an

country concerned that in general.

their aid budgets

and

access to

markets as carrots to induce the developing countries to

is

to benefit specific firms

environment

in the developing

friendly to foreign goods

The IMF and the World Bank play

and investment

their part

by attaching

to their loans the condition that the recipient countries adopt neoliberal policies.

The

WTO

contributes by

making trading

rules that

favour free trade in areas where the rich countries are stronger but

not where they are weak

(e.g.,

agriculture or textiles). These govern-

ments and international organizations are supported by an army of

Some of these people are highly trained academics who should know the limits of their free-market economics but tend to ignore them when it comes to giving policy advice (as happened especially when they advised the former communist economies in the ideologues.

1990s). Together, these various bodies

13

and individuals form

a powerful

BAD SAMARITANS propaganda machine,

money and

complex backed by

a financial-intellectual

power.

This neo-liberal establishment would have us believe that, during its

miracle years between the 1960s and the 1980s, Korea pursued a

neo-liberal

economic development strategy/ The

however, was

What Korea actually did during these decades new industries, selected by the government

very different indeed.

was

reality,

to nurture certain

in consultation with the private sector,

subsidies

through

tariff protection,

and other forms of government support

marketing information services provided by the until they 'grew up'

enough

state

overseas

(e.g.,

export agency)

to withstand international competition.

The government owned all the banks, so it could direct the life blood of business - credit. Some big projects were undertaken directly by state-owned enterprises - the

example - although

well, that

was

the government had prises (SOEs);

and

if

maker,

POSCO,

being the best

the country had a pragmatic, rather than ideo-

logical, attitude to the issue

worked

steel

of state ownership.

fine; if

they did not invest in important areas,

no qualms about

some

If private enterprises

setting

up state-owned

mismanaged, the

private enterprises were

government often took them

over, restructured

enter-

them, and usually (but

not always) sold them off again.

The Korean government

had absolute control over

also

scarce

foreign exchange (violation of foreign exchange controls could be

punished with the death penalty). designed

list

When combined

with a carefully

of priorities in the use of foreign exchange,

it

ensured

that hard-earned foreign currencies were used for importing vital

machinery and industrial inputs. The Korean government heavily controlled foreign investment as well, welcoming in certain sectors while shutting

to the evolving national

it

it

with open arms

out completely in others, according

development plan.

It

also

had

a lax attitude

towards foreign patents, encouraging 'reverse engineering' and overlooking 'pirating' of patented products.

The popular impression of Korea as a free- trade economy was created by

its

export success. But export success does not require free trade, as

Japan and China have also shown. Korean exports in the earlier period

-

things like simple garments

and cheap 14

electronics

- were

all

means

MOZAMBIQUE

ECONOMIC MIRACLE

S

hard currencies needed to pay for the advanced technoloand expensive machines that were necessary for the new, more

to earn the gies

difficult industries,

At the same time, industries

which were protected through

time to absorb

forever,

new technologies and establish new organizational capa-

they could compete in the world market.

The Korean economic miracle was the

result

of a clever and prag-

state direction.

government did not vanquish the market

as the

it

it

shield

but to give them the

matic mixture of market incentives and

However,

subsidies.

and subsidies were not there to

tariff protection

from international competition

bilities until

and

tariffs

did not have

bhnd

The Korean

communist

faith in the free

market

states did.

either.

While

took markets seriously, the Korean strategy recognized that they

often need to be corrected through pohcy intervention.

Now,

if it

was only Korea that became

policies, the free-market

rich through such 'heretical'

gurus might be able to dismiss

the exception that proves the rule. However, Korea

As

shall

I

show

later, practically all

free trade,

it

as

merely

no exception.

of today's developed countries,

including Britain and the US, the supposed

and

is

homes of the

free

market

have become rich on the basis of policy recipes that

go against the orthodoxy of neo-liberal economics. Today's rich countries used protection and subsidies, while discriminating against foreign investors

orthodoxy and

WTO

-

all

anathema

to today's

now severely restricted by multilateral

economic

treaties, like the

Agreements, and proscribed by aid donors and international

IMF and use much

World Bank). There

financial organizations (notably the

the

are a few countries that did not

protection, such as the

Netherlands and (until the

First

World War) Switzerland. But they

deviated from the orthodoxy in other ways, such as their refusal to protect patents.

The records of

today's rich countries

on

policies

regarding foreign investment, state-owned enterprises, macroeconomic

management and tions

political institutions also

show

significant devia-

from today's orthodoxy regarding these matters.

Why

then don't the rich countries recommend to today's devel-

oping countries the strategies that served them so well? instead

one

Why do

they

hand out a fiction about the history of capitalism, and a bad

at that?

15

BAD SAMARITANS German economist,

In 1841, a

Friedrich List, criticized Britain for

preaching free trade to other countries, while having achieved

economic supremacy through high

tariffs

and extensive

subsidies.

its

He

accused the British of 'kicking away the ladder' that they had climbed to reach the world's top

clever device that

he

away

kicks

economic

when anyone

the ladder

deprive others of the

position:

'[i]t is

a very

common

summit of greatness,

has attained the

by which he has climbed up,

in order to

means of climbing up after him [italics added] some people in the rich countries who

'.^

Today, there are certainly

preach free market and free trade to the poor countries in order to capture larger shares of the

latter's

markets and to pre-empt the emer-

gence of possible competitors. They are saying 'do as

we

did'

and

"^^

But what

is

Bad Samaritans do not even oping countries with their so totally re-written that

more worrying realize that

policies.

The

free

am

not as

is

that

many

who

of today's

they are hurting the devel-

history of capitalism has been

many people in the rich world do not perceive

the historical double standards involved in

I

say,

act as 'Bad Samaritans', taking advantage of others

are in trouble.

and

we

recommending

free trade

market to developing countries. not suggesting that there

somewhere

is

a sinister secret

committee

that systematically air-brushes undesirable people out of

photographs and re-writes historical accounts. However, history written by the victors and

it is

human

nature to re-interpret the past

from the point of view of the present. As have, over time, gradually,

own histories

to

if

a result, the rich countries

often sub-consciously, re-written their

make them more

selves today, rather

is

consistent with

than as they really were - in

that today people write about Renaissance

how they see themmuch the same way

'Italy' (a

country that did

not exist until 1871) or include the French-speaking Scandinavians

(Norman conqueror kings) in the hst of 'English' kings and queens. The result is that many Bad Samaritans are recommending freetrade, free-market policies to the *

The

a

man who was

original story

is

that of the

poor countries

'Good Samaritan' from the

robbed by highwaymen was helped by

a

in the honest but Bible. In that parable,

'Good Samaritan', despite

the fact that the Samaritans were stereotyped as being callous and not above taking

advantage of the others in trouble.

16

MOZAMBIQUE

ECONOMIC MIRACLE

S

mistaken belief that those are the routes their the past to

whom

become

But they are in

rich.

Samaritans

may be more

in 'kicking

away the

stubborn than

So

more

they are trying to help

fact

own

countries took in

making the

difficult.

lives

of those

Sometimes these Bad

of a problem than those knowingly engaged

ladder',

because self-righteousness

is

often

more

self-interest.

how do we

dissuade the Bad Samaritans from hurting the poor

What else should they do some answers through a mix of history, world today, some future predictions and suggestions

countries, whatever their intentions are? instead? This analysis of the

book

offers

for change.

The

place to start

which

ization,

I

with a true history of capitalism and global-

is

examine

In these chapters,

I

will

in the next

show how many

have accepted as 'historical Britain

and the US

two chapters (chapters

facts' are either

are not the

i

and

things that the reader

homes of free

wrong or

2).

may

partial truths.

trade; in fact, for a long

time they were the most protectionist countries in the world. Not

all

countries have succeeded through protection and subsidies, but few

have done so without them. For developing countries, free trade has rarely

been a matter of choice;

outside,

it

was often an imposition from

sometimes even through military power. Most of them did

very poorly under free trade; they did protection and subsidies.

much

better

when

they used

The best-performing economies have been

those that opened up their economies selectively and gradually. Neoliberal free-trade free-market policy claims to sacrifice equity for

growth, but in fact the past two

and

achieves neither; growth has slowed

it

a half decades

when markets were

freed

down

in

and borders

opened. In the

main chapters of the book

ters (chapters 3 to 9),

I

deploy a mixture of economic theory, history

and contemporary evidence about development on

that follow the historical chap-

its

to turn

much of the conventional wisdom

head.

•

Free trade reduces freedom of choice for poor countries.

•

Keeping foreign companies out may be good for them long run.

17

in the

BAD SAMARITANS •

•

•

Investing in a

that

is

going to make a loss for 17 years

may be an excellent proposition. Some of the world's best firms are owned and run by 'Borrowing' ideas from for

•

company

more productive

foreigners

is

the state. essential

economic development.

Low

inflation

and government prudence may be harmful

for

economic development. too much, not too

•

Corruption

•

Free market and democracy are not natural partners.

•

Countries are poor not because their people are are 'lazy'

exists

because there

is

little,

market.

lazy; their

people

because they are poor.

Like this opening chapter, the closing chapter of the

with an alternative 'future history' - but

this

book opens

time a very bleak one.

The scenario is deliberately pessimistic, but it is firmly rooted in reality, showing how

close

we

are to such a future, should

the neo-liberal policies propagated by the

of the chapter,

I

present

policy alternatives that

guide our action

if

we

believe

book -

Bad Samaritans. In the

rest

some key principles, distilled from the detailed I

discuss throughout the book,

which should

are to enable developing countries to advance

their economies. Despite

fore the

we continue with

its

bleak scenario, the chapter - and there-

closes with a note of optimism, explaining

most Bad Samaritans can be changed and

really

made

developing countries improve their economic situations.

18

why

I

to help

CHAPTER The Lexus and

1

the oHve

tree revisited

Myths and facts about

Once upon exported

maker of

a time, the leading car

its first

globalization

passenger cars to the US.

Up

a developing country to that day, the

little

company had only made shoddy products - poor copies of quality items made by richer countries. The car was nothing too sophisticated

- just

and an

a

cheap subcompact (one could have called

ashtray').

exporters

felt

But

it

was

moment

a big

family car that

came from

disaster led to a

major debate among the country's

biggest export item

was

silk. If

US

market. This

the car

ensured high profits for

at

it

even gave public

the country's

to succeed.

in the car industry.

had

money to

critics

save the

Fewer than ten

company from immi-

argued, foreign cars should

now be

and foreign car makers, who had been kicked out 20

before, allowed to set

It

home through high tariffs and draconian

on foreign investment

nent bankruptcy. So, the

original

company could not make good was no future for it. The govern-

maker every opportunity it

all,

its

the

cars after 25 years of trying, there

ment had given

a

citizens.

argued that the company should have stuck to

business of making simple textile machinery. After

in freely

money on

where only second-rate products

a place

were made. The car had to be withdrawn from the

years ago,

its

Most thought the little car looked

lousy and savvy buyers were reluctant to spend serious

controls

and

proud.

Unfortunately, the product failed.

Many

'four wheels

it

for the country

up shop

let

years

again.

Others disagreed. They argued that no country had got anywhere

without developing

'serious' industries like

19

automobile production.

BAD SAMARITANS They

just

needed more time

The year was

make

a manufacturer of textile

The company

machinery (Toyoda Automatic Loom) and

out General Motors and Ford in the central

in fact, Japan.

called the Toyopet. Toyota started out as

into car production in 1933.

money from

cars that appealed to everyone.

and the country was,

1958

was Toyota, and the car was

moved

to

The Japanese government kicked 1939 and bailed out Toyota with

bank (Bank of Japan)

cars are considered as 'natural' as Scottish

in 1949. Today, Japanese

salmon or French wine, but

fewer than 50 years ago, most people, including many Japanese, thought the Japanese car industry simply should not exist.

Half a century

after the

Toyopet debacle, Toyota's luxury brand

Lexus has become something of an icon for globalization, thanks to the

American

the Olive Tree.

journalist

Thomas Friedman's book. The Lexus and

The book owes

its title

to

an epiphany that Friedman

had on the Shinkansen

bullet train during his trip to Japan in 1992.

He had

Lexus factory, which mightily impressed him.

On

paid a

came

visit to a

back from the car factory in Toyota City to Tokyo, he

his train

across yet another newspaper article about the troubles in the

Middle East where he had been a long-time correspondent. Then hit

him.

He

on building

realized that that 'half the

world seemed to be

.

.

intent

a better Lexus, dedicated to modernizing, streamlining,

and privatizing globalization.

economies

their

in order to thrive in the system of

And half of the world - sometimes half the same country,

sometimes half the same person - was

who owns which

olive

still

economic

caught up in the fight over

tree'.^

According to Friedman, unless they ular set of

.

it

policies that

he

themselves into a partic-

fit

calls

the Golden Straitjacket,

countries in the olive-tree world will not be able to join the Lexus

world. In describing the Golden Straitjacket, he pretty today's neo-liberal

economic orthodoxy:

much sums up

in order to

fit

into

it,

a

country needs to privatize state-owned enterprises, maintain low inflation, (if

reduce the

size

of government bureaucracy, balance the budget

not running a surplus), liberalize trade, deregulate foreign invest-

ment, deregulate capital markets, make the currency convertible, reduce corruption and privatize pensions.^ According to him, this the only path to success in the

new 20

is

global economy. His Straitjacket

THE LEXUS AND THE OLIVE TREE REVISITED is

the only gear suitable for the harsh but exhilarating

ization.

Friedman

Straitjacket

is

categorical:

is

pretty

much "one-size

or gentle or comfortable. But

it's

game of global-

'Unfortunately, fits all"

here and

...

it's

It is

Golden

this

not always pretty

the only

model on the

rack this historical season.'^

However, the

fact

is

that,

had the Japanese government followed

the free-trade economists back in the early 1960s, there

been no Lexus. Toyota today would,

at best,

would have

be a junior partner to

some western car manufacturer, or worse, have been wiped out. The same would have been true for the entire Japanese economy. Had the country donned Friedman's Golden Straitjacket early on, Japan would have remained the third-rate industrial power that

it

was

in the 1960s,

with its income level on a par with Chile, Argentina and South Africa^ - it was then a country whose prime minister was insultingly dismissed as

'a

transistor-radio salesman'

Gaulle.5 In other words,

Japanese would over

now

by the French president, Charles De

had they followed Friedman's

not be exporting the Lexus but

who owns which mulberry

The Our Toyota

still

advice, the

be fighting

tree.

official history

of globaHzation

story suggests that there

is

something spectacularly

jarring in the fable of globalization

promoted by Thomas Friedman

and

you what

tell its

his colleagues. In order to tell

you what

I

call

the

'official

it is

exactly,

I

need to

history of globalization' and discuss

limitations.

According to

this history, globalization has progressed over the last

three centuries in the following way:^ Britain adopted free- market

and

free-trade policies in the 18th century, well ahead of other countries.

By the middle of the

19th century, the superiority of these policies

became so obvious, thanks

to Britain's spectacular

that other countries started liberalizing their trade their

domestic economies. This

liberal

economic

success,

and deregulating

world order, perfected around

1870 under British hegemony, was based on: laissez-faire industrial policies at

home; low

barriers to the international flows of goods, capital

21

BAD SAMARITANS and labour; and macroeconomic tionally,

stability,

both nationally and interna-

guaranteed by the principles of sound

money

(low inflation)

A period of unprecedented prosperity followed.

and balanced budgets.

Unfortunately, things started to go

wrong

after the First

World

War. In response to the ensuing instability of the world economy, countries unwisely began to erect trade barriers again. In 1930, the

abandoned Countries

free trade

like

and enacted the infamous Smoot-Hawley

Germany and Japan abandoned and created

erected high trade barriers

associated with their fascism

pion of

free trade,

The

and then, of the

succumbed

when

the Second

first liberal

a

and

and

itself

instability in the

free

cham-

re-introduced

world economy,

World War, destroyed the

last

remnants

world order.

After the Second

on

Britain, hitherto the

to temptation

resulting contraction

finally,

and

liberal policies

which were intimately

and external aggression. The world

trade system finally ended in 1932,

tariffs.

cartels,

US

tariff.

World War, the world economy was re-organized

more liberal Une, this time under American hegemony. In parsome significant progress was made in trade liberalization

ticular,

among the rich countries through the early GATT on Trade and

persisted in

still

communist

most developing countries and, needless

Fortunately, illiberal policies have been largely

1970s, the failures of so-called

in developing countries

*

The

starts

state intervention

to say, in the

countries.

world since the 1980s following the

tion

(General Agreement

But protectionism and

Tariffs) talks.

rise

abandoned across the

of neo-liberalism. By the

import substitution industrialization

- based on

- had become too obvious

protection, subsidies

to ignore,"^

The economic

idea behind import substitution industrialization

producing industrial products that

it

is

that a

and

artificially

backward country

used to import, thereby 'substituting'

expensive by means of

imports, or subsidies to domestic producers.

American countries

in the 1930s.

(ISI)

regula-

'miracle' in

imported industrial products with domestically produced equivalents. This

by making imports

late

The

strategy

tariffs

is

achieved

and quotas against

was adopted by many Latin

At the time, most other developing countries were

not in a position to practise the ISI strategy, as they were either colonies or subject to 'unequal treaties' that deprived

The

ISI strategy

them of the

right to set their

own tariffs

was adopted by most other developing countries

independence between the mid-i940s and the mid-1960s.

22

(see below).

after they

gained

THE LEXUS AND THE OLIVE TREE REVISITED East Asia, which was already practising free trade

investment, was a wake- up

call for

and welcoming foreign

the other developing countries. After

World debt crisis, many developing countries abandoned interventionism and protectionism, and embraced neo-liberalism. The the 1982 Third

crowning glory of

communism

this

trend towards global integration was the

of

fall

in 1989.

These national policy changes were made

all

the

more necessary

by the unprecedented acceleration

in the development of transport and communications technologies. With these developments, the

possibilities of entering mutually beneficial economic arrangements with partners in faraway countries - through international trade and

investment - increased dramatically. This has

more

made openness an even

crucial determinant of a country's prosperity than before.

Reflecting the deepening global

economic

integration, the global

governance system has recently been strengthened. Most importantly, in

the

1995

GATT

was upgraded

to

WTO

the

(World Trade

Organisation), a powerful agency pushing for liberalization not just in trade but also in other areas, like foreign investment regulation intellectual

global

property

economic

(International

finance

- and

The

rights.

governance

WTO

now forms

system,

together

and

the core of the

with

the

IMF

Monetary Fund) - in charge of access to short-term World Bank - in charge of longer-term investments.

the

The result of all these developments, according to the official history, is

a globalized

tial

world economy comparable in

its

liberality

and poten-

for prosperity only to the earlier 'golden age' of liberalism

(1870-1913). Renato Ruggiero, the first director-general of the

solemnly declared

now have 'the of the next

but a

consequence of

that, as a

this

order,

we

potential for eradicating global poverty in the early part

[21st]

century - a Utopian notion even a few decades ago,

real possibility today.'^

This version of the history of globaUzation is

new world

WTO,

supposed to be the route

map

for

is

widely accepted.

pohcy makers

countries towards prosperity. Unfortunately,

it

It

in steering their

paints a fiandamentally

misleading picture, distorting our understanding of where

we have

now and where we may be heading

for. Let's

come from, where we see

are

how. 23

BAD SAMARITANS

The On

Hong Kong was

30 June 1997,

of globahzation

real history

officially

handed back

Many

British governor, Christopher Patten.

its last

about the

tators fretted

fate

Hong

of

China by

to

British

commen-

Kong's democracy under the

Hong

Chinese Communist Party, although democratic elections in

Kong had only been permitted

as late as 1994, 152 years after the start

of British rule and only three years before the planned hand-over. But

no one seems

to

possession in the

remember how Hong Kong came

to

be a British

first place.

Hong Kong became in 1842, the result of the

a British colony after the Treaty of

Opium War.

Nanking

This was a particularly shameful

The

episode, even by the standards of 19th-century imperialism.

growing British

taste for tea

had created a huge trade

with

deficit

China. In a desperate attempt to plug the gap, Britain started exporting

opium produced in was

India to China.

The mere

China could not possibly be allowed

illegal in

noble cause of balancing the books.

an

illicit

cargo of

excuse to

fix

opium

in 1841, the British

in the

Nanking, which made China

up

its

right to set

So there

and

the problem once

was heavily defeated

it

its

When

own

for

all

to obstruct the

a Chinese official seized

government used

as

it

an

by declaring war. China

war and forced 'lease'

opium

detail that selling

to sign the Treaty of

Hong Kong

to Britain

and

give

tariffs.

was - the self-proclaimed leader of the

'liberal'

world

on another country because the latter was getting in way of its illegal trade in narcotics. The truth is that the free movement of goods, people, and money that developed under British hegemony between 1870 and 1913 - the first episode of globahzation - was made possible, in large part, by military might, rather than declaring war the

market

forces.

during

this

into, rather

Apart from Britain

itself,

the practitioners of free trade

period were mostly weaker countries that had been forced

than had voluntarily adopted,

rule or 'unequal treaties' (like the

other things, deprived

them of

it

Nanking

as a result of colonial

Treaty), which,

among

the right to set tariffs and imposed

externally determined low, flat-rate tariffs (3-5%)

24

on them.^

THE LEXUS AND THE OLIVE TREE REVISITED Despite their key role in promoting early 20th centuries, colonialism

mention

'free'

treaties

in the hordes of pro-globalisation books.^

explicitly discussed, their role

is

and

trade in the late 19th

and unequal

hardly get any

Even when they are

seen as positive on the whole. For

example, in his acclaimed book. Empire, the British historian Niall

Ferguson honestly notes including the

good thing trade,

rule

Opium

overall

of the misdeeds of the British empire,

War, but contends that the British empire was a

it

was arguably the cheapest way

to guarantee free

which benefits everyone/^ However, the countries under colonial

and unequal

capita

-

many

income

that in Africa

treaties

did very poorly. Between 1870 and

in Asia (excluding Japan)

grew

at

0.6% per

year.^^

grew

at

0.4% per

The corresponding

1.3% for Western Europe and 1.8% per year for the USA.^^ larly interesting to

1913,

per

year,

while

figures

were

It is

particu-

note that the Latin American countries, which by that

time had regained tariff autonomy and were boasting some of the highest tariffs in

the world, grew as fast as the

While they were imposing

US

free trade

did during this period. ^^

on weaker nations through

colonialism and unequal treaties, rich countries maintained rather

high

tariffs,

especially industrial tariffs, for themselves, as

in greater detail in the next chapter.

home it

we

will see

To begin with, Britain, the supposed

of free trade, was one of the most protectionist countries until

converted to free trade in the mid- 19th century. There was a brief

period during the 1860s and the 1870s free trade did exist in

However,

this

when something approaching

Europe, especially with zero

tariffs in Britain.

proved short-lived. From the 1880s, most European

countries raised protective barriers again, partly to protect their

New World and

partly

industries, such as steel,

chem-

farmers from cheap food imported from the to

promote

icals

their

newly emerging heavy

and machinery.^4

architect of the first

re-introduced

Finally,

wave of

tariffs in 1932.

even Britain, as

globalization,

The

I

have noted, the chief

abandoned

free trade

official history describes this

Britain 'succumbing to the temptation of protectionism. But cally fails to

mention

that this

economic supremacy, which

in

was due

and

event as it

typi-

to the decline in British

turn was the

result of the success of

protectionism on the part of competitor countries, especially the USA, in developing their

own new

industries.

25

BAD SAMARITANS Thus, the history of the

first

globaUzation in the

late 19th

20th centuries has been rewritten today in order to neo-liberal orthodoxy.

countries

is

The

and

early

the current

fit

history of protectionism in today's rich

vastly underplayed, while the imperialist origin of the

high degree of global integration on the part of today's developing countries

on the

is

hardly ever mentioned. The final curtain coming

episode -

that

is,

Britain's

presented in a biased way.

made

abandon

Britain

protectionism by

its

It is

abandonment of

mentioned that what

rarely

was

free trade

free

trade -

down is

also

really

precisely the successful use of

competitors.

Neo-liberals vs neo-idiotics? In the official history of globalization, the early post-Second-World-

War period is portrayed as

a period of incomplete globalization.

among

there was a significant increase in integration tries,

accelerating their growth,

it is

said,

refused to fully participate in the global

While

the rich coun-

most developing countries

economy

until the 1980s, thus

holding themselves back from economic progress. This story misrepresents the process of globalization rich countries during this period.

lower their

tariff barriers

this period,

promote research

ment

between the 1950s and the

they also used

their

among

the

These countries did significantly

many

1970s.

But during

other nationalistic policies to

own economic development - subsidies

and development, or R8cD), state-owned

(especially for

enterprises, govern-

direction of banking credits, capital controls

and so on.

When

they started implementing neo-liberal programmes, their growth decelerated. In the 1960s

and the

1970s, per capita

countries grew by 3.2% a year, but to 2.1% in the next

its

growth

fell

in the rich

substantially

two decades. ^^

But more misleading

is

the portrayal of the experiences of devel-

oping countries. The postwar period historians of globalization as an era of countries. This

income

rate

is

described by the official

economic

disasters in these

was because, they argue, these countries believed

'wrong' economic theories that

made them 26

in

think they could defy

THE LEXUS AND THE OLIVE TREE REVISITED market

good

As

logic.

a result, they suppressed activities

which they were

mineral extraction and labour-intensive manu-

at (agriculture,

and promoted 'white elephant' projects that made them proud but were economic nonsense - the most notorious example

facturing) feel

of this

Indonesia producing heavily subsidized

is

The

aeroplanes.

right to 'asymmetric protection' that the developing countries

secured in 1964 at the

which

jet

to

GATT

is

portrayed as 'the proverbial rope on

hang one's own economy!',

Sachs and

in a

Andrew Warner. ^^ Gustavo

well-known

article

by

Jeffrey

Franco, a former president of

bank (1997-99), made the same point more when he said his policy objective was 'to of stupidity' and that the only choice was 'to be

the Brazilian central succinctly, if

undo

more

forty years

crudely,

neo-liberal or neo-idiotic'.^^

The problem with

this interpretation

is

the developing countries weren't so bad at the 1970s,

when they were pursuing

that the 'bad old days' in all.

During the 1960s and

the 'wrong' policies of protec-

tionism and state intervention, per capita income in the developing countries grew by 3.0% annually.^^ As Ajit

my esteemed colleague Professor

Singh once pointed out, this was the period of 'Industrial

huge improve-

Revolution in the Third World'.^^ This growth rate

is

ment over what they achieved under

during the 'age of

free trade

a

imperialism' (see above) and compares favourably with the 1-1.5%

achieved by the rich countries during the Industrial Revolution in the 19th century.

It

also

remains the best that they have ever recorded.

Since the 1980s, after they implemented neo-liberal policies, they grew at

only about half the speed seen in the 1960s and the 1970s (1.7%).

Growth slowed down was

less

in the rich countries too, but the

slowdown

marked (from 3.2% to 2.1%), not least because they did not

introduce neo-liberal policies to the same extent as the developing countries did.

The average growth

rate of developing countries in this

we exclude China and India. These two countries, which accounted for 12% of total developing country income in 1980 and 30% in 2000, have so far refused to put on Thomas

period would be even lower

if

Friedman's Golden Straitjacket.^°

Growth and

Africa,

failure has

been particularly noticeable in Latin America

where neo-liberal programmes were implemented more 27

BAD SAMARITANS thoroughly than in Asia. In the 1960s and the 1970s, per capita income in Latin

America was growing

developing country average.

faster

than the

was growing almost

as

the continent embraced neo-liberalism, Latin America has been

growing if

3.1% per year, shghtly

the East Asian 'miracle' economies. Since the 1980s, however,

fast as

when

at

Brazil, especially,

than one-third of the rate of the 'bad old

at less

we discount

the 1980s as a decade of adjustment

days'.

and take

it

Even

out of

the equation, per capita income in the region during the 1990s grew

of the 'bad old days' (3.1% vs 1.7%). Between

at basically half the rate

2000 and 2005, the region has done even worse; with per capita income growing its

at

it

only 0.6% per

virtually stood year.^^

As

still,

for Africa,

per capita income grew relatively slowly even in the 1960s and the

1970s (1-2% a year). But since the 1980s, the region has seen a fall in living standards. This record

is

a

damning indictment of

the neo-

orthodoxy, because most of the African economies have been

liberal

practically

run by the

IMF and

the

World Bank over the

past quarter

of a century.

The poor growth record of neo-liberal globahzation since the 1980s is particularly embarrassing. Accelerating growth - if necessary at the cost of increasing inequality and possibly some increase in poverty was the proclaimed goal of neo-liberal reform.

We

have been repeat-

we first have to 'create more wealth' before we can distribute it more widely and that neo-liberalism was the way to do that. As a result of neo-liberal policies, income inequality has edly told that

increased in most countries as predicted, but growth has actually

slowed

down

significantly.^^

Moreover, economic instability has markedly increased during the period of neo-liberal dominance. The world, especially the developing world, has seen

more frequent and

larger-scale financial crises since

the 1980s. In other words, neo-liberal globalization has failed to deliver

on

all

this,

fronts of

we

economic

life

are constantly told

- growth,

how

equality

and

stability.

Despite

neo-liberal globalization has brought

unprecedented benefits.

The

distortion of facts in the official history of globalization

evident at country

level.

us believe, virtually

all

is

also

Contrary to what the orthodoxy would have

the successful developing countries since the

28

THE LEXUS AND THE OLIVE TREE REVISITED Second World War

initially

succeeded through nationalistic policies,

using protection, subsidies and other forms of government intervention. I

have already discussed the case of my native Korea in some detail

in the Prologue, but other 'miracle'

economies of East Asia have

also

succeeded through a strategic approach to integration with the global

economy. Taiwan used a strategy that although

it

somewhat

is

very similar to that of Korea,

used state-owned enterprises more extensively while being

Korea was. Singapore

friendlier to foreign investors than

has had free trade and relied heavily on foreign investment, but, even so,

does not conform in other respects to the neo-liberal

it

Though

it

welcomed

foreign investors,

it

ideal.

used considerable subsidies

in order to attract transnational corporations in industries

it

consid-

ered strategic, especially in the form of government investment in infrastructure

Moreover,

and education targeted

particular

at

industries.

has one of the largest state-owned enterprise sectors in

it

the world, including the Housing Development Board, which supplies

85% of all housing (almost all land is owned by the government). Hong Kong is the exception that proves the rule. It became rich despite having free trade

and a

laissez-faire industrial policy.

never was an independent state (not even a city state

but a city within a bigger

used as a platform for Asia. Today, facts

made

it is

it

entity. Until 1997,

Britain's trading

less

necessary for

manufacturing output per capita it

was not

started

and

like

was a

it

Singapore)

British colony

financial interests in

the financial centre of the Chinese economy. These

Hong Kong

industrial base, although, even so,

when

it

But

its full

a total free

it

to have

an independent

was producing twice

as that of

as

much

Korea until the mid-1980s,

absorption into China. But even

market economy. Most importantly,

Hong Kong all

land was

owned by the government in order to control the housing situation. The more recent economic success stories of China, and increasingly India, are also examples that show the importance of strategic, rather than unconditional, integration with the global economy based on a nationalistic vision. Like the US in the mid-i9th century, or Japan and Korea

up

its

in the

mid-20th century, China used high

industrial base. Right

up

tariffs to

build

to the 1990s, China's average tariff

29

was

BAD SAMARITANS over 30%. Admittedly,

it

ment than Japan or Korea ship ceilings

and

were. But

it still

to foreign invest-

imposed foreign owner-

local contents requirements (the requirements that

buy

the foreign firms

more welcoming

has been

at least a certain

proportion of their inputs from

local suppliers). India's recent

globalizers to

its

economic success trade

and

As some recent research really

began

is

often attributed by the pro-

financial liberalization in the early 1990s.

reveals,

however, India's growth acceleration

in the 1980s, discrediting the simple 'greater

openness

accelerates growth' story. ^^ Moreover, even after the early 1990s trade liberalization, India's average

30%

25%

(it is still

manufacturing

tariffs

remained

at

above

today). India's protectionism before the 1990s

certainly over-done in

some

sectors.

would have been even more

But

successful

this

had

is it

was

not to say that India

adopted

free trade at

independence in 1947. India has also imposed severe restrictions on foreign direct investment

- entry restrictions, ownership

various performance requirements

The one country

(e.g., local

Chile adopted the strategy before anyone Britain, following the coup d'etat

in 1973. Since then, Chile has

contents requirements).

else,

Chile. Indeed,

is

including the

US and

by General Augusto Pinochet back quite well - although nowhere

grown

And the

nearly as fast as the East Asian 'miracle' economies.^^

has been constantly cited as a neo-liberal success story. undeniable. But even Chile's story

is

and

that seems to have succeeded in the postwar

globaUzation period by using the neo-liberal strategy

performance

restrictions

Its

is

country

good growth

more complex

than the orthodoxy suggests.

experiment with neo-liberalism, led by the so-called

Chile's early

Chicago Boys

(a

group of Chilean economists trained

at the University

of Chicago, one of the centres of neo-liberal economics), was a It

ended

in a terrible financial crash in 1982,

which had

disaster.

to be resolved

by the nationalization of the whole banking sector. Thanks

to this crash,

the country recovered the pre-Pinochet level of income only in the i98os.^5 after

ii

^as only when

Chile's neo-liberalism got

the crash that the country started doing

government provided exporters with a

and R8cD.^^

It

also

lot

well.

late

more pragmatic For example, the

of help in overseas marketing

used capital controls in the 1990s to successfully

30

THE LEXUS AND THE OLIVE TREE REVISITED reduce the inflow of short-term speculative funds, although free trade

them

ability

US

agreement with the

again.

More

has forced

importantly, there

is

it

to

its

recent

promise never to use

a lot of doubt about the sustain-

of Chile's development. Over the past three decades, the country

has lost a lot of manufacturing industries and become excessively

dependent on natural-resources-based exports. Not having the technological capabilities to

move

into higher-productivity activities, Chile

faces a clear limit to the level of prosperity

To sum

opposite of the alization

it

can attain in the long run.

up, the truth of post-1945 globalization official history.

underpinned by

is

almost the polar

During the period of controlled glob-

nationalistic poHcies

between the 1950s and

the 1970s, the world economy, especially in the developing world, was

growing

faster,

was more

stable

distribution than in the past

and had more equitable income

two and

a half decades of rapid

and

uncontrolled neo-liberal globalization. Nevertheless, this period portrayed in the

official history as a

one of unmitigated

is

disaster of

nationalistic policies, especially in developing countries. This distor-

tion of the historical record

is

peddled in order to mask the

failure

of neo-liberal policies.

Who's running the world economy? Much

of what happens in the global economy

rich countries, without even trying.

output, conduct

70%

is

They account

determined by the for

of international trade and

80%

of world

make 70-90%

(depending on the year) of all foreign direct investments. ^7 xhis means that their national policies can strongly influence the world

But more important than their sheer weight

is

economy.

the rich countries'

willingness to throw that very weight about in shaping the rules of

the global economy. For example, developed countries induce poorer

countries to adopt particular poUcies by their foreign aid or

by offering them

making them

a condition for

preferential trade agreements in

return for good behaviour' (adoption of neo-liberal policies). Even

more important

in shaping options for developing countries, however,

are the actions of multilateral organizations such as the 'Unholy Trinity'

31

BAD SAMARITANS - namely

the IMF, the

Organisation). tries,

the

tries

Though they

Unholy

so they devise

World Bank and the

WTO

(World Trade

are not merely puppets of the rich coun-

Trinity are largely controlled

and implement Bad Samaritan

by the rich countries,

policies that those

coun-

want.

The IMF and

the

World Bank were

originally set

conference between the Allied forces (essentially the

up

in 1944 at a

US and

Britain),

which worked out the shape of postwar international economic governance. This conference was held in the

New Hampshire

resort of

Bretton Woods, so these agencies are sometimes collectively called the Bretton

money

Woods

Institutions (BWIs).

The IMF was

payments

to countries in balance of

set

up

to lend

they can

crises so that

reduce their balance of payments deficits without having to resort to deflation.

The World Bank was

up

set

to help the reconstruction of

war-torn countries in Europe and the economic development of the post-colonial societies that were about to emerge officially

called

the International

Development. This was supposed to infrastructure development

- which

is

why

it is

Bank for Reconstruction and be done by financing projects in

roads, bridges, dams).

(e.g.,

Following the Third World debt

crisis

of 1982, the roles of both

IMF and the World Bank changed dramatically. They exert a much stronger policy influence on developing

the

started to

countries

through their joint operation of so-called structural adjustment

programmes (SAPs). These programmes covered of pohcies than what the Bretton

been mandated all

areas of

to do.

like

much wider

Institutions

had

The BWIs now got deeply involved

economic policy

out into areas

Woods

a

in the developing world.

government budgets,

cultural pricing, labour

range

originally

in virtually

They branched

industrial regulation, agri-

market regulation, privatization and so on.

In the 1990s, there was a further advance in this 'mission creep' as

they started attaching so-called governance conditionalities to their loans.

These involved intervention in hitherto unthinkable

areas, like

democracy, government decentralization, central bank independence

and corporate governance. This mission creep raises a serious issue. The World Bank and the

IMF

initially started

with rather limited mandates. Subsequently, they

32

THE LEXUS AND THE OLIVE TREE REVISITED argued that they have to intervene in new areas outside their original mandates, as they, too,

economic performance,

affect

a failure in

which

money from them. However, on this of our Hfe in which the BWIs cannot inter-

has driven countries to borrow reasoning, there

is

no area

vene. Everything that goes

on

economic performance. By

this logic, the

in a

country has implications for

IMF and

should be able to impose conditionalities on everything from

and gender

decisions, ethnic integration

me wrong. I am

Don't get

fertility

equality, to cultural values.

not one of those people

loan conditionalities on principle.

its

World Bank

the

who

are against

reasonable for the lender to

It is

attach conditions. But conditions should be confined to only those

most relevant

aspects that are

may

the lender

Suppose

my

bank

intrude in

am

I

to repay.

repayment of the loan. Otherwise,

aspects of the borrower's

a small businessman trying to

in order to

bank manager

all

to the

to

expand

impose a

my

factory.

might even be reasonable for him

It

I

can buy in expanding

condition that

cut

I

down on my

my

fat

I

by making even to

on how

to

for

am

I

my

going

impose conditions

can use and what kind of

factory. But, if

intake

my

evant) grounds that a fatty diet reduces

Of course,

would be natural

unilateral condition

on what kind of construction materials machinery

It

life.

borrow money from

he attaches the

on the (not ability to

totally irrel-

repay the loan

me unhealthy, I would find this unreasonably intrusive. am really desperate, I may swallow my pride and agree

if I

this

unreasonable condition. But

condition that

I

when he makes

it

a further

spend less than an hour a day at home (on the grounds

that spending less time with the family will increase

able for business

my

and therefore reduce the chance of loan

would probably punch him

in the face

time

avail-

default),

and storm out of the bank.

I

It

not that my my ability to manage my business. As my bank manager reasons, they diet and family

is

are relevant. But the point

is

life

have no bearings whatsoever on

that their relevance

is

indirect

and

marginal. In the beginning, the to the

IMF

only imposed conditions closely related

borrower country's management of

its

balance of payments,

started putting conditions

such as currency devaluation. But then

it

on government budgets on the grounds

that budget deficits are a key

33

BAD SAMARITANS cause of balance of payments problems. This led to the imposition of conditions like the privatization of state-owned enterprises, because it

made by those enterprises were an imporbudget deficits in many developing countries. Once

was argued that the

tant source of

losses

such an extension of logic began, there was no stopping. Since everything

related to everything else, anything could be a condition. In

is

IMF

1997, in Korea, for example, the

amount of debt

that private sector

laid

down

conditions

on the

companies could have, on the

grounds that over-borrowing by these companies was the main reason for Korea's financial crisis.

To add

demand,

insult to injury, the

borrowing country be made to adopt

do with

to

rich nations often

as a condition for their financial contribution to

ages, that the little

Bad Samaritan

fixing

its

economy but

IMF

pack-

policies that have

that serve the interests of the

money. For example, on seeing Korea s 1997 agreement with the IMF, one outraged observer commented: 'Several rich countries lending the

features of the

IMF

plan are replays of the policies that Japan and the

United States have long been trying to get Korea to adopt. These included accelerating the

.

.

.

reductions of trade barriers to specific

Japanese products and opening capital markets so that foreign investors

can have majority ownership of Korean firms, engage in hostile takeovers

.

.

.

,

and expand

financial services.

direct participation in

imports and more foreign ownership could

economy, Koreans and others saw to force

Korea

policies

it

at a

this ... as

.

.

.

help the Korean

an abuse of

IMF power

time of weakness to accept trade and investment

had previously

capitalist anarchist

economist

banking and other

Although greater competition from manufactured

rejected'.^^

This was said not by some anti-

but by Martin Feldstein, the conservative Harvard

who was

the key economic advisor to Ronald Reagan in

the 1980s.

The IMF-World Bank mission conditionalities

ceptable

when

creep,

combined with the abuse of

by the Bad Samaritan nations, the policies of the Bretton

is

Woods

particularly unacInstitutions have

produced slower growth, more unequal income distribution and greater

economic

instability in

most developing countries,

out earlier in this chapter.

34

as

I

pointed

THE LEXUS AND THE OLIVE TREE REVISITED

How on

earth can the

in pursuing the

This

is

wrong

IMF and

the

World Bank

persist for so

long

produce such poor outcomes?

policies that

because their governance structure severely biases them towards

the interests of the rich countries. Their decisions are

made

basically

according to the share capital that a country has (in other words, they

have a one-dollar-one-vote system). This means that the rich countries,

which

collectively control

60%

of the voting shares, have an

absolute control over their policies, while the in relation to decisions in the 18

US

most important

has a de facto veto areas.^^

One result of this governance structure is that the World Bank and the IMF have imposed on developing countries standard policy packages that are considered to be universally valid by the rich countries, rather than policies that are carefully designed for each particular

developing country - predictably producing poor results as a consequence. Another result priate, they

is

that,

even

when their policies may be appro-

have often failed because they are resisted by the locals as

impositions from outside. In response to

mounting

criticisms, the

World Bank and the IMF

have recently reacted in a number of ways.

On

the one hand, there

have been some window-dressing moves. Thus the

IMF now

calls

the

Programme the Poverty Reduction and Growth show that it cares about poverty issues, though the contents of the programme have hardly changed from before. On the other hand, there have been some genuine efforts to Structural Adjustment Facility

Programme,

open dialogues with engagement with

in order to

a

wider constituency, especially the World Bank's

NGOs

(non-governmental organizations). But the

impacts of such consultation are increasing

numbers of

NGOs

at best marginal.

Moreover,

funded by the World Bank, the value of such an exercise

more

when

in developing countries are indirectly is

becoming

doubtful.

The IMF and

the

World Bank have

also tried to increase the local

ownership of their programmes by involving local people in Fiowever, this has borne few

fruits.

Many

intellectual resources to argue against

tions with an

army of highly

their design.

developing countries lack the

powerful international organiza-

trained economists and a lot of financial

clout behind them. Moreover, the

World Bank and the IMF have taken 35

BAD SAMARITANS what

I

the 'Henry Ford approach to diversity (he once said that a

call

customer could have a car painted any colour

The range of local

long as

... so

it's

black').

variation in policies that they find acceptable

is

very

narrow. Also, with the increasing tendency for developing countries to or appoint ex- World

elect

Bank or ex-IMF

key economic

officials to

posts, 'local' solutions are increasingly resembling the solutions

by the Bretton Woods

provided

Institutions.

Completing the Unholy

Trinity, the

World Trade Organisation was

launched in 1995, following the conclusion of the so-called Uruguay

Round of

the

GATT

talks.

I

what the

will discuss the substance of

WTO does in greater detail in later chapters, so here let me focus just on

its

governance structure.

The World Trade Organisation has been

Many

grounds.

believe that

it

the developed countries pry that

it

has

is little

criticized

more than

on

a

number of

a tool with

which

open developing markets. Others argue

become a vehicle for furthering the interests of transnational

corporations. There are elements of truth in both of these criticisms, as

I

will

show

in later chapters.

But, despite these criticisms, the World Trade Organisation

is

an inter-

whose running the developing countries have Unlike the IMF or the World Bank, it is 'democratic' -

national organization in the greatest

say.

in the sense

of allowing one country one vote (of course,

whether giving China, with

1.3

billion people,

we can

debate

and Luxembourg, with

fewer than half a million people, one vote each

is

really 'democratic').

And, unlike in the UN, where the five permanent members of the Security Council have veto power, no country has a veto in the

WTO.

Since they

have the numerical advantage, the developing countries count in the

far

more

WTO than they do in the IMF or the World Bank.

Unfortunately, in practice, votes are never taken, and the organization

is

essentially

of rich countries.

(Geneva 1998,

run by an oligarchy comprising a small number

It is

reported that, in various ministerial meetings

Seattle 1999,

Doha

2001,

Cancun

2003),

ant negotiations were held in the so-called Green invitation- only' basis.

Only the

rich

invited. Especially

(e.g.,

a 'by-

some

large

India and Brazil)

during the 1999 Seattle meeting, 36

the import-

Rooms on

countries and

developing countries that they cannot ignore

were

all

it

was reported

THE LEXUS AND THE OLIVE TREE REVISITED that

some developing country

Rooms without

delegates

who

invitations were physically

Green

tried to get into

thrown

out.

But even without such extreme measures, the decisions are to be biased towards the rich countries.

likely

They can threaten and bribe

developing countries by means of their foreign aid budgets or using their influence

on the loan decisions by the IMF, the World Bank and

'regional' multilateral financial institutions."*^

Moreover, there

exists a vast

gap in intellectual and negotiation

resources between the two groups of countries.

mine,

who

in Africa,

has just

left

once told

A

former student of

the diplomatic service of his native country

me

had only three people,

that his country

including himself, to attend

all

the meetings at the

numbered more than

WTO

Geneva.

in

The meetings

often

his colleagues

dropped a few meetings altogether and divided up the

rest

a

dozen

he and

a day, so

between the three of them. This meant that they could

allocate

only two to three hours to each meeting. Sometimes they went in the right

moment and made some

times, they were not so lucky

US - to

useful contributions.

at

other

and got completely lost. In contrast, the - had dozens of people

take the example at the other extreme

working on said, his

intellectual

property rights alone. But

my former

student

country was lucky - more than 20 developing countries do

not have a single person based in Geneva, and

with only one or two people. told,

Some

but they

all

highly lopsided

Many more

many have

to get

stories like this

by

could be

suggest that international trade negotiations are a

war where some people

affair; it is like a

pistols while the others

engage in

aerial

fight

with

bombardment.

Are the Bad Samaritans winning? Margaret Thatcher, the British prime minister who spearheaded the neoliberal counter-revolution,

once famously dismissed her

critics

saying

These include the Asian Development Bank (ADB), the Inter- American Development Bank (IDB), the African Development Bank (AFDB) and the European Bank for Reconstruction and Development (EBRD), which deals with the former communist *

economies.

37

BAD SAMARITANS that 'There

TINA

no

is

(There

Is

The spirit of this argument - known as - permeates the way globalization is

alternative'.

No

Alternative)

portrayed by the Bad Samaritans.

The Bad Samaritans result of relentless

tion

like to

present globalization as an inevitable

developments in the technologies of communica-

and transportation. They like

looking 'modern-day Luddites'3° tree'.

Going against

backward-

to portray their critics as

who Tight over who owns which olive

this historical tide

only produces disasters,

argued, as evidenced by the collapse of the world

it

economy during

is

the

inter-war period and by the failures of state-led industrialization in the developing countries in the 1960s there

is

and

alization,

which their

and the

only one way to survive the historic that

virtually

way

is

to put

on the

1970s.

It is

argued that

tidal force that

one-size-fits-all

Golden

Straitjacket

the successful economies have allegedly

all

glob-

is

worn on

to prosperity.

In this chapter,

I

TINA conclusion

have shown that the

stems from

a fundamentally defective understanding of the forces driving globalization

and

a distortion of history to

fit

the theory. Free trade was

often imposed on, rather than chosen by, weaker countries. tries that

had the choice did not choose

periods. Virtually

all

free trade for

successful economies, developed

Most coun-

more than

brief

and developing,

got where they are through selective, strategic integration with the

world economy, rather than through unconditional global integration.

The performance of the developing countries was much

when they had

a large

amount of

policy

autonomy during

old days' of state-led industrialization than

deprived of it during the

first

and unequal

when

treaties) or

(as in the past quarter

There

is

when

better

the 'bad

they were totally

globalization (in the era of colonial rule

they had

much

less

policy

autonomy

of a century).

nothing inevitable about globalization, because

it is

driven

more by politics (that is, human will and decision) than technology, as the Bad Samaritans claim. If it were technology that determined the extent of globalization, the world was

modern

much

less

it

would be impossible

globalized in the 1970s

to explain

(when we had

how

all

the

technologies of transport and communication except the

internet) than in the 1870s

(when we 38

relied

on steamships and wired

THE LEXUS AND THE OLIVE TREE REVISITED telegraphy). Technology only defines the outer boundaries of globalization. Exactly

what shape

it

takes

depends on what we do with

national policies and what international agreements is

TINA thesis is wrong. There is an many alternatives, to the neo-liberal

the case, the

there are

happening today. The

rest

of this book

alternatives.

39

is

we make.

If that

alternative, or rather

globalization that

is

going to explore those

CHAPTER The double

How

2

of Daniel Defoe

life

did the rich countries

become

rich?

Daniel Defoe, the author of Robinson Crusoe, had a colourful

life.

Before writing novels, he was a businessman, importing woollen goods, hosiery,

wine and tobacco. He

worked

also

Duty

in the

government

royal lotteries

and

in the Glass

'window

tax',

a property tax levied according to the

ious

a house's windows.

He was

pamphlets and led a double for Robert Harley, the

he complicated his

also life

tator

if being

government

spy. First

even further by spying for the

and spy wasn't providing

spying. Unlike his novels, Flanders, Defoe's

political

arch-enemy.

sufficient stimulus, life is

even

Later,

govern-

commen-

Defoe was

less well

also

known than

an his

which include Robinson Crusoe and Moll

main economic work, A Plan of the English Commerce

almost forgotten now. The popular biography of Defoe by

is

Richard West does not mention the book

at

all,

while the award-

winning biography by Paula Backscheider mentions relation

political

he spied

Whig

a businessman, novelist, tax collector, political

economist. This aspect of his

(1728),

number of

Tory speaker of the House of Commons.

life

ment of Robert Walpole, Harley 's As

Office that collected the notor-

an influential author of

as a

in the

to

it

largely in

marginal subjects, such as Defoe's view on native

Americans.^ However, the book was a thorough and insightful account

of Tudor industrial policy (under England's Tudor monarchs) that has

much In the

to teach us today.

book (henceforth

A

Plan), Defoe describes

monarchs, especially Henry VII and Elizabeth subsidies, distribution of

monopoly 40

rights,

I,

how

the

Tudor

used protectionism,

government-sponsored

THE DOUBLE LIFE OF DANIEL DEFOE and other means of government intervention to develop England's woollen manufacturing industry - Europe's highindustrial espionage

tech industry at the time. Until Tudor times, Britain had been a relatively

backward economy, relying on exports of raw wool to finance

The woollen manufacturing industry was centred in the Low Countries (today Belgium and the Netherlands), especially the cities imports.

of Bruges, Ghent and Ypres in Flanders. Britain exported

and made

a reasonable profit.

a law of competition that people

which others cannot

Henry VII wanted

will earn

to

who knew how to much greater profits.

But those foreigners

convert the wool into clothes were generating It is

raw wool

its

more

change in the

who

profit.

can do

This

is

difficult things

the situation that

late 15th century.^

According to Defoe, Henry VII sent royal missions to identify locations suited to woollen manufacturing.^ Like

he poached

skilled

workers from the

Edward

before him,

III

Low Countries."* He also increased

on the export of raw wool, and even temporarily banned

the tax

its

export, in order to encourage further processing of the raw material at

home. In

1489,

for coarse pieces

he also banned the export of unfinished

below a certain market value,

further processing at home.^ His son,

cloth, save

in order to

Henry VIII, continued

and banned the export of unfinished

cloth in 1512, 1513

promote

the policy

and

1536.

As Defoe emphasizes, Henry VII did not have any illusions as to

how

quickly the English producers could catch

Low

ticated competitors in the

Countries.^

up with

The King

their sophis-

raised export

on raw wool only when the English industry was

duties

enough

to handle the

volume of wool

quickly withdrew his ban

to be processed.

on raw wool exports when

it

established

Henry then

became

that Britain simply did not have the capacity to process

wool

it

in the

produced.7 Indeed, according to

middle of Elizabeth

Henry VII had in 1489 - that wool exports

I's

A

Plan,

reign (1558-1603)

it

was not

all

clear

the raw

until 1578,

- nearly 100 years

after

started his 'import substitution industrialization' policy

Britain

totally.^

had

sufficient processing capacity to

Once

in place, however, the export

the competing manufacturers in the

Low

Countries,

ban raw

ban drove

who were now

deprived of their raw materials, to ruin.

Without the

policies put in place

41

by Henry VII and further pursued

BAD SAMARITANS by

his successors,

would have been very

it

for Britain to have transformed itself

into the

difficult, if

from

not impossible,

a raw- material exporter

European centre of the then high-tech industry. Wool

manufacture became

Britain's

most important export

industry.

It

provided most of the export earnings to finance the massive import of raw materials and food that fed the Industrial Revolution. ^ shatters the foundation it

figured out the true

market and

A

Plan

myth of capitalism that Britain succeeded because path to prosperity before other countries - free

free trade.

Daniel Defoe's fictional hero, Robinson Crusoe,

economics teachers

as the

by

often used

is

pure example of 'rational economic man', the

hero of neo-liberal free-market economics. They claim that, even though

he

lives alone,

has to decide ial

the

Crusoe has to make 'economic' decisions

how much

consumption and

to

work

leisure.

all

the time.

He

in order to satisfy his desire for mater-

Being a rational man, he puts in precisely

minimum amount of work to achieve the goal. Suppose Crusoe then man living alone on a nearby island. How should they

discovers another

trade with each other?

The free-market theory

market (exchange) does not fundamentally situation. Life goes

tion that

he now

on much

as before,

says that introducing a

alter the

nature of Crusoe's

with the additional considera-

needs to establish the rate of exchange between his

product and his neighbour's. Being a rational man, he

make

exactly

we

are like

Crusoe that

what we want and how best

people to do what they desire and the best

way

to

markets work.

free

to achieve

know

to

it.

was not the

free

is

Consequently, leaving is

just gets in the way.

that underpins Defoe's Plan

opposite of Robinson Crusoe economics. In

it

We know

be good for themselves

run the economy. Government

The kind of economics

it

continue to

the right decisions. According to free-market economics,

precisely because

that

will

is

exactly the

A Plan, Defoe clearly shows

market but government protection and subsi-

dies that developed British woollen manufacturing. Defying signals

from

the market that his country was an efficient raw wool producer and

should remain distorted such

so,

Henry VII introduced

unwelcome

notions.

By doing

policies that deliberately so,

he started the process

that eventually transformed Britain into a leading manufacturing nation.

Economic development

requires people like

42

Henry VII, who build

a

new

THE DOUBLE LIFE OF DANIEL DEFOE Robinson Crusoe, who

future, rather than people like

Thus, in addition to his double as

an economist - without

in free

as a spy,

life

realizing

market economics in

it,

his fictional

double

his

life

double

life

work, yet his

market and

own economic free trade.

on the world

Britain takes Defoe started

live for today.

also led a

he created the central character

analysis clearly illustrated the limits of free

later, as I

Defoe

Tory government, but

as a spy for the

mentioned, he spied for the Whig government of Robert

Walpole. Walpole

commonly known

is

minister, although he

was never

Walpole was notorious for

his venality

corruption to a regular system'. aristocratic titles,

government

as the first British

called that

He

by

- he

is

said to have 'reduced

deftly juggled the

offices

prime

his contemporaries.^^

and perks

disbursement of

in order to maintain

his power base, which enabled him to remain the prime minister for

a staggering 21 years (1721-42). His political skills were immortalized

by Jonathan Swift Flimnap. Flimnap

in his novel, Gulliver's Travels^ in the character of is

the prime minister of the empire of Lilliput

champion of Dance of the Rope, the

frivolous

method by which

and the

holders of high offices in Lilliput are selected.^^ Yet Walpole was a highly competent

economic manager. During

time as chancellor of the exchequer, he enhanced the creditwor-

his

government by creating a 'sinking fund' dedicated to repaying the debts. He became prime minister in 1721 because he was

thiness of his

considered the only person cial

mess

left

who had

the ability to

manage

the finan-

behind by the infamous South Sea Bubble."^

Upon becoming prime

minister, Walpole launched a policy reform

that dramatically shifted the focus of British industrial

and trade

poli-

The South Sea Company was set up in 1711 by Robert Harley, Defoe's first spymaster, and was granted exclusive trading rights in Spanish South America. It made little actual profit, but talked up its stock with the most extravagant rumours of the value *

A

speculative frenzy developed

of

its

its

stock price rising by ten times in seven

potential trade.

The stock

around

its

shares in 1720, with

months between January and August

price then started falHng and, by

in January 1720.

43

eady

1721,

was back where

it

1720.

had been

BAD SAMARITANS Prior to Walpole, the British government's poHcies were, in general,

cies.

aimed

capturing trade through colonization and the Navigation

at

Act (which required that

and

in British ships)

at

trade with Britain should be conducted

all

generating government revenue. The

tion of woollen manufacturing

promo-

was the most important exception,

but even that was partly motivated by the desire to generate more

government revenue. In after 1721

Introducing the

tries.

address to Parliament: to

contrast, the policies introduced

were deliberately aimed

new 'it is

law,

at

Walpole

stated,

through the King's

evident that nothing so

promote the public well-being

by Walpole

promoting manufacturing indus-

much

as the exportation of

goods and the importation of foreign raw

contributes

manufactured

matrial'.^^

Walpole's 1721 legislation essentially aimed to protect British

manufacturing industries from foreign competition, subsidize them

and encourage them

to export. ^^ Tariffs

on imported

factured goods were significantly raised, while rials

foreign

tariffs

manu-

on raw mate-

used for manufacture were lowered, or even dropped altogether.

Manufacturing exports were encouraged by a including export subsidies.

^"^

Finally, regulation

series

of measures,

was introduced

to

control the quality of manufactured products, especially textile products, so that unscrupulous manufacturers could not

damage the

reputation of British products in foreign markets.^5

These policies are strikingly similar to those used with such success

by the 'miracle' economies of East Asia, such after the

Second World War.

as Japan,

Policies that

many

Korea and Taiwan,

believe, as

I

myself

used

to, to

have been invented by Japanese policy-makers in the

1950s

- such

as 'duty

products'^

drawbacks on inputs for exported manufactured

and the imposition of export product quality standards by - were actually early British inventions.^^

the government^ *

This

that

it

is

a practice

where

a manufacturer exporting a product

is

paid back the

has paid for the imported inputs used in producing the product. This

is

tariff

a

way

of encouraging exports. ^

This

is

a practice

where the government

minimum quaHty standards for who do not meet them. This is intended

sets the

export products and punishes those exporters

to prevent substandard export products tarnishing the It is

particularly useful

image of the exporting country.

when products do not have

and, therefore, are identified by their national origin.

44

well- recognized

brand names

THE DOUBLE LIFE OF DANIEL DEFOE Walpole's protectionist policies remained in place for the next century, helping British manufacturing industries catch

up with and

then finally forge ahead of their counterparts on the Continent. Britain

remained

a highly protectionist

country until the mid-i9th century.

In 1820, Britain's average tariff rate

45-55%^ compared to

6-8%

and Switzerland and around 20% Tariffs were,

trade policy.

on manufacturing imports was Countries, 8-12% in Germany

Low

in the

in France.^^

however, not the only weapon in the arsenal of British

When

it

came

to

its

was quite happy

colonies, Britain

impose an outright ban on advanced manufacturing

activities that

not want developed. Walpole banned the construction of

and in

slitting steel mills in

new

it

to

did

rolling

America, forcing the Americans to specialize

low value-added pig and bar

iron, rather

than high value-added

steel

products.

banned exports from

Britain also its

own

products,

from India In 1699

it

home and

('calicoes'),

It

colonies that

banned cotton

which were then superior

stifling the

Wool

competed with textile

imports

to the British ones.

banned the export of woollen cloth from

other countries (the

and

abroad.

its

its

colonies to

Act), destroying the Irish woollen industry

emergence of woollen manufacture in America.

Finally, policies

were deployed to encourage primary commodity

production in the colonies. Walpole provided export subsidies to (on the

American

side)

side)

and abolished import

raw materials produced

in the

taxes

on (on the

American colonies such

wood and timber. He wanted to make

as

British

hemp,

absolutely sure that the colonists

stuck to producing primary commodities and never emerged as

competitors to British manufacturers. Thus they were compelled to

most profitable 'high-tech' industries in the hands of Britain - which ensured that Britain would enjoy the benefits of being on the leave the

cutting edge of world development.^^

The double The world's

first

life

of the British

economy

famous free-market economist,

mently attacked what

Adam

he called the 'mercantile system'

45

Smith, vehe-

whose

chief

BAD SAMARITANS was Walpole.

architect

Adam

Smith's masterpiece, The Wealth of

Nations^ was pubUshed in 1776, at the height of the British mercantile

He argued

system.

that the restrictions

on competition

that the

system was producing through protection, subsidies and granting of

monopoly

Adam

rights

were bad for the British economy.

Smith understood that Walpole's

Without them, many

obsolete.

"^^

policies

British industries

wiped out before they had had the chance

were becoming

would have been up with

to catch

become

superior rivals abroad. But once British industries had nationally competitive, protection

became

their inter-

necessary and even

less

counter-productive. Protecting industries that do not need protection

any more

likely to

is

make them complacent and

observed. Therefore, adopting free trade was Britain's interest.

and

it

now

was not

his views

until 84 years after

Smith

increasingly in

However, Smith was somewhat ahead of

Another generation would pass before ential,

inefficient, as

became

his time.

truly influ-

The Wealth of Nations was

published that Britain became a genuine free trading nation.

By the end of the Napeolenic Wars

in 1815, four decades after the

publication of The Wealth ofNationSy British manufacturers were firmly established as the

most

where countries

areas

logical leads. British

was now that,

few limited

efficient in the world, except in a

like

Belgium and Switzerland possessed techno-

manufacturers correctly perceived that free trade

in their interest

and

started

campaigning for

when

came

(having said

it

they naturally remained quite happy to restrict trade

when it suited

them,

as the cotton

textile

machinery that might help foreign competitors). In

manufacturers did

it

the manufacturers agitated for the abolition of the

to the export of particular,

Corn Laws

that

limited the country's ability to import cheap grains. Cheaper food was

important to them because

it

could lower wages and raise

The anti-Corn Law campaign was omist, politician *

crucially helped

and stock-market player, David Ricardo. Ricardo came

However, Smith was a patriot even more than he was a

market and

supported

free

Britain, as

we can

profits.

by the econ-

see

from

free trade

his praise

free

market economist. He

only because he thought they were good for

of the Navigation Acts - the most blatant kind

of 'market-distorting' regulation - as 'the wisest of England'.

46

all

the commercial regulations of

THE DOUBLE LIFE OF DANIEL DEFOE up with the theory of comparative advantage

that

forms the core

still

of free trade theory. Before Ricardo, people thought foreign trade makes sense only

when

a country can

make something more cheaply than its commonsen-

trading partner. Ricardo, in a brilliant inversion of this sical

observation, argued that trade between two countries makes sense

when one country can produce everything more cheaply than another. Although this country is more efficient in producing everyeven

thing than the other, it

it

can

still

gain by speciaUzing in things in which

has the greatest cost advantage over

its

trading partner. Conversely,

even a country that has no cost advantage over

producing any product can gain from trade ucts in

its

trading partner in in prod-

if it specializes

which it has the least cost disadvantage. With this theory, Ricardo

provided the 19th-century free traders with a simple but powerful tool to argue that free trade benefits every country.

Ricardo's theory

absolutely right

is

- within

its

narrow confines.

His theory correctly says that, accepting their current nology as given,

it is

they are relatively better

His theory

fails

can do -

that

is,

and experience

at.

when

technologies so that

levels

it

when

ward producers need

One cannot

a country

argue with that.

wants to acquire more advanced

can do more

difficult things that

wants to develop

it

to absorb

new

its

economy.

It

few others takes time

technologies, so technologically back-

a period of protection

from international

competition during this period of learning. Such protection because the country

is

giving

cheaper products. However, to develop

who

of tech-

better for countries to specialize in things that

up the chance

to

costly,

import better and

a price that has to be paid

it is

is

if it

wants

advanced industries. Ricardo's theory is, thus seen, for those

accept the status quo but not for those

The big change

in British trade policy

Laws were repealed and

tariffs

who want

came

in 1846,

to

change

when

the

it.

Corn

on many manufacturing goods were

abolished. Free trade economists today like to portray the repeal of

the

Corn Laws

Ricardo's

as the ultimate victory

wisdom over wrong-headed

of

Adam

Smith's and David

mercantilism. ^^

The leading

free

trade economist of our time, Jagdish Bhagwati of Columbia University, calls this a 'historic transition'.^°

However, many historians familiar with the period point out 47

BAD SAMARITANS that

making food cheaper was only one aim of the anti-Corn Law

campaigners. to 'halt the

It

was

move

an act of

also

to industrialisation

on the Continent by enlarging

and primary

the market for agricultural produce

opening its

its

trade imperialism' intended

'free

materials'.^^

By

domestic agricultural market wider, Britain wanted to lure

competitors back into agriculture. Indeed, the leader of the anti-

Corn Law movement, Richard Cobden, argued Laws: 'The factory system would, in place in

America and Germany.

ished, as

it

It

most

has done, both in these

that,

without the Corn

probability, not have taken

all

certainly could not have flour-

and

states,

in France,

Belgium and

Switzerland, through the fostering bounties which the high-priced

food of the British artisan has offered to the cheaper fed manufacturer of those countries'.^^ In the

of the Board of Trade, a key explicitly advised the

Union)

same

member

spirit, in 1840,

John Bowring

of the anti-Corn

Law

League,

member states of the German Zollverein (Custom

to specialize in

growing wheat and

manufactures.^^ Moreover,

it

was not

sell

the wheat to

buy British

until i860 that tariffs

were

completely abolished. In other words, Britain adopted free trade only

when

it

had acquired a technological lead over

high and long-lasting

about 'kicking away the

it.^^ ]sjo

wonder

best critique of Britain's hypocrisy

German, but the country

fray

may

have been written by a

that best resisted Britain's ladder-kicking in

terms of policy was not Germany. Nor was as the protectionist

Friedrich List talked

ladder'.

America enters the The

competitors 'behind

the eminent economic

as

tariff barriers',

historian Paul Bairoch once put

its

it

France,

commonly known

counterpoint to free-trading Britain. In

fact,

the

counterbalance was provided by the US, Britain's former colony and today's

champion of

Under

free trade.

British rule,

America was given the

British colonial

full

new

treatment.

It

was naturally denied the use of

industries.

It

was prohibited from exporting products that competed

with British products.

It

was given subsidies 48

tariffs to

to

protect

its

produce raw materials.

THE DOUBLE LIFE OF DANIEL DEFOE Moreover, outright restrictions were imposed on what Americans could manufacture. The

remark WiUiam tries

spirit

Pitt the

behind Elder

this

made

poHcy

best

is

in 1770.

summed up by

Hearing that new indus-

were emerging in the American colonies, he famously

New

a

said:

'[The

England] colonies should not be permitted to manufacture so

much

as a

horseshoe nail?5 1^

lenient than

this

reality, British policies

may imply: some

were a

little

more

industrial activities were permitted.

But the manufacture of high-technology products was banned.

Not

all

Britons were as hard-hearted as

trade to the Americans,

them. In his Wealth of Nations, free

Pitt.

some were convinced

Adam

In

recommending

Smith, the Scottish father of

market economics, solemnly advised the Americans not

manufacturing.

He argued

free

that they were helping

to develop

that any attempt to 'stop the importation

of European manufactures' would 'obstruct instead of promoting the progress of their country towards real wealth and greatness'. ^^

Many Americans agreed, including Thomas Jefferson, the first secreand the

tary of state

They argued industries

third president. But others fiercely disagreed.

that the country

needed

to develop

manufacturing

and use government protection and subsidies

had done before them. The

as Britain

movement was

to that end,

intellectual leader of this

a half-Scottish upstart called Alexander Hamilton.

Hamilton was born on the Caribbean island of Nevis, the

mate child of a Scottish pedlar (who dubiously claimed an lineage)

and

a

woman

of French descent.

to his sheer brilliance

de-camp

George Washington

to

He climbed

and boundless energy. At in the

War

22,

to

illegiti-

aristocratic

power thanks

he was an aide-

of Independence. In 1789,

at the outrageously early age of 33, he became the country's

first

treasury

secretary.

In

1791,

Hamilton submitted

his

Report on

Manufactures (henceforth the Report) to the

expounded develop

its

like the

US

his

US

the

Subject

Congress. In

it,

of

he

view that the country needed a big programme to

industries.

The core of his idea was that a backward country

should protect

its

'industries in their infancy'

from foreign

competition and nurture them to the point where they could stand

on their own feet. In recommending such a course of action for his young country, the impudent 35-year-old finance minister with only 49

BAD SAMARITANS from

a liberal arts degree

of

a then second-rate college (King's College

New York, now Columbia

University)

was openly going against the

Adam

advice of the world's most famous economist,

The gave

it

had

practice of protecting 'infant industries'

have shown, but a

name

was Hamilton who

it

term

(the

first

'infant industry'

turned

later further

developed by Friedrich

mistakenly

known

father. List actually started

its

existed before, as

it

into a theory

who

List,

today often

is

out as a free-trader;

he was one of the leading promoters of one of world's

first free

agreements -

He

the

infant industry

US

in the

many

German Zollverein,

or Customs Union.

argument from the Americans during

trade

learned the

his political exile

argument inspired

in the 1820s. Hamilton's infant industry

countries'

I

and

was invented by him). The

theory was

as

Smith.

economic development programmes and became the economists for generations to come.

hete noire of free trade

In the Report, Hamilton proposed a series of measures to achieve the industrial development of his country, including protective tariffs

and import bans; liberalization of

subsidies; export

and

ban on key raw

tariff rebates

on

materials;

import

industrial inputs; prizes

and

patents for inventions; regulation of product standards; and develop-

ment of

financial

Hamilton

rightly cautioned against taking these policies too far, they

and transportation

are, nevertheless, a pretty

tions.

infrastructures.^^

potent and 'heretical'

set

of policy prescrip-

Were he the finance minister of a developing country

IMF and

the

World Bank would

Although

today, the

certainly have refused to lend

to his country and would be lobbying for his removal from

Congress's action following Hamilton's Report

recommendations, largely because

US

fell far

politics at the

money

office.

short of his

time were domi-

nated by Southern plantation owners with no interest in developing

American manufacturing industries. Quite understandably, they wanted to

be able to import higher- quality manufactured products from Europe

at the

lowest possible price with the proceeds they earned from

exporting agricultural products. Following Hamilton's Report, the average tariff

5%

to

on

foreign manufactured goods

around 12.5%, but

it

was

far

was raised from around

too low to induce those buying

manufactured goods to support the nascent American

Hamilton resigned

industries.

as treasurey secretary in 1795, following the

50

THE DOUBLE LIFE OF DANIEL DEFOE scandal surrounding his extra-marital affair with a married

without the chance to further advance his programme. The

man was

brilliant if caustic

duel in

New York,

political rival,

Jefferson.^^

Aaron Burr, the then

Had he

would have been

When doubled

the

tariffs

the space for

under Thomas

vice president

programme adopted

US

of 1812 broke out the

from the average of 12.5%

new

his friend-turned-

lived for another decade or so, however,

able to see his

War

to

in full.

25%. The war also made

emerge by interrupting the manufac-

industries to

who had now

to continue, and, indeed, to

Hamilton

Congress immediately

tured imports from Britain and the rest of Europe. The

of industrialists

of this

cut short in his 50th year (1804) in a pistol

which he was challenged by

to

woman,

life

arisen naturally

be increased,

new group

wanted the protection

after the war.^^ jn 1816, tariffs

were raised further, bringing up the average to 35%. By 1820, the average tariff rose further to

40%, firmly

establishing Hamilton's

Hamilton provided the blueprint

for

US economic

programme.

policy until the

end of the Second World War. His infant industry programme created the condition for a rapid industrial development.

He

also set

up the

government bond market and promoted the development of the banking system (once again, against opposition from Thomas Jefferson

and

his followers). ^°

It is

Society to have called

no hyperbole

him 'The Man

a recent exhibition.^^

Had

the

accepted that of his archrival, society

US

New- York Historical Made Modern America' in

for the

Who

rejected Hamilton's vision

Thomas

Jefferson, for

whom

the ideal

was an agrarian economy made up of self-governing yeoman

who

farmers (although this slave-owner had to sweep the slaves

supported

this lifestyle

under the

able to propel itself from being a its

and

carpet),

it

would never have been

minor agrarian power rebelling against

powerful colonial master to the world's greatest super-power.

Abraham Lincoln and America s bid

for

supremacy Although Hamilton's trade policy was well established by the tariffs

were an ever-present source of tension in

51

US

1820s,

politics for the

BAD SAMARITANS following three decades.

The Southern agrarian

attempted to lower industrial

tariffs,

while the Northern manufac-

them high or even

turing states argued the case for keeping

them

new

federal tariff law, causing a political crisis.

called Nullification Crisis

who

offered

some

tariff

as the folk hero of

raising

South Carolina even refused

further. In 1832, pro-free trade

accept the

states constantly

The

to

so-

was resolved by President Andrew Jackson,

reduction (though not a

American

despite his image

lot,

market capitalism), while threat-

free

ening South Carolina with military action. This served to patch things

up temporarily, but the resolution in the Civil

Abraham

festering conflict eventually

War

that

came

to a violent

was fought under the presidency of

Lincoln.

Many Americans call Abraham Lincoln, the 16th president the Great Emancipator

- of the American

slaves.

(1861-5),

But he might equally

be labelled the Great Protector - of American manufacturing. Lincoln

was

He cut his politwho advocated the

a strong advocate of infant industry protection.

ical teeth

under Henry Clay of the Whig

Party,

building of the American System', which consisted of infant industry protection ('Protection for

Home

Industries', in Clay's

words) and

investment in infrastructure such as canals ('Internal Improvements' ).3^ Lincoln, born in the same state of Kentucky as Clay, entered politics as a

and

Whig

state

lawmaker of

Illinois in 1834 at the

age of

25,

was Clay's trusted lieutenant in the early days of his political

career.

The charismatic Clay stood out from as

soon

as

he was elected to Congress in

of the House (from politician

1811 until 1820

from the West, he wanted

early 1810,

on

in his career.

Almost

he became the Speaker

and then again to persuade the

in 1823-5).

Western

As a

states to

join forces with the Northern states, in the development of

whose

manufacturing industries Clay saw the future of his country. Traditionally, the

Western

cates of free trade

Southern

states.

protectionist

states,

and thus

having

allied

little

industry,

had been advo-

themselves with the pro-free trade

Clay argued that they should switch sides to back a

programme of

industrial

development

in return for

federal investments in infrastructure to develop the region. Clay ran for the presidency three times (1824, 1832

52

and 1844) without

success.

THE DOUBLE LIFE OF DANIEL DEFOE although he came very dose to winning the popular vote in the 1844 election. The Whig candidates who did manage to become presidents - WilUam Harrison (1841-4) and Zachary Taylor (1849-51) - were

generals with

no

In the end,

clear political or

what made

economic views.

possible for the protectionists to

it

win

the presidency with Lincoln as their candidate was the formation of the

Republican Party. Today the Republican Party

(Grand Old Party,

Party), but

actually

it is

which has existed

the

calls itself

GOP

younger than the Democratic

one form or another since the days of

in

Thomas Jefferson (when it was called, somewhat confusingly to the modern observer, the Democratic Republicans). The Republican Party was a mid-i9th-century invention, based on a new vision that befitted a

country that was rapidly moving outward (into the West) and

forward (through industrialization), rather than harking back to an

economy based on slavery. Republican Party came up with was

increasingly unsustainable agrarian

The winning formula to

that the

combine the American System of the Whigs with the

free distribu-

tion of public land (often already illegally occupied) so strongly wanted

by the Western naturally

states.

anathema

This

to the

call for free distribution

of public land was

who saw

Southern landlords,

it

as the start

of a slippery slope towards a comprehensive land reform. The tion for such distribution

legisla-

had been constantly thwarted by the Southern

Congressmen. The RepubUcan Party undertook to pass the Homestead Act,

which promised

farm

it

to give 160 acres of land to

for five years. This act

any

was passed during the

who would Civil War in 1862,

settler

by which time the South had withdrawn from Congress. Slavery

was not

most of us today influence in

as divisive

believe

it

some Northern

an issue in pre-Civil-War

to have been. Abolitionists states, especially

mainstream Northern view was not

opposed

abolitionist.

to slavery thought that black people

US

politics as

had

a strong

Massachusetts, but the

Many people who were

were

racially inferior

and

thus were against giving them full citizenship, including the right to vote.

an immediate abolition of

They believed the proposal by

radicals for

slavery to be highly unrealistic.

The Great Emancipator himself shared

these views. In response to a newspaper editorial urging immediate slave

emancipation, Lincoln wrote: Tf

I

could save the Union without freeing

53

BAD SAMARITANS any

slave,

would do alone,

I

would do

I

it;

and

would

if I

could save

if I

could do

do

also

and

it;

that'.^^

abolition of slavery in 1862

it

it

by

freeing

the slaves,

all

by freeing some and leaving others

Historians of the period agree that his

was more of a

strategic

move

win the war

to

than an act of moral conviction. Disagreement over trade policy, in

was

at least as

important

as,

I

and possibly more important than,

fact,

slavery

in bringing about the Civil War.

During the i860 election campaign, the Republicans protectionist states assailed the

Antitariff-Disunion party

[my

Democrats

italics]',

American system which implied that not American, tariff issue

interest.^4

as a 'Southern-5nYfs/z-

playing on Clay's idea of the free trade

was

in the British,

However, Lincoln tried to keep quiet on the

during the election campaign, not just to avoid attacks

from the Democrats but as there

some

in

also to

keep the

new

fragile

party united,

were some free-traders in the party (mostly former Democrats

who were

anti-slavery).

But, once elected, Lincoln raised industrial tariffs to their highest level so far in

given as in

US

US

history.^^

an excuse -

tariffs

However,

in the

xhe expenditure

same way

came about during

in

for the Civil

which the

first

the Anglo-American

after the war, tariffs stayed at

on manufactured imports remained

wartime

at

levels

40-50%

War was

significant rise

War

(1812-16).

or above. Tariffs

until the First

World

War, and were the highest of any country in the world.^^ In 1913, following the Democratic electoral victory, the Tariff bill

was passed, reducing the average

goods from

44%

to 25%. ^^ g^t tariffs

afterwards, thanks to

tariff

power

on manufactured

were raised again very soon

American participation

After the Republican return to

Underwood

in the First

in 1921, tariffs

World War.

went up

again,

although they did not go back to the heights of the 1861-1913 period.

By 1925, the average manufacturing tariff had climbed back up

to

37%.

Following the onset of the Great Depression, there came the 1930

Smooth-Hawley

tariff,

which raised

tariffs

even higher.

Along with the much-trumpeted wisdom of the Anti-Corn Law

movement, the

stupidity of the

Smoot-Hawley

fable in free trade mythology. Jagdish visible

tariff

has

become

Bhagwati has called

and dramatic act of anti-trade foUy'.^^ But this view is 54

it

'the

a key

most

misleading.

THE DOUBLE LIFE OF DANIEL DEFOE The Smoot-Hawley tariff may have provoked an thanks to bad timing, especially given the

new

international tariff war,

US

status of the

World War. But

world's largest creditor nation after the First

as the it

was

simply not the radical departure from the country's traditional trade policy stance that free trade economists claim

the

bill,

to have been. Following

it

the average industrial tariff rate rose to 48%.

(1925) to

48%

Moreover, the

(1930)

48%

is

not exactly small but

obtained after the

bill

it is

The

from 37%

rise

hardly a seismic

comfortably

falls

shift.

within the

range of the rates that had prevailed in the country ever since the Civil

War,

albeit in the

upper region thereof

Despite being the

most protectionist country

the

in

throughout the 19th century and right up to the 1920s, the also the fastest

US was

growing economy. The eminent Swiss economic

torian, Paul Bairoch, points out that there

is

no evidence

significant reduction of protectionism in the

economic growth.^^ Some

free trade

his-

that the only

US economy

1846 and 1861) had any noticeable positive impact rate of

world

(between

on the country's

economists argue that the

US grew quickly during this period despite protectionism, because it had so many other favourable conditions for growth, particularly its abundant natural resources, rate.4^

The

that, as

we

tions also

large domestic

force of this counter-argument shall see,

many

market and high is

was only

industrial started

after the

barriers.

Second World War that

supremacy now unchallenged -

championing the cause of

practised free trade to the

fact

other countries with few of those condi-

grew rapidly behind protective

France, Finland, Austria, Japan, Taiwan and Korea It

literacy

diminished by the

trade period (i860 to 1932).

It

come

to

mind.

the US - with

liberalized

free trade.

same degree

Germany, Sweden,

But the

as Britain did

its

and

its

trade

US

has never

during

its

free

has never had a zero-tariff regime

like

much more aggressive in using non-tariff protectionist measures when necessary. ^^ Moreover, even when it shifted to freer (if not absolutely free) trade, the US government promoted key industries by another means, namely, public funding of R&D. Between the 1950s and the mid-1990s, US federal government funding Britain. It has also

been

accounted for 50-70% of the country's far

total

R&D

funding, which

is

above the figure of around 20%, found in such government-led'

55

BAD SAMARITANS countries as Japan and Korea. Without federal government funding

R&D,

for

the

US would

not have been able to maintain

logical lead over the rest of the

semiconductors,

life

world in key industries

sciences, the internet

is

bad

two most successful economies

One

possible answer

tionist,

is

secrets

in history have

more

less protectionist

techno-

economic growth, how can the

for

that, while Britain

they were economically

because they were

its

computers,

and aerospace.

Other countries, guilty Given that protectionism

like

been so protectionist?

and the US were protec-

successful than other countries

than others. Indeed,

it

seems

likely

known for their protectionist tendencies Germany and Japan - had even higher tariff walls

that other rich countries

such as France,

than those of Britain and the US. This

is

None of the

not true.

other countries

among

today's wealthy

nations were ever as protectionist as Britain or the US, with the brief

exception of Spain in the i930s.4^ France, countries that are usually considered to

- always had lower

tariffs

Germany and Japan - the three be the homes of protectionism

than Britain or the

US

(until the latter

two

countries converted to free trade following their economic ascendancy).

France

is

often presented as the protectionist counterpoint to free-

and

trade Britain. But, between 1821

1875, especially

up

until the early

had lower tariffs than Britain.^^ Even when it became - between the 1920s and the 1950s - its average industrial

1860S, France

protectionist tariff rate

Britain

Tariffs

and

was never over 30%. The average

and the US were 50-55% were always

relatively

low

in

Germany. Throughout the 19th

in the early 20th century (until the First

manufacturing

tariff rate in

American and the the 1920s,

when

it

industrial tariff rates in

at their heights.

World War), the average

Germany was 5-15%, way below

British (before the 1860s) rates of

became more

the

35-50%. Even in

protective of its industries, Germany's

average industrial tariff rate stayed around 20%.

The frequent equa-

tion of fascism with protectionism in free trade mythology

misleading in this sense.

56

is

highly

THE DOUBLE LIFE OF DANIEL DEFOE As it

for Japan, in the very early days of

actually practised free trade. But this

to a series of to sign

upon

unequal its

5%

treaties that

opening in

1853.

it

its

industrial development,

was not out of choice but due

was forced by Western countries

These

treaties

bound

Japan's tariff

rate

below

and

raised manufacturing tariffs, the average industrial tariff rate

until 1911. But, even after

autonomy

regained tariff

it

was

only about 30%. It

was only

dog and

after the

liberalized

its

Second World War, when the

US became

protectionist. But, even then, the difference

was not that

US was

the average industrial tariff in the

still

Japan,

14%

great. In 1962,

7%

Germany were

than the US. Tariff rates in Belgium,

Austria and Finland were only slightly higher, ranging from

Italy,

to

less protectionist

top

to look

13%. With only

average industrial tariff rates, the Netherlands and West

considerably

came

trade, that countries like France

20%. France, with

exception.44

By the

a tariff rate of

early 1970s, the

it

in 1959,

was the one

US could not claim to be the leading By

practitioner of free trade any more.

caught up with

30%

had

then, other rich countries

economically and found themselves able to lower

their industrial tariffs. In 1973, the

US

average industrial tariff rate was

12%, compared to Finland's 13%, Austria's 11% and Japan's 10%. The average tariff rate of the

EEC (European Economic Community) US rate, at only 8%.'^5

countries was considerably lower than the

So the two champions of

free trade, Britain

and the US, were not

only not free trade economies, but had been the two most protectionist

economies among rich countries - that

succession

*

became

The average

the world's

tariff rate,

dominant

of course, does not

have a relatively low average

tariff rate,

tell

is,

until they each in

industrial power.

us the

full story.

For example, during the

late 19th

and the

strong tariff protection to strategic industries like iron

Sweden

also provided high protection to

industries, although

its

may

its

and

other

tariffs in

early 20th century, while

taining a relatively moderate average industrial tariff rate (5-15%),

period,

country

but this could be the result of the heavy

protection of certain sectors counterbalanced by very low or zero sectors.

A

'^

main-

Germany accorded

steel.

During the same

newly emerging engineering

average tariff rate was 15-20%. In the

first

half of the 20th

century, Belgium maintained moderate levels of overall protection (around

10%

average industrial tariff rate), but heavily protected key textile sectors (30-60%) and the iron industry (85%).

57

BAD SAMARITANS Of

one of the many

course, tariffs are only

can use to promote

recommendation

infant industries. After

its

listed eleven types

tools that a country

all,

Hamilton's original

of measures to promote infant

and public

industry, including patents, product quality standards

investment in infrastructure. Britain and the

US may have

used

tariffs

most aggressively, but other countries often used other means of policy intervention - for example, state-owned enterprises, subsidies or export marketing support -

more

intensively.

when

In the early days of their industrialization,

enough

private sector entrepreneurs

most of

scale ventures,

US and

the British) set

many

provided so

who

today's rich country

up state-owned

subsidies

there were not

could take on

risky, large-

governments (except the

enterprises. In

and other help

(e.g.,

some

case, they

poaching

skilled

workers from abroad) to some private- sector enterprises that they

were

effectively public-private joint ventures. In the i8th century,

Prussia, the leader of like linen, iron steel,

and

German

industrialization,

industries

by means of these methods. Japan started

steel

shipbuilding and railway industries through state ownership

and targeted subsidies (more on century, the Swedish

ways. As of 1913,

and 60%

it

owned one-third of the

in terms of

Sweden continued

in the

sectors.

namely

5).

In the late 19th

in developing the rail-

railways in terms of mileage

goods transported -

almost entirely on the private

hydro -electric

chapter

this in

government took the lead

leaders in railway development,

from

promoted

this at a

Britain

time

when

and the US,

sector. Public-private

the

relied

co-operation in

development of the telegraph, telephone and

The Swedish government

also subsidised

R&D

early on.

After the Second intensified in

most

World War,

state efforts to

rich countries.

The

biggest shift

Contrary to the popular image, the French interventionist.

promote industry were

state has

was

in France.

not always been

There certainly had been a tradition of

state activism,

represented by Jean-Baptiste Colbert, Louis XIV's long-time finance minister (1865-83), but

it

was rejected

after the

French Revolution. So,

between the end of Napoleon's rule and the Second World War, except during the rule of Napoleon

III,

the French state took an extreme

laissez-faire approach to economic policy. One major historical account

58

THE DOUBLE LIFE OF DANIEL DEFOE of French economic policy points out that, during this period, the industrial

promotion strategy of the French government

largely of organising exhibitions, looking after the

Commerce, gathering economic to businessmen'.^^ After 1945,

statistics,

defeats in

its

Chambers of

distributing decorations

acknowledging that

hands-off policies were responsible for

and thus

and

'consisted

relative

two world wars, the French

its

conservative,

economic decline

state

took a

much

more active role in the economy. It launched 'indicative' (as opposed to communism's 'compulsory') planning, took over key industries through nationalization, and channelled investment into

strategic

industries through state-owned banks. To create the breathing space for

new industries

tively

were maintained

at a rela-

high level until the 1960s. The strategy worked very well. By the

had transformed

1980s, France

many

to grow, industrial tariffs

itself into a

technological leader in

areas.

In Japan, the

famous MITI (Ministry of International Trade and

Industry) orchestrated an industrial development

now become

a legend. Japan's industrial tariffs

programme that has

were not particularly

high after the Second World War, but imports were tightly controlled

through government control over foreign exchange. Exports were

promoted in order to maximize the supply of foreign currency needed to

buy up better technology

(either

by buying machinery or by paying

for technology licences). This involved direct

subsidies as well as information

and

indirect export

and marketing help from JETRO

(Japan External Trade Organisation), the state trading agency. Japan

took other measures to create the space needed for the accumulation of

new productive

capabilities

by infant

government channelled subsidized 'directed credit progammes'.

It

industries.

The Japanese

credits into key sectors

through

also heavily regulated foreign invest-

ment by transnational corporations (TNCs). Foreign investment was simply banned in most key industries. Even when it was allowed, there were strict ceilings on foreign ownership, usually a maximum of 49%. Foreign companies were required to transfer technology and buy at least specified

proportions of their inputs locally (the so-called local

contents requirement).

The Japanese government

inflow of technologies, to

make

also regulated the

sure that obsolete or over-priced

59

BAD SAMARITANS technologies were not imported. However, unlike in the 19th century, the Japanese government did not use

SOEs

in key

manufacturing

industries.

Countries

backward

relatively

at the

need for rapid industrial to those

to

Italy

and Austria - which were

all

end of the Second World War and saw the development - also used strategies similar

used by France and Japan to promote their industries. All of

them had

SOEs

Norway,

like Finland,

high

relatively

tariffs until

They

the 1960s.

all

actively

used

upgrade their industries. This was particularly successful in

Norway and

Finland and Norway. In Finland,

ment was very much involved

Austria, the govern-

in directing the flow of

bank

credit to

strategic industries. Finland heavily controlled foreign investment. In

many parts and

R&D

Thus

of Italy, local government provided support for marketing

to small

and medium-sized firms

practically

all

in the locality.

of today's rich countries used nationalistic

on foreign

policies (e.g., tariffs, subsidies, restrictions

promote

their infant industries,

used, as well as their timing

trade) to

though the exact mix of

and duration,

policies

differed across countries.

There were some exceptions, notably the Netherlands (which has had the best free-trade credentials since the 19th century) and Switzerland

World War)

(until the First

consistently practised free trade. But even

they do not conform to today's neo-liberal ideal, as they did not protect patents until the early 20th century.

The Netherlands

duced

it

a patent

re-introduce in 1888, but full

it

it

law in

1817,

but abolished

in 1869

The Swiss introduced

until 1912.

and did not

their first patent law

protected only mechanical inventions.

It

introduced a

patent law only in 1907 (more on these cases in chapter

Against the kind of historical evidence that

I

intro-

6).

have presented in

chapter, free trade economists have argued that the

this

mere co- existence

of protectionism and economic development does not prove that the former caused the explain one

co-existed

explain

latter. ^7

how free trade can be an

of today's rich countries,

much

This

is

true.

But

I

am

at least trying to

phenomenon - economic development - with another that with it - protectionism. Free trade economists have to

before they

when

became

explanation for the economic success

it

simply had not been practised very

rich.

60

THE DOUBLE LIFE OF DANIEL DEFOE

Learning the right lessons from history The Roman

politician

and philosopher Cicero once

what has been transacted

no use

made of

is

in

former times

is

said:

'Not to

know

to be always a child. If

the labours of past ages, the world must remain

always in the infancy of knowledge.'

Nowhere development

is

this

policy,

observation more relevant than in the design of

but nowhere

is it

more

ignored.

a wealth of historical experiences to draw upon,

Though we have

we do not bother

from them, and unquestioningly accept the prevailing myth

learn

to

that

today's rich countries developed through free-trade, free-market policy.

But history virtually

all

tells

successful countries used

and regulation

dies

us that, in the early stage of their development,

some mixture of protection, subsi-

in order to develop their economies.

of the successful developing countries that that. it,

as

I

The

discussed in chapter

history i

shows

Furthermore, the history of today's rich countries also confirms have discussed in

I

this chapter.

Unfortunately, another lesson of history 'kicked

away the

ladder'

is

that rich countries have

by forcing free-market, free-trade

policies

on

poor countries. Already established countries do not want more competitors

emerging through the nationalistic policies they themselves success-

fully

used in the

past.

my native

countries,

Even the newest member of the club of rich

Korea, has not been an exception to this pattern.

Despite once having been one of the most protectionist countries in the world,

it

now

free trade, in the capital,

pirate

it

advocates steep cuts in industrial

WTO.

not total

Despite once having been the world piracy

gets upset that the

CDs

tariffs, if

Chinese and the Vietnamese are producing

of Korean pop music and pirate

DVDs

of Korean movies.

Worse, these Korean free-marketeers are often the same people who, not so long ago, actually drafted and implemented interventionist, protectionist policies in their earlier jobs. their free

Most of them probably learned

market economics from pirate-copied American economics

textbooks, while listening to pirate- copied rock and

roll

music and

watching pirate-copied videos of Hollywood films in their spare time.

Even more prevalent and important than 'ladder-kicking', however, 61

BAD SAMARITANS is

historical amnesia. In the Prologue,

which history

subtle process in self-image.

As

a result,

many

explained the gradual and

I

re-written to

is

fit

a country's present

rich country people

recommend

free-

trade, free-market policies in the honest belief that these are policies

that their

own

ancestors used in order to

make

their countries rich.

When the poor countries protest that those policies hurt, those protests are dismissed as being intellectually misguided^^ or as serving the interests of their corrupt leaders.49

odds with what history teaches us cies.

The intention behind

It

never occurs to those Bad

recommend

Samaritans that the policies they

to

are fundamentally at

be the best development poli-

poHcy recommendations may be

their

honourable, but their effects are no

less

harmful than those from

policy recommendations motivated by deliberate ladder-kicking. Fortunately, history also

their

shows that it is not inevitable that successful

Bad Samaritans, and, more importantly,

countries act as

enUghtened

self-interest

not

to.

The most

recent

that

it is

in

and important

episode of this kind occurred between the launch of the Marshall Plan in 1947

and the

rise

In June 1947, the

of neo-liberalism in the 1980s.

US abandoned

its

previous policy of deliberately

weakening the German economy and launched the Marshall Plan,

which channelled reconstruction."^

'^

a large

amount of money

European post-war

into

Even though the sum involved

in this

was not huge,

The Marshall Plan was announced by George Marshall, the then US secretary of state, Harvard University on 5 June 1947. Its details were negotiated in a

in his address at

meeting held in Paris from

12 July 1947. It

was

started in 1948

and ended

in 1951, chan-

some $13 billion (equivalent to $130 billion today) into the war-torn economies of Europe. The Marshall Plan replaced the Morgenthau Plan that had dictated postwar American foreign policy until then. The Morgenthau Plan, named after the treasury secretary of the time (1934-45), focused on putting an end to Germany's expansionist ambition by 'pastoralizing' it. When combined with the Soviet Union's desire to seize advanced German machinery, it was very effective in destroying the German economy. However, it soon became obvious that such a plan was unviable. After his visit to Germany in 1947, the former US president Herbert Hoover denounced the Morgenthau Plan as 'illusory', and argued that it would not work unless the German population nelling

was reduced by sion

on the

25 million,

from 65 million

to 40 miOion. For

an enlightening discus-

subject, see E. Reinert (2003), 'Increasing Poverty in a Globalised

World:

Marshall Plans and Morgenthau Plans as Mechanisms of Polarisation of World Incomes' in H-J.

Change

(ed.),

Rethinking Development Economics (Anthem Press, London).

62

THE DOUBLE LIFE OF DANIEL DEFOE the Marshall Plan played an important role in kickstarting the war-

torn European economies by financing essential import financing the re-building of infrastructure. that the

US saw

in

it

enemies, prosper. The

tries

US

and Trade),

was

bills

and

a political signal

interest that other nations,

even

its

former

also led other rich countries in helping, or

poor countries develop

at least allowing,

nationaUstic poHcies. Tariffs

its

It

Through the

also set

up

their

GATT

in 1947, the

economies through

(General Agreement on

US and

other rich coun-

allowed developing countries to protect and subsidize their

producers more actively than the rich countries. This was a huge

and unequal

contrast to the days of colonialism

oping countries were forced into

treaties,

free trade. This

when

devel-

was partly due

the sense of colonial guilt in countries like Britain and France, but

was mostly because of the more enlightened

hegemon of

attitude of the then

to it

new

the global economy, the US, towards the economic

development of poorer nations.

The

result of this enlightened strategy

was spectacular. The

rich

countries experienced the so-called 'Golden Age of Capitalism' (1950-73). 5° Per capita

income growth

rate in

Europe shot up from

1.3% in the liberal golden age (1870-1913) to 4.1%. to

2.5% in the US, while

it

It

from 1.8%

rose

skyrocketed from 1.5% to 8.1% in Japan.

These spectacular growth performances were combined with low

income inequality and economic

stability. Significantly,

developing

countries also performed very well during this period. As

out in chapter

1,

nationalistic policies

grew

3%

at

pointed

under the 'permissive' international system, they

in per capita terms. This

achieved under old

and twice the

I

during the 1960s and the 1970s, when they used

liberal policies

rate they

is

way above what they had

during 'first globalization' (1870-1913)

have recorded since the 1980s under neo-liberal

policies.

Some have discounted the generosity of the US during the i947-i979 period on the grounds that

it

was being nice

because of the rivalry with the silly

to

USSR

in the

to

poor countries only

Cold War.

It

would be

deny that the Cold War had an important influence on US

foreign policy, but that should not stop us from giving credit where it is

due. During the 'age of imperialism' in the late 19th and the early

63

BAD SAMARITANS 20th century, the powerful countries behaved abominably towards the

weaker countries despite the intense rivalry amongst themselves.

The

- recent and more

history

the last two chapters will inform ters,

where

I

explain

in relation to the

how

key areas

distant

-

that

I

have discussed in

my discussion in the following chap-

Bad Samaritans are wrong of economic policy - international trade,

exactly today's

foreign investment regulation, privatisation, protection of intellectual

property rights,

like patents,

and macroeconomic policy - and suggest

how their behaviour should be changed if we are to promote economic development

in

poor countries.

64

CHAPTER

My

3

six-year-old son should get a job

75 free

I

trade always the answer?

have a six-year-old son. His

he

is

quite capable of

making

name

is

Jin-Gyu.

a living.

I

He

me, yet

lives off

pay for his lodging, food,

education and health care. But millions of children of his age already

have jobs. Daniel Defoe, in the i8th century, thought that children could earn a living from the age of four.

Moreover, working might do Jin-Gyu's character a world of good.

now

he

of money.

He

Right

make on

lives in

an economic bubble with no sense of the value

has zero appreciation of the efforts his mother and

his behalf, subsidizing his idle existence

from harsh

reality.

He

is

I

and cocooning him

over-protected and needs to be exposed to

competition, so that he can become a more productive person.

Thinking about sooner It

will

this

is

it,

the

more competition he

done, the better

whip him

it

will

into a mentality that

is

exposed to and the

be for his future development. is

ready for hard work.

I

should

make him quit school and get a job. Perhaps I could move to a country is still tolerated, if not legal, to give him more

where child labour

choice in employment. I I

can hear you say

I

must be mad. Myopic.

need to protect and nurture the

labour market at the age of

six,

child. If

I

Cruel.

dozen years of

from a purely

my son's

my

that

me

a savvy shoeshine

or even a prosperous street hawker, but he will never

surgeon or a nuclear physicist

tell

that

drive Jin-Gyu into the

he may become

-

You

would require

become at least

boy

a brain

another

protection and investment. You argue that, even

materialistic viewpoint,

education than gloat over the

65

I

would be wiser

money

I

to invest in

save by not sending

BAD SAMARITANS him

to school. After

all, if I

were

would have been

right, Oliver Twist

by the

better off pick-pocketing for Fagin, rather than being rescued

Good Samaritan Mr Brownlow, who

misguided his

deprived the boy of

chance to remain competitive in the labour market. Yet this absurd line of

argument

is

in essence

how free-trade

econ-

omists justify rapid, large-scale trade liberalization in developing countries.

They claim

exposed to as

much

need to be

that developing country producers

competition as possible right now, so that they

have the incentive to raise their productivity in order to survive.

and

Protection, by contrast, only creates complacency earlier the exposure, the

argument

goes, the better

it is

The

sloth.

for

economic

development. Incentives, however, are only half the story.

Even

if

The other

£2om reward

Jin-Gyu were to be offered a

is

capability.

or, alternatively,

threatened with a bullet in his head, he would not be able to

rise to

the challenge of brain surgery had he quit school at the age of Likewise, industries in developing countries will not survive are exposed to international competition too early. to

improve

their capabilities

They need time

is

the essence of the infant

theorized by Alexander Hamilton,

first

six.

they

by mastering advanced technologies and

building effective organizations. This

industry argument,

if

first

treasury secretary of the US, and used by generations of policy-makers

before and after him, as

I

have just shown in the previous chapter.

Naturally, the protection

argument

itself says)

tition forever.

subsidizing

him

should not be used to shelter him from compe-

at the

protection while he

and well-paid

Of

provide to Jin-Gyu (as the infant industry

Making him work

is

at the

age of six

and

live

an independent

Some

life.

He

is

only needs

accumulating the capabilities to take on a

course, as happens with parents bringing

up

satis-

their children,

some

parents are

governments can cosset infant industries too much.

children are unwilling to prepare themselves for adult

as infant industry

some

wrong, but so

job.

infant industry protection can go wrong. Just as over-protective,

is

age of 40. Eventually he should go out into the

big wide world, get a job

f)^ing

I

support

is

life,

just

wasted on some firms. In the way that

children manipulate their parents into supporting

66

them beyond

MY SIX-YEAR-OLD SON SHOULD GET

A JOB

childhood, there are industries that prolong government protection

through clever lobbying. But the existence of dysfunctional families is

hardly an argument against parenting

Likewise, cases of

itself.

fail-

ures in infant industry protection cannot discredit the strategy per

The examples of bad protectionism merely tell

se.

us that the policy needs

to be used wisely.

Free trade Free trade

is

good -

orthodoxy. To the proposition than colleague at

working

isn't

this is the doctrine at the heart

cannot be a more self-evident

neo-liberals, there

this.

Professor Willem Buiter,

Cambridge and

of the neo-liberal

a former chief

my distinguished former economist of the EBRD

(European Bank for Reconstruction and Development), once expressed this succinctly:

'Remember:

sion" or a "sacrifice" that

unilateral trade liberalization

one should be compensated

is

not a "conces-

for. It is

an

act of

enlightened self-interest. Reciprocal trade liberalization enhances the gains but

is

not necessary for gains to be present. The economics

there? Belief in the virtue of free trade

orthodoxy that

may question

it is

(if

agenda - open

and

still

trade,

effectively

not totally

reject)

so central to the neo-liberal a neo-liberal economist.

You

any other element of the neo-liberal

capital markets, strong patents or

stay in the neo-liberal church.

you

is

what defines

is all

even privatisation -

However, once you object to

free

are effectively inviting ex-communication.

Based on such convictions, the Bad Samaritans have done their

utmost to push developing countries into

much

freer trade.

-

or, at least,

a century,

most devel-

free trade

During the past quarter of

oping countries have liberalized trade to a huge degree. They were first

pushed by the IMF and the World Bank

Third World debt

crisis

in the aftermath of the

of 1982. There was a further decisive impetus

towards trade liberalization following the launch of the

During the

last

decade or

so, bilateral

and regional

WTO in 1995.

free trade agree-

ments (FTAs) have also proliferated. Unfortunately, during this period, developing countries have not done well at in

my view)

all,

massive trade liberalization, as

67

I

despite (or because of,

showed

in chapter

1.

BAD SAMARITANS The

Story of Mexico

it

free-trade

should be Mexico.

world (the US) and has had

It

a large diaspora living in the US,

business links. ^ Unlike

is

free

borders on the largest market in the

a free trade

agreement with

since 1995

it

North American Free Trade Agreement or NAFTA).

(the

camp -

any developing country can succeed with

particularly telling. If trade,

- poster boy of the

also has

It

which can provide important informal

many other poorer developing countries, managers and

a decent pool of skilled workers, competent

it

has

relatively

developed physical infrastructure (roads, ports and so on). Free trade economists argue that free trade benefited Mexico by accelerating growth. Indeed, following

Mexico's per capita

GDP

grew

NAFTA, between 1994 and 2002,

1.8% per year, a big improvement

at

over the 0.1% rate recorded between 1985 and 1995.^ But the decade before

NAFTA

was

Mexico, following

also a decade of extensive trade liberalisation for

its

conversion to neo-liberalism in the mid-1980s.

So trade liberalization was also responsible for the 0.1% growth

rate.

Wide-ranging trade liberalization in the 1980s and the 1990s wiped out whole swathes of Mexican industry that had been painstakingly

up during the period of import

built

The

(ISI).

lost jobs

peared).

and falls Its

in

wages

substitution industrialization

slowdown

result was, predictably, a

(as better-paying

agricultural sector

was

economic growth,

manufacturing jobs disap-

hard

also

in

hit

by subsidized US

products, especially corn, the staple diet of most Mexicans. that,

US

NAFTA's

On

top of

positive impact (in terms of increasing exports to the

market) has run out of steam in the

last

few years. During

2001-2005, Mexico's growth performance has been miserable, with an

annual growth rate of per capita income increase in total over five years). ^

By

at

0.3% (or

a paltry 1.7%

contrast, during the 'bad old

income had grown much than during the NAFTA period at an average of 3.1% per year.^

days' of ISI (1955-82), Mexico's per capita faster

Mexico

is

a particularly striking

example of the

failure

of premature

wholesale trade liberalization, but there are other examples.^ In Ivory Coast, following tariff cuts of

40%

in 1986, the chemical, textile,

shoe and automobile industries virtually collapsed. Unemployment soared. In

Zimbabwe, following trade

ployment

rate

jumped from 10%

to

68

liberalization in 1990, the

20%.

It

had been hoped

unem-

that the

MY SIX-YEAR-OLD SON SHOULD GET and labour resources

capital

bankrupt due to trade nesses. This simply did

that

from the enterprises

that

went

would be absorbed by new

busi-

released

liberalization

A JOB

not happen on a sufficient scale.

It is

not surprising

growth evaporated and unemployment soared.

Trade liberalization has created other problems, too.

on government budgets,

the pressures

as

it

reduced

It

has increased

tariff

revenues.

This has been a particularly serious problem for the poorer countries.

Because they lack tax collection capabilities and because easiest tax to collect, they rely heavily

account for over

50%

on

tariffs

tariffs are

the

(which sometimes

of total government revenue). ^ As a

result, the

adjustment that has had to be made following large-scale trade

fiscal

liberaHzation has been huge in recent

many

developing countries - even a

IMF study shows that, in low-income countries that have limited other taxes, less than 30% of the revenue lost due to liberalization over the last 25 years has been made up by other

abilities to collect

trade

Moreover, lower

taxes.^

of business activity and higher unem-

levels

ployment resulting from trade

When

tax revenue.

from the IMF

liberalization have also reduced

income

countries were already under considerable pressure

to reduce their

budget

deficits, falling

revenue meant

severe cuts in spending, often eating into vital areas like education,

health

and physical

It is

ization

infrastructure,

perfectly possible that

may

damaging long-term growth.

some degree of gradual trade

liberal-

have been beneficial, and even necessary, for certain

developing countries in the 1980s - India and China

come

to

mind. But what has happened during the past quarter of a century has been a rapid, unplanned and blanket trade liberalization. Just to

remind the

reader, during the 'bad old days' of protectionist

import

substitution industrialization (ISI), developing countries used to grow,

on

average, at double the rate that they are doing today under free

trade. Free trade simply isn't

working

for developing countries.

Poor theory, poor Free trade economists find tries

do badly when they

all this

results

quite mysterious.

How

can coun-

are using such theoretically well-proven ('the

69

BAD SAMARITANS economics

is all there',

as Professor Buiter says) policy as free trade?

But they should not be surprised. For their theory has some serious limitations.

Modern

free trade

argument

based on the so-called Heckscher-

is

HOS

Ohlin-Samuelson theory (or the derives

but

from David Ricardo's theory, which

differs

it

from Ricardo's theory

one

I

theory

outlined in chapter

crucial respect.

from international

that comparative advantage arises

the relative

in

HOS

The

theory).'^

endowments of 'factors of production

It

2,

assumes

differences in

(capital

and labour),

rather than international differences in technology, as in Ricardian theory.9

According to

free trade theory,

be

it

HOS version,

Ricardian or the

some products, as it is, producing some things than others.^

every country has a comparative advantage in

by

definition, relatively better at

In the

HOS

theory, a country has comparative advantage in products

more intensively use the factor of production with which it is more richly endowed. So even if Germany, a country relatively richer in capital than labour, can produce both automobiles and stuffed toys more cheaply than Guatemala, it pays for it to specialize in automobiles, as their production uses capital more intensively. that

relatively

Guatemala, even

and

if it is less efficient

stuffed toys than

in

Germany, should

producing both automobiles still

whose production uses more labour than '^

The

HOS

theory

Bertil Ohlin,

who

is

named

pioneered

after the it

it

trade theory, for each product there all

in the is

countries will use

one best production technology tage can not be determined

by how

by

two Swedish economists, Eh Heckscher and

in the early 20th century,

American economist who perfected technology, which

specialize in stuffed toys,

capital.

its

for

its

and Paul Saumelson, the

mid-20th century. In

only one 'best practice' if

they are producing

this version

most

(i.e.,

it.

If

of free

efficient)

each product has

production, a country's comparative advan-

technologies, as in Ricardo's theory.

suitable the technology used for each product

is

It is

determined

for the country. In the

HOS

on how intenwith which the country

theory, the suitability of a particular technology for a country depends sively is ^

it

uses the factor of production

relatively

(i.e.,

labour or capital)

abundantly endowed.

So, 'comparative' in the

term 'comparative advantage'

is

not about comparison

between countries but about comparison between products.

mix

these two

up

comparative advantage in

It is

because people

sometimes believe that poor countries do not have anything - which is a logical impossibility.

that they

70

MY SIX-YEAR-OLD SON SHOULD GET The more

closely a country

conforms

comparative advantage, the more to the increase in

its

own

it

to

its

A JOB

underlying pattern of

can consume. This

due

possible

is

production (of the goods for which

has

it

comparative advantage), and, more importantly, due to increased trading with other countries that specialize in different products.

How

When

they

can the country achieve

this?

By leaving things

as they are.

Robinson Crusoe)

are free to choose, firms will rationally (like

good

specialize in things that they are relatively

foreigners.

and

From

that trade liberalization, even

But the conclusion of the

when

HOS

unilateral,

it is

theory

critically

assumption that productive resources can move activities.

any one

With

among economists -

no problem.

economic

adjustments to changing trade

If a steel mill

shuts

down due

government reduces

(at

the

same or higher

levels

tariffs,

to

an increase

the resources

of productivity and thus

higher returns) by another industry that has

computer

profitable, say, the

In reality, this as

it

ical qualities

a 'general

freely across

in the industry (the workers, the buildings, the blast furnaces)

be employed

any form

beneficial.

is

depends on the

assumption - known as the assumption of 'perfect

in imports because, say, the

employed

is

become

No one

loses

relatively

from the

computers;

and there

necessary.

They are

usually fixed in their phys-

are few 'general use'

machines or workers with

that can be used across industries. Blast furnaces

steel

workers do not have the right

skills for

the

ployed. At best, they will end

up working

in low-skill jobs,

existing skills are totally wasted. This point

male

comedy

steel

film of 1997, The Full

making

unem-

where

their

made by the Monty, where six unem-

is

poignantly

workers from Sheffield struggle to rebuild their

strippers.

from

computer

industry. Unless they are retrained, the steel workers will remain

British hit

more

process.

not the case: factors of production cannot take

becomes

skill'

industry.

a bankrupt steel mill cannot be re-moulded into a machine

ployed

best

can immediately and without cost be absorbed by other this

factor mobihty'

patterns pose

will

is

This assumption means that capital and labour released from

activity

activities.

and trade with

at

this follows the propositions that free trade

lives as

There are clearly winners and losers involved

changing trade patterns, whether to the rise of new,

it

more productive

is

due

in

to trade liberalization or

foreign producers.

BAD SAMARITANS Most and

economists would accept that there are winners

free trade

from trade

losers

liberalization but argue that their existence

cannot be an argument against trade liberalization. Trade tion brings overall gains. As the winners gain

by the

losers, the

have something tion principle'

winners can make up

left

-

compensate the

if

all

for themselves. This

is

liberaliza-

more than what

is

lost

the latter 's losses and

still

known

as the

'compensa-

the winners from an economic change can fully

losers

and

still

have something

left,

the change

is

worth making.

The

first

problem with

this line

of argument

ization does not necessarily bring overall gain.

from the process, their gains may not be as by the losers - for example, when trade growth

many

is

Even

that trade liberal-

if

there are winners

large as the losses suffered liberalization reduces the

even make the economy shrink, as has happened in

rate or

developing countries in the past two decades.

more than the losers lose, the compensation is not automatically made through the workings of the market, which means that some people will be worse off than before. Trade liberalization will benefit everyone only when the displaced workers can get better (or at least equally good) jobs quickly, and Moreover, even

when

if

the winners gain

the discharged machines can be re-shaped into

- which

new machines

is rarely.

more serious problem in developing countries, where the compensation mechanism is weak, if not non-existent. In developed countries, the welfare state works as a mechanism to partially comThis

is

a

pensate the losers from the trade adjustment process through

unemployment

benefits, guarantees of health care

and education, and

minimum

income. In some countries, such as

Sweden and other Scandinavian

countries, there are also highly effec-

even guarantees of a

tive retraining

schemes for unemployed workers so that they can be

equipped with new welfare state result, the

is

skills.

In

most developing

countries, however, the

very weak and sometimes virtually non-existent. As a

victims of trade adjustment in these countries do not get

even partially compensated for the

sacrifice that

they have

made

for

the rest of society.

As

a result, the gains

from trade 72

liberalization in

poor countries

MY SIX-YEAR-OLD SON SHOULD GET more unevenly

are likely to be

when

Especially tries are

A JOB

distributed than in rich countries.

many

considering that

people in developing coun-

already very poor and close to the subsistence

level, large-

scale trade liberalization carried out in a short period of time will

mean of

life

some people have

that

and death, but

we need

their livelihoods wrecked. In developed

unemployment due to trade adjustment may not be a matter

countries,

in developing countries

more cautious with

to be

it

often

is.

This

is

why

trade liberalization in poorer

economies.

The short-run bility

mechanisms

immo-

although serious, only a secondary problem with free

is,

trade theory. like

trade adjustment problem arising from the

of economic resources and the weakness of compensating

myself -

The more

serious

that the theory

is

problem is

at least for

an economist

about efficiency in the short- run

use of given resources, and not about increasing available resources

through economic development in the long run; contrary to what proponents would have us

their

us that free trade

The problem

believe, free trade theory does not

tell

good for economic development. this - producers in developing countries entering

is

is

new industries need a period of (partial)

insulation

from international

competition (through protection, subsidies and other measures) before they can build up their capabilities to compete with superior foreign producers. able to

Of

course,

should go. But

much

too

when

the infant producers 'grow up' and are

compete with the more advanced producers, the insulation this has to

be done gradually.

If

they are exposed to

international competition too soon, they are

disappear. That

is

bound

to

the essence of the infant industry argument that

set out at the beginning of the chapter with a

little

help from

I

my son,

Jin-Gyu. In

recommending

free trade to

Samaritans point out that This to

is,

however,

make him

like

all

developing countries, the Bad

the rich countries have free(ish) trade.

people advising the parents of a six-year-old boy

get a job, arguing that successful adults don't live off

their parents and, therefore, that being

for their successes.

They do not

pendent because they are

independent must be the reason

realize that those adults are inde-

successful,

73

and not the other way around.

BAD SAMARITANS In fact,

most successful people

financially

are those

and emotionally, by

Likewise, as

I

discussed in chapter

when

their trade only

who have been well supported,

their parents 2,

their producers

when

they were children.

the rich countries liberalized

were ready, and usually only

gradually even then. In other words, historically, trade liberalization

has been the outcome rather than the cause of economic development. Free trade

may

- although not always - be the

often

policy in the short run, as

consumption. But

it

is

it is

likely to

maximize

definitely not the best

economy. In the long run,

free trade

is

a policy that

best trade

a country's current

way is

to develop

likely to

an

condemn

developing countries to specialize in sectors that offer low productivity

growth and thus low growth in

few countries have succeeded with

living standards. This

free trade, while

most

is

why

so

successful

countries have used infant industry protection to one degree or

Low income that

another.

severely restricts the

results

from lack of economic development

freedom that the poor countries have

in deciding

their fiiture. Paradoxically, therefore, 'free' trade policy reduces the

'freedom' of the developing countries that practise

The

international trading system

it.

and

its

discontents Never mind that Despite

its

promoted trade

strongly

As

I

free trade

works neither

in practice

nor

in theory.

abysmal record, the Bad Samaritan rich countries have liberalization in developing since the 1980s.

discussed in the earlier chapters, the rich countries had been

quite willing to

let

poor countries use more protection and subsidies

until the late 1970s.

However,

this

began to change in the 1980s. The

change was most palpable in the US, whose enlightened approach to international trade with economically lesser nations rapidly gave

way

to a system similar to 19th-century British 'free trade imperialism'. This

new

direction

Reagan

was

clearly expressed

in 1986, as the

by the then US president Ronald

Uruguay Round of

GATT

when he

called for

partners

- agreement under which they would

'new and more

liberal

74

talks

was

starting,

agreements with our trading hilly

open

their

markets

MY SIX-YEAR-OLD SON SHOULD GET and

treat

American products

as they treat their

was reahzed through the Uruguay Round of started in the

Uruguayan

city

concluded in the Moroccan

city

much more

regime that was

ownV° Such agreement

GATT

trade talks, which

of Punta del Este in 1986 and was of Marrakech in 1994. The result was

World Trade Organisation regime -

the

A JOB

a

new

international trade

biased against the developing countries

GATT regime. On the surface, the WTO simply created a 'level playing field' among

than the

its

member

countries, requiring that everyone plays

- how can we argue

by the same

rule

against that? Critical to the process was the adop-

tion of the principle of a 'single undertaking', which

meant

that

members had

GATT

regime,

up

to sign

to

all

agreements. In the

all

countries could pick and choose the agreements that they signed up

and many developing countries could stay out of agreements that they did not want - for example, the agreement restricting the use of to

subsidies.

the

same

to give

With the

rules. All

of them had to

all

up import quotas, export subsidies (allowed only for the poorest and most domestic

countries) detail,

members had to abide by reduce their tariffs. They were made

single undertaking,

we

realize that the field

subsidies. But, is

not level

at

when we look

at the

all.

To begin with, even though the rich countries have low average protection, they tend to disproportionately protect products that poor

countries export, especially garments and

when tariffs

exporting to a rich country market, poor countries face higher

An Oxfam for the USA is 1.6

than other rich countries.

'The overall import tax rate steeply for a large taxes range

number

from around four per cent

Cambodia and

Nepal.'^^

to the

US government

of

economy was

strikingly, in the

same

per cent. That rate

As a

much

for India

and Peru,

rises

to seven

as 14-15 per cent for Bangladesh,

paid

result, in 2002, India

than Britain did, despite the

less

more

tariffs

fact that the size

than one-third that of the UK. Even more

year,

US government economy was only 3%

to the

report points out that

of developing countries: average import

per cent for Nicaragua, and as

its

This means that,

textiles.

Bangladesh paid almost as

much

in tariffs

as France, despite the fact that the size of

its

that of France.^^

There are also structural reasons that

75

make what

looks Like 'levelling

BAD SAMARITANS the playing

field'

best example.

actually favour developed countries. Tariffs are the

The Uruguay Round

resulted in

all

countries, except for

the poorest ones, reducing tariffs quite a lot in proportional terms. But

up reducing

the developing countries ended

more

their tariffs a lot

absolute terms, for the simple reason that they started with higher

WTO

For example, before the rate of

to

a

71%.

was cut

It

to

agreement, India had an average

32%. The

US

average tariff rate

tariff

from

fell

in

tariffs.

7%

3%. Both are similar in proportional terms (each representing around

55%

cut),

but the absolute impact

is

very different. In the Indian case,

an imported good that formerly cost $171 would a significant

fall

in

now

cost only $132

what the consumer pays (about 23%)

-

would

that

dramatically alter consumer behaviour. In the American case, the price

consumer pays would have

the

difference that

most consumers

fallen

from $107

-

to $103

will hardly notice (less

than 4%). In

other words, the impact of tariff cuts of the same proportion portionately larger for the country

whose

TRIPS (Trade- related

the

meant

The most important example

is

Intellectual Property Rights) agreement,

property rights (more on this in chapter services,

dispro-

field'

which strengthened the protection of patents and other

and

is

initial tariff rate is higher.

In addition, there were areas where 'levelling the playing a one-sided benefit to rich countries.

a price

6).

Unlike trade in goods

where everyone has something to

where developed countries are almost always

intellectual

this

sell,

sellers

is

an area

and developing

countries buyers. Therefore, increasing the protection for intellectual

property rights means that the cost nations.

The same problem

is

mainly borne by the developing

applies to the

Investment Measures) agreement, which

restricts the

countries' ability to regulate foreign investors 4).

Once

again,

TRIMS

most poor countries only

(more on

receive,

(Trade-related

WTO

and do not make,

foreign investment. So, while their ability to regulate foreign nies

is

member

this in chapter

compa-

reduced, they do not get 'compensated' by any reduction in the

regulations that their national firms operating abroad are subject to, as they

simply do not have such firms.

Many

of the exceptions to the rules were created in areas where

the developed countries needed them. For example, while

most

domestic subsidies are banned, subsidies are allowed in relation to 7^

MY SIX-YEAR-OLD SON SHOULD GET agriculture, basic (as

opposed

commercial)

to

A JOB

R&D

and

(research

development), and reduction of regional disparities. These are subsidies that

The

happen

to

all

be extensively used by the rich countries.

rich nations give out an estimated $100 billion

worth of

agri-

cultural subsidies every year; these include the $4 billion given to

25,000 American peanut farmers and to

produce sugar (from

cially the

EU subsidies that allow Finland

beets). ^^ All rich

US government,

country governments, espe-

heavily subsidize basic

R&D, which then

increases their competitiveness in related industries. Moreover, this is

not a subsidy that developing nations can use, even

allowed to - they simply do not do little

for

them

to subsidize.

extensively used

much

R&D,

basic

they are

if

so there

is

As for regional subsides, which have been

by the European Union,

this

is

another case of

apparent neutrality really serving the interests mainly of rich countries.

In the

name

of redressing regional imbalances, they have

subsidized firms to induce

them

to locate in 'depressed' regions.

Within the nation, this maybe contributing to a reduction inequality. But, is

little

when viewed from an international perspective, there

difference between these subsidies

promote particular

and subsidies given

suits

to

industries.

Against these accusations of 'levelling the playing it

in regional

field'

them, the rich countries often argue that they

only where

still

give the

developing countries 'special and differential treatment' (SDT). But special

to be

and

differential treatment

under the

GATT

now a pale shadow of what

is

regime. While

some exceptions

are

it

used

made

for

the developing countries, especially the poorest ones ('the least devel-

oped

countries' in

the form

WTO

jargon),

many

of these exceptions were in

of a slightly longer 'transition period' (five to ten years)

before they reach the same final goal as the rich countries, rather than the offer of

permanent asymmetrical arrangements.^^

So, in the

name

of 'levelUng the playing

field',

new international They are preventing

the

Bad Samaritan

rich nations have created a

trading system that

rigged in their favour.

the poorer countries

from using the

tools of trade

and

industrial policies that they

is

had

themselves so effectively used in the past in order to promote their

own economic development -

not just

11

tariffs

and

subsidies, but also

BAD SAMARITANS and

regulation of foreign investment tual property rights, as

I

will

show

'violation'

of foreign intellec-

in subsequent chapters.

Industry for agriculture? Not

satisfied

tries

with the result of the Uruguay Round, the rich coun-

have been pushing for further liberalization by developing

economies. There has been a push to tighten restrictions on controls over foreign investment, over and above what was accepted in the

TRIMS 1998)

agreement. This was attempted

first

through the

and then through the World Trade Organisation

(in

OECD

(in

2003 ).^5 xh^

move was thwarted both times, so the developed countries have shifted their focus

and are now concentrating on

reduce industrial

the developing countries.

tariffs in

NAM A

This proposal, dubbed

was

first

a proposal to drastically

(non-agricultural market access),

launched in the Doha ministerial meeting of the World Trade

Organisation in 2001.

It

US government

2002, the

got a critical impetus when, in

December

dramatically upped the ante by calling for

the abolition of all industrial tariffs by 2015. There are various proposals floating around, but, if the rich countries have their

way in

the

NAMA

negotiations, the tariff ceiling for developing economies could

from the current 10-70%

to

5-10% -

a level that has not been seen

since the days of the 'unequal treaties' in the 19th centuries,

and

early 20th

when the weaker countries were deprived of tariff autonomy

and forced

to set a low,

uniform

tariff rate, typically

3-5%.

In return for developing countries cutting industrial

tariffs,

countries promise that they will lower their agricultural subsidies, so that the

poor countries can increase

was sold

deal,

as a

should be

fall

its

win-win

own

the rich

tariffs

and

their exports. This

even though unilateral trade liberalization

reward, according to free trade theory.

The proposal was debated in the December 2005 Hong Kong ministerial

meeting of the World Trade Organisation. As no agreement

could be reached, the negotiation was extended until the following

summer, where it was finally put into a state of suspended animation - Mr Kamal Nath, the Indian commerce minister, famously described the negotiation to be 'between intensive care and crematorium'. The 78

MY SIX-YEAR-OLD SON SHOULD GET

A JOB

rich countries said that the developing countries were not offering sufficient industrial tariff cuts, while the developing countries

demanding

that the rich countries were tariff cuts

and

and not

offering enough reduction in agricultural tariffs The negotiation is stalled for the moment, but this

subsidies.

'industry-agriculture swap'

many

argued

excessively steep industrial

basically seen as the

is

people, even including

some

way forward by

WTO.

traditional critics of the

In the short run, greater opening of agricultural markets in the

may

rich countries

them.

benefit developing countries

- but only

a few of

Many developing countries are in fact net agricultural importers to benefit from it. They may even get hurt, if they

and thus unlikely

happen

to be importers of those agricultural products that are heavily

subsidized by the rich countries. Eliminating those subsidies would increase these developing countries' import Overall, the

main

beneficiaries of the

markets in the rich world agriculture

-

will

opening up of agricultural

be those rich countries with strong

the US, Canada, Australia and

countries

do not protect many

countries

(e.g., coffee, tea,

bills.

New

Zealand.^^ Developed

agricultural products exported

by poor

cocoa) for the simple reason that they do not

have any domestic producer to protect. So, where protection and subsidies are going to

products Brazil

like

come down

is

mainly in 'temperate zone' agricultural

wheat, beef and dairy. Only two developing countries,

and Argentina,

are

major exporters of these products. Moreover,

some (although obviously not

all)

of the prospective

'losers'

from

agricultural trade liberalization within rich countries will be the least

by

well-off people in

their national standards (e.g., hard-pressed farmers

Norway, Japan or Switzerland), while some of the beneficiaries in

developing countries are already rich even by international standards (e.g.,

agricultural capitalists in Brazil or Argentina). In this sense, the

popular image that agricultural liberalization in rich countries

poor peasant farmers "^

The other main

their

in developing countries

is

is

helping

misleading."^

beneficiaries of agricultural liberalization in rich countries, that

is,

consumers, do not gain very much. As a proportion of income, their spending

on agricultural products is already pretty low (around 13% for food and 4% for alcohol and tobacco, of which only a fraction is the cost of the agricultural produce itself). Moreover, the trade in many agricultural products they buy is already liberalized (e.g., coffee, tea, cocoa).

79

BAD SAMARITANS More fail

to

see agricultural liberalization in the

an important way to help poor countries develop

rich countries as

often

who

importantly, those

pay enough attention to the

for free. In return, the

The problem

is

poor countries

fact that

come

does not

it

have to make concessions. - reducing industrial tariffs,

will

that these concessions

dismantling foreign investment controls and abandoning 'permissive' intellectual

more

property rights - will make their economic development

difficult in the

long run. These are policy tools that are crucial

economic development,

for

Given

this,

as

document throughout

book.

this

the current debate surrounding the liberalization of

agriculture in rich countries

valuable for

I

getting

is

some developing

its

priorities

wrong.

may be

It

countries to get access to agricultural

markets in developed economies."^ But

it is

more important

far

that

we

allow developing countries to use protection, subsidies and regulation of foreign investment adequately in order to develop their rather than giving if

them

by the

rich countries can only

by the developing countries giving up industry promotion, the price

should not be forced to

More It is

is

sell

their use of the tools of infant

not worth paying. Developing coun-

their future for small

immediate

gains.

trade, fewer ideologies

It

was the part of Korea that Japan had developed

In the earlier stages of development,

agriculture

is

most people

on

live

agriculture, so developing

Higher agricultural productivity

crucial in reducing poverty.

a pool of healthy

and productive workers

for a high share of exports, as the country

may have

little

tance of export earnings for economic development that

exports should be increased as for this, greater

much

also creates

that can be used later for industrial develop-

ment. In the early stages of development, agricultural products are also

And,

be 'bought'

hard to believe today, but North Korea used to be richer than

South Korea. *

economies,

bigger agricultural markets overseas. Especially

agricultural liberalization

tries

own

I

else to

sell.

discussed

as possible (although the scope

opening of agricultural markets

likely to

account

Given the impor-

earlier, agricultural

may not be

in the rich countries

But increased agricultural productivity and agricultural exports often require

is

large).

helpful.

state inter-

vention along the line of 'infant industry promotion'. Agricultural producers, especially the smaller ones, need government investment irrigation for production

and roads

and support

in infrastructure (especially

for exports), international marketing

80

and R&D.

MY SIX-YEAR-OLD SON SHOULD GET when

industrially

it

A JOB

ruled the country from 1910 until 1945.

The

Japanese colonial rulers saw the northern part of Korea as the ideal base from which to launch their imperialist plan to take over China. It is

and has considerable mineral

close to China,

Even

coal.

resources, especially

after the Japanese left, their industrial legacy

Korea to maintain

its

enabled North

economic lead over South Korea

well into the

1960s.

Today, South Korea

is

one of the world's industrial powerhouses,

while North Korea languishes in poverty. fact that

actively

Through

the existence of better technologies

needed

it

in order to

managed some

way

things

is

thanks to the

trade.

buy them. In

technological

its

- limestone, invented by a Korean

the second-ever

man-made

on elsewhere because

it

own

way, North Korea has

make

fibre

it

has figured out a

made out of - of

scientist in 1939. Despite

a comfortable fabric, but

it

allowed North Koreans to be self-sufficient in clothes. But there limit to

what a

all

being

Nylon, Vinalon did not catch

fibre after

did not

South Korea learned about

For example,

feats.

its

and earned the foreign currency

mass-produce Vinalon, a synthetic

to

of this

absorbed foreign technologies while North Korea pursued

doctrine of self-sufficiency.

that

Much

South Korea aggressively traded with the outside world and

single developing country can invent

on

its

has is

a

own without

continuous importation of advanced technologies. Thus, North Korea is

technologically stuck in the past, with 1940s Japanese

technologies, while South Korea

dynamic economies trade

is

good

for

is

in the world.

and 1950s Soviet

one of the most technologically

Do we

need any better proof that

economic development?

In the end, economic development

is

about acquiring and mastering

advanced technologies. In theory, a country can develop such technologies

on

its

own, but such

a strategy of technological self-sufficiency

quickly hits the wall, as seen in the North Korean case. This all

successful cases of

is

why

economic development have involved serious

attempts to get hold of and master advanced foreign technologies

(more on

this in chapter 6).

But in order to be able to import tech-

nologies from developed countries, developing nations need foreign

currency to pay for them - whether they want to buy directly

(e.g.,

technology Hcences, technology consultancy services) or indirectly

81

BAD SAMARITANS (e.g.,

better machines).

be provided through

Some

may

of the necessary foreign currency

from

gifts

rich countries (foreign aid), but

most

has to be earned through exports. Without trade, therefore, there will

be

little

technological progress and thus

But there for

tial

a

is

economic development.

little

huge difference between saying that trade

economic development and saying that

at least, that freer trade is better) for

Bad Samaritans

do.

is

essen-

best (or,

economic development,

mists have so effectively deployed in cowing their opponents

you must be against

are against free trade, they insinuate,

As South Korea shows,

is

as the

of hand that free trade econo-

this sleight

It is

free trade

-

if

you

progress.

active participation in international trade

does not require free trade. Indeed, had South Korea pursued free trade and not a

promoted

major trading nation.

tungsten ore,

fish,

might

The

1,

be fighting over

secret of

its

it

would not have become

be exporting raw materials

made with human

who owns which

success lay in a judicious

industries were developed

and old

tionally competitive. In a way, this

tuft

became

rich

and

this

of

hair, so to speak.

changing as new infant

became

interna-

much of a 'secret'. As I have how almost all of today's rich

not

is

at the

is

used to be

mix of protection and open

infant industries is

in the earlier chapters, this

countries

hair) that

from the 1960s, Koreans

free trade policy

trade, with the areas of protection constantly

shown

(e.g.,

To go back to the imagery of

in the 1960s.

had they followed

still

still

seaweed) or low-technology, low-price products

main export items

chapter

would

garments, wigs

(e.g., textiles, its

infant industries,

It

root of almost

all

recent

success stories in the developing world. Protection does not guarantee

development, but development without Therefore,

if

it is

very

difficult.

they are genuinely to help developing countries

develop through trade, wealthy countries need to accept asymmetric protectionism, as they used to between the 1950s and the 1970s.

should acknowledge that they need to have

much

for themselves than the developing countries have.

They

lower protection

The

global trading

system should support the developmental efforts of developing coun-

by allowing them to use more freely the tools of infant industry promotion - such as tariff protection, subsidies and foreign invest-

tries

ment

regulation. At the

moment,

the system allows protection and

82

MY SIX-YEAR-OLD SON SHOULD GET subsidies

much more

need them. But

it

readily in areas

A JOB

where the developed countries

should be the other way around - protection and

subsidies should be easier to use

where the developing countries need

them more. Here,

is

it

particularly important to get our perspective right

about agricultural liberalization in the rich countries. Lowering

countries, especially Brazil

may

agri-

some developing and Argentina, but not most. Above all,

cultural protection in those countries

help

agricultural liberalization in the rich world should not be conditional

upon

further restrictions

on the use of the

industry promotion by developing nations, as

demanded by the rich countries. The importance of international cannot be overemphasized. But

is

tools of infant

currently being

trade for economic development

free trade

is

not the best path to

economic development. Trade helps economic development only when the country employs a mixture of protection and open trade, constantly

adjusting

it

according to

its

changing needs and

capabilities.

simply too important for economic development to be trade economists.

83

Trade

left

is

to free

CHAPTER

4

The Finn and the elephant Should we regulate foreign investment?

The Finns a

like to tell a

joke about themselves.

Frenchman, an American and a Finn do

if

What would

book on the elephant? The German, with

write a

a

German,

they were each asked to his characteristic

thoroughness, would write a thick two -volume, fully annotated study entitled. Everything

Frenchman, with

That There

his

is

to

book

tential anguish,

would write

of the Elephant.

The American, with

ness opportunities,

Know About

a

The

entitled

Life

famous nose

his

would naturally write

a

book

Make Money with an Elephant. The Finn would What Does the Elephant Think of the Finnsl The Finns

the Elephant.

penchant for philosophical musings and

The exis-

and Philosophy for

good

entitled.

write a

book

busi-

How

to

entitled

are laughing at their excessive self-consciousness. Their

own

preoccupation with their a language that

is

more

identity

is

understandable. They speak

Korean and Japanese than

related to

to the

language of their Swedish or Russian neighbours. Finland was a

Swedish colony for around for

six

hundred years and

a Russian colony

about a hundred. As a Korean, whose country has been pushed

around

for thousands of years

by every neighbour

in sight

- the

Chinese, the Huns, the Mongolians, the Manchurians, the Japanese, the Americans, the Russians, So,

it

you name

it

-

in 1918, Finland tried

its

know

the feeling.

best to keep foreigners out.

introduced a series of laws in the 1930s that

The country

officially classified all the

more than 20% foreign ownership as - hold your - ^dangerous'. The Finns may not be the subtlest people in the

enterprises with

breath

I

was unsurprising that, after gaining independence from Russia

84

THE FINN AND THE ELEPHANT world, but this

wanted, very

heavy stuff even for them. Finland

is

little

foreign investment/

1980, 'Finland, Finland, Finland

.

.

When Monty

You

.

got, as

it

had

Python sang

are so sadly neglected,

in

and

often ignored' ('The Finland Song'), they did not perhaps guess that

the Finns had sought to be neglected

The Finnish law was eventually ownership

had

to be

ceiling

was raised

to

and ignored.

relaxed in 1987,

40%, but

and the foreign

foreign investments

all

still

approved by the Ministry of Trade and Industry. General

liberalization of foreign investment did not

come

until 1993, as part

of the preparations for the country's accession to the

According to the neo-liberal orthodoxy, foreign strategy, especially

if

this sort

EU

in 1995.

of extreme anti-

sustained for over half a century, should

have severely damaged Finland's economic prospects. However, since the mid-1990s, Finland has been touted as the paragon of successful global integration. In particular, Nokia,

mobile phone company,

its

has been, figuratively speaking, inducted into the Globalization Hall

A

of Fame.

country that did not want to be a part of the global

economy has suddenly become an icon of globalization. possible?

ments

We

for

shall

answer that

later,

but

first let

How was this

us examine the argu-

and against foreign investment.

Is

foreign capital essential?

Many developing countries find it difficult to generate enough savings to satisfy their own investment demands. Given this, it seems uncontroversial that any additional money they can get from other countries that have surplus savings should be good. Developing countries

should open their capital markets,

Samaritans, so that

The liberal gap'. It

such money can

benefit of having free international

economists argue, does not stop

is

it

flow in

argued by the Bad

freely.

movement of capital, neo-

at

plugging such a 'savings

improves economic efficiency by allowing capital to flow

into projects with the highest possible returns

on

a global scale. Free

cross-border capital flows are also seen as spreading 'best practice' in

government policy and corporate governance. Foreign investors would 85

BAD SAMARITANS simply pull out, the reasoning goes,

Some

not well run.^

if

companies and countries were

even, controversially, argue that these 'collateral

even more important than the direct benefits that come

benefits' are

from the more

efficient allocation

of

capital.^

Foreign capital flows into developing countries consist of three

main elements -

grants, debts

and investments. Grants

are

money

given away (but often with strings attached) by another country and

development assistance (ODA). Debts

are called foreign aid or official

consist of

bonds).

which

bank loans and bonds (government bonds and corporate

made up of

Investments are

"^

'portfolio equity investment',

equity (share) ownership seeking financial returns rather

is

than managerial influence, and foreign direct investment (FDI),

which involves the purchase of equity with

management of There

is

the firm

on

a

view to influence the

a regular basis.^

an increasingly popular view

among

neo-liberal econo-

mists that foreign aid does not work, although others argue that

not primarily motivated by

the 'right' kind of aid (that

is,

geo-politics) works.^ Debts

and portfolio equity investment have

come under volatile.

aid that

is

attack for their volatility.^

For example, in 1998,

Bank loans

total net

also

are notoriously

bank loans

to developing

countries were $50 billion; following a series of financial crises that

engulfed the developing world (Asia in 1997, Russia and Brazil in 1998, Argentina in 2002), they turned negative for the next four years (-$6.5 biUion per year

on

average);

by 2005, however, they were 30%

higher than in 1998 ($67 billion). Although not as volatile as bank loans, capital inflows

investment as

bank

is

through bonds fluctuate a

lot.^

Portfolio equity

even more volatile than bonds, although not as volatile

loans.^

These flows are not exactly at the

wrong

just volatile, they tend to

time.

When economic

country are considered good, too enter. This

much

beyond

in

and go out

foreign financial capital

can temporarily raise asset prices

real estate prices)

come

prospects in a developing

(e.g.,

their real value, creating asset bubbles.

things get bad, often because of the bursting of the very

bubble, foreign capital tends to leave

all at

the

may

prices of stocks,

When

same

asset

same time, making the

economic downturn even worse. Such 'herd behaviour' was most 86

THE FINN AND THE ELEPHANT vividly demonstrated in the 1997 Asian crises,

flowed out on a massive

scale, despite the

of the economies concerned (Korea,

and Indonesia).

Of

when

foreign capital

good long-term prospects

Hong Kong,

Malaysia, Thailand

^°

course, this kind of behaviour

behaviour - also

exists

- known

as 'pro-cycHcal'

among domestic investors. Indeed, when things

go bad, these investors, using their insider information, often leave the country before the foreigners do. But the impact of herd behav-

iour by foreign investors

much

is

greater for the simple reason that

developing country financial markets are tiny relative to the amounts of

money

sloshing around the international financial system.

The

Indian stock market, the largest stock market in the developing world, is less

than one-thirtieth the

size

of the

US stock market.^^ The Nigerian

stock market, the second largest in Sub-Saharan Africa,

worth

is

less

US stock market. Ghana's stock market US market.^^ What is a mere drop in the

than one five-thousandth of the is

worth only 0.006% of the

ocean of rich country assets will be a flood that can sweep away financial markets in developing countries.

Given

this,

it

is

no coincidence

that developing countries have

experienced more frequent financial crises since their capital

and the ians,

markets

at the

1990s. According to a study

between 1945 and

1971,

when

by two leading economic

global finance

developing countries suffered no banking

and one 'twin

crisis'

Between 1973 and

21

was not

crises, 16

twin

crises in the

were

17

histor-

liberalized,

currency crises

(simultaneous currency and banking

1997, however, there

currency crises and

many of them opened

urge of the Bad Samaritans in the 1980s

banking

crises).

crises, 57

developing world.^^ This

is

not even counting some of the biggest financial crises that occurred after 1998 (Brazil, Russia

and Argentina being the most prominent

cases).

The volatility and the pro-cyclicality of international financial flows are

what make even some globalization

lagdish Bhagwati,

warn

against

enthusiasts, such as Professor

what he

calls 'the perils

of gung-ho

international financial capitalism'.^^ Even the IMF, which used to push

strongly for capital market opening during the 1980s and especially the 1990s, has recently changed

its

stance

87

on

this matter,

becoming

a

BAD SAMARITANS more muted

lot

in

oping countries/5 account

.

.

its

support of capital market opening in devel-

Now it accepts that 'premature opening of the capital

can hurt a country by making the structure of the inflows

.

unfavourable and by making the country vulnerable to sudden stops or reversals of

flows.'^^

The Mother Teresa of The behaviour of

international financial flows (debt

equity investment)

is

and portfolio

in stark contrast with that of foreign direct

FDI flows

investment. Net

foreign capital?

into developing countries were $169 billion

in 1997.^^ Despite the financial turmoil in the developing world, still

$172 billion per year

tion to

not just

money but

opment.

Sir

Leon

on average between 1998 and

foreign direct investment

its stability,

is

it

was

2002.^^ In addi-

thought to bring in

a lot of other things that help

economic devel-

former British commissioner of the

Brittan, a

European Union, sums

it

up: foreign direct investment

is 'a

source of

extra capital, a contribution to a healthy external balance, a basis for

increased productivity, additional employment, effective competition, rational production, technology transfer,

and a source of managerial

knowhow.'^9

The case for welcoming foreign direct investment, then, seems overwhelming. FDI

is

stable, unlike

other forms of foreign capital inflows.

Moreover, it brings not just money but also enhances the host country's productive capabilities by bringing in skills

and technology.

feted as if

it

were

'the

No wonder

more advanced

that foreign direct investment

Mother Teresa of foreign

Palma, the distinguished Chilean economist

and now

a colleague at

who

is

capital', as

my former teacher

its

limitations

foreign direct investment flows

and problems.

may

have been very stable

during the financial turmoil in developing countries in the 1990s and the early 2000s, but all

countries.^^

can be

made

When

'liquid'

is

Gabriel

Cambridge, once ironically observed. But

foreign direct investment has First,

organization,

it

late

has not always been the case for

a country has an

open

and shipped out rather 88

capital market,

quickly.

FDI

As even an IMF

THE FINN AND THE ELEPHANT publication points out, the foreign subsidiary can use

borrow from domestic banks, change the money and send the money

company loan

it

the extreme case,

company may

out; or the parent

its

assets to

into foreign currency recall the intra-

has lent to the subsidiary (this counts as FDI).^^ In

most foreign

direct investment that

out again through such channels, adding

little

came

in

can go

to the host country's

foreign exchange reserve position.^^

Not only

may

it

is

FDI not

necessarily a stable source of foreign currency,

have negative impacts on the foreign exchange position of the

host country. FDI

may

generate additional

demands

Of

foreign loans).

bring in foreign currency, but

course,

it

for

(e.g.,

it

can (but

may

foreign exchange than

it

uses

is

why many countries have imposed

is

can also

not) also generate addi-

tional foreign currency through exporting, but

more

it

importing inputs, contracting

whether

it

will earn

not a foregone conclusion. This controls

on

the foreign exchange

earnings and spending by the foreign companies making the invest-

ment to

(e.g.,

buy

how much they should export, how much

locally).

Another drawback with foreign

direct investment

the opportunity for 'transfer pricing'

(TNCs) with operations practice

inputs they have

^3

in

a

that

it

creates

by transnational corporations

more than one

where the subsidiaries of

is

TNC

country. This refers to the

are overcharging or under-

charging each other so that profits are highest in those subsidiaries operating in countries with the lowest corporate tax I

say overcharging or undercharging,

I

really

mean

at

And when

A Christian Aid TV antennas from

it.

report documents cases of underpriced exports like

China

rates.

$0.40 apiece, rocket launchers from Bolivia at $40 and

bulldozers at $528, and overpriced imports such as

US

German hacksaw

blades at $5,485 each, Japanese tweezers at $4,896, and French wrenches at $1,089.^4

xhis

is

a classic

problem with TNCs, but today the problem

become more severe because of the proliferation of tax havens that have no or minimal corporate income taxes. Companies can vastly reduce their tax obligations by shifting most of their profits to a paper has

company It

registered in a tax haven.

may be argued

that the host country should not

complain about

transfer pricing, because, without the foreign direct investment in

89

BAD SAMARITANS question, the taxable first place.

But

this

is

income would not have been generated

in the

need to use

a disingenuous argument. All firms

money who have

productive resources provided by government with taxpayers' roads, the telecommunications network, workers

(e.g.,

received publicly funded education

subsidiary

is

not paying

its 'fair

and

training). So, if the

share' of tax,

it is

TNC

effectively free-riding

on the host country. Even

foreign direct investment is

and management know-how

for the technologies, skills is

supposed to bring with

it,

the evidence

ambiguous: '[d]espite the theoretical presumption

different types of [capital] inflows,

FDI has

that

that,

of the

the strongest benefits,

it

has not proven easy to document these benefits' - and that's what an

IMF

publication

is

saying. ^^

why

is

this? It

is

because different types

of FDI have different productive impacts.

When we think of foreign direct investment, most of us think about new microchip factory in Costa Rica or Volkswagen laying down a new assembly line in China - this is known as greenfield' investment. But a lot of foreign direct investment is made by foreigners buying into an existing local company - or 'brownfield' Intel building a

investment. ^^ Brownfield investment has accounted for over half of total

world FDI since the 1990s, although the share

is

lower for develop-

ing countries, for the obvious reason that they have relatively fewer firms that foreigners want to take over. At for as

much

as

80%

its

height in 2001,

it

accounted

of total world FDI.^^

Brownfield investment does not add any

new production facilities car maker Daewoo in

- when General Motors bought up the Korean

wake of the 1997 financial crisis, it just took over the existing factories and produced the same cars, designed by Koreans, under the

different

names. However, brownfield investment can

increase in productive capabilities. This it

is

is

because

it

still

lead to an

can bring with

new management techniques or higher quality engineers. The trouble that there

In

some

is

no guarantee

cases,

of not doing

much

company bought that he thinks

is

that this will happen.

brownfield FDI to

is

made with an

improve the productive

a foreign direct investor

explicit intention

capabilities of the

might buy a company

undervalued by the market, especially in times of 90

THE FINN AND THE ELEPHANT financial crisis,

buyer.^^

and run

it

as

Sometimes the foreign

it

used to be until he finds a suitable

direct investor

may even actively destroy

company bought by engaging when the Spanish airline Iberia bought

the existing productive capabilities of the in 'asset stripping'. For example,

some

Latin

American airUnes

planes for the tually driving

in the 1990s, it swapped its own old new ones owned by the Latin American airlines, evensome of the latter into bankruptcy due to a poor service

record and high maintenance costs.

Of course, the value of foreign direct investment to the host economy is not confined to what it does to the enterprise in which the investment has been made. The enterprise concerned hires local workers (who may learn new skills), buys inputs from local producers (who may pick up new technologies in the process) and has some 'demonstration effects' on domestic firms (by showing them new management techniques or providing knowledge about overseas markets). These effects, known as 'spill-over effects', are real additions to a nation's

to be scoffed

long-run productive capabilities and not

at.

Unfortunately, the spill-over effects case, a

and

may not happen. In the extreme

TNC can set up an 'enclave' facility, where all inputs are imported

all

that the locals

do

do not even pick up new

is

to engage in simple assembly,

skills.

Moreover, even

when

where they

they occur,

spill-

over effects tend to be relatively insignificant in magnitude.^^ This

why governments have ance requirements -

tried to magnif)^

is

them by imposing perform-

regarding, for example, technology transfer, local

contents or exports.^"

A

critical

but often ignored impact of FDI

is

and future) domestic competitors. An entry by

that a

on the (current

TNC

through FDI

can destroy existing national firms that could have 'grown up' into successful operations without this premature exposure to competition, or

it

can pre-empt the emergence of domestic competitors. In

such cases, short-run productive capabilities are enhanced, as the

TNC

subsidiary replacing the (current and future) national firms

usually

more

productive than the

latter.

But the

level

capability that the country can attain in the long run as a result.

91

is

of productive

becomes lower

BAD SAMARITANS This

is

activities outside later.

As a

TNCs do not, as a rule, transfer the most valuable their home country, as I will discuss in greater detail

because

result, there will

tication that a

TNC

to the Toyota

example

be a definite ceiling on the

level

of sophis-

subsidiary can reach in the long run. To go back in chapter

i,

had Japan

FDI

liberalized

in

its

automobile industry in the 1960s, Toyota definitely wouldn't be producing the Lexus today -

would have been wiped out

it

or,

more

have become a valued subsidiary of an American carmaker.

likely,

Given

this,

a developing country

may

reasonably decide to forego

short-term benefits from FDI in order to increase the chance for

domestic firms to engage in higher-level

banning FDI

same

activities in the

in certain sectors or regulating

it.^^

This

logic as that of infant industry protection that

the earlier chapters

-

a country gives

up the short-run

long run, by exactly the

is I

its

discussed in

benefits of free

trade in order to create higher productive capabilities in the long run.

And it is why, historically, most economic success stories have to regulation of FDI, often in a draconian

manner,

as

I

resorted

shall

now

show.

'More dangerous than military power' be a happy day for us when not a single good American securowned abroad and when the United States shall cease to be an exploiting ground for European bankers and money lenders.' Thus 'It

will

ity is

wrote the

US

Bankers' Magazine in 1884.^^

The reader may

find

it

hard to believe that a bankers' magazine

published in America could be so hostile to foreign investors. But this

was its

in fact true to type at the time.

The US had

a terrible record in

dealings with foreign investors.^^

In 1832,

Andrew

Jackson, today a folk hero to American free-

marketeers, refused to renew the licence for the quasi-central bank, the second the

USA

Bank of

the

(see chapter

USA -

2).^"^

the successor to Hamilton's

Bank of

This was done on the grounds that the

foreign ownership share of the

bank was too high - 30%

(the

pre-EU

Finns would have heartily approved!). Declaring his decision, Jackson

92

THE FINN AND THE ELEPHANT said: 'should the stock

of the bank principally pass into the hands of

the subjects of a foreign country, and

we should

unfortunately become

involved in a war with that country, what would be our condition? .

.

.

Controlling our currency, receiving our pubHc moneys, and holding

thousands of our citizens in dependence,

it

would be

more formi-

far

dable and dangerous than the naval and military power of the enemy. If

we must have

a

bank

...

should be purely American!^^

it

If

the

president of a developing country said something like this today, he

would be branded

a

xenophobic dinosaur and blackballed

in the

international community.

From the First

the earliest days of

its

economic development

World War, the US was the world's Given

capital.^^

this,

largest

right

up

to

importer of foreign

there was, naturally, considerable concern over

management' by foreign investors^^. 'We have no horror of FOREIGN CAPITAL - if subjected to American management [italics 'absentee

and

capitals original],' declared Niks' Weekly Register, a nationalist

magazine

in the

Hamiltonian tradition, in

Reflecting such sentiment, the

US

1835.^^

federal

government strongly

regulated foreign investment. Non-resident shareholders could not

vote and only American citizens could (as

opposed

and foreign banks

to state-level) bank. This

become meant

financial institutions could

buy

directors in a national

that 'foreign individuals

shares in U.S. national

if they were prepared to have American citizens as their repre-

sentatives

on the board of directors', thus discouraging

A

foreign invest-

monopoly for US ships in coastal shipping was imposed in 1817 by Congress and continued until the First World War. 4° There were also strict regulations on foreign

ment

in the

banking

sector.39

navigation

investment in natural resource industries.

Many

state

governments

barred or restricted investment by non-resident foreigners in land.

The by

1887 federal Alien Property Act prohibited the ownership of land

aliens

- or by companies more than 20% owned by

'territories' (as

opposed to the

fully fledged states),

aliens

-

in the

where land spec-

ulation was particularly rampant.^^ Federal mining laws restricted

mining

rights to

US

citizens

and companies incorporated

In 1878, a timber law was enacted, permitting only

on public

land.

93

US

in the

US.

residents to log

BAD SAMARITANS Some

state (as

opposed

foreign investment. heavily than the

to federal) laws

were even more hostile to

A number of states taxed foreign companies more

American ones. There was

a notorious Indiana law

of 1887 that withdrew court protection from foreign firms altogether.^^ In the late 19th century, the ticularly hostile attitude

where

New

York

state

government took

towards FDI in the financial sector, an area

was rapidly developing a world-class position

it

of infant industry

a par-

protection). 43 It

(a clear case

instituted a law in the 1880s that

banned foreign banks from engaging

in 'banking business' (such as

taking deposits and discounting notes or

bills).

The

1914 banking law

banned the establishment of foreign bank branches. For example, the

London

City and Midland

Bank (then the world's

third largest bank,

measured by deposits) could not open a New York branch, even though it

had 867 branches worldwide and 45 correspondent banks

in the

US

alone.44

Despite

ment, the

extensive,

its

and often

strict,

controls

on

foreign invest-

US was the largest recipient of foreign investment throughout

the 19th century and the early 20th century regulation of

TNCs

FDI from pouring

in

bound

is

in the

same way

a large

Bad Samaritans

strict

amount of

into that country in recent decades. This

the face of the belief by the regulation

-

China has not prevented

flies

in

that foreign investment

to reduce investment flows, or, conversely, that

the liberalization of foreign investment regulation will increase foreign

investment flows. Moreover, despite of -

its strict

or,

I

would

argue, partly because

regulation of foreign investment (as well as having in

place manufacturing tariffs that were the highest in the world), the

US was

economy throughout

the world's fastest-growing

the 19th

century and up until the 1920s. This undermines the standard argu-

ment

that foreign investment regulation

harms the growth prospects

of an economy.

Even more draconian than the

was

US

in regulating foreign investment

Japan.45 Especially before 1963, foreign

49%, while

in

many

Vital industries'

ownership was limited to

FDI was banned

altogether.

Foreign investment was steadily liberalized, but only in industries

where the domestic firms were ready tries

outside the

communist

for

it.

As a

result,

of

all

coun-

bloc, Japan has received the lowest level

94

THE FINN AND THE ELEPHANT of FDI as a proportion of history, the Japanese

total national investment."^^

its

government saying

[foreign direct] investment

Given

this

that '[p] lacing constraints

would not seem

to be

on

an appropriate deci-

sion even from the perspective of development policy' in a recent

submission to the

WTO

a classic

is

example of

amnesia, double standards and 'kicking away the

Korea and Taiwan are often seen

selective historical ladder''^^

pro-FDI

as pioneers of

policy,

thanks to their early successes with export-processing zones (EPZs),

where the investing foreign firms were these zones, they actually investors.

regulated. But, outside

imposed many restrictive

policies

on foreign

These restrictions allowed them to accumulate techno-

logical capabilities

more

for the 'anything goes'

periods.

little

They

rapidly, which, in turn,

approach found

on

their

EPZs

ownership shares. They also screened

the technologies brought in by

TNCs and imposed

ments. Local content requirements were quite although they were

subsequent

in

where foreign companies could

restricted the areas

enter and put ceilings

in their

reduced the need

export require-

strictly

imposed,

less stringently

applied to exported products (so

that lower quality domestic inputs

would not hurt export compet-

itiveness too

much). As a

dependent countries

result,

in the

world

country adopted neo-liberal

were

slightly

Korea was one of the until the late 1990s,

policies.^^

least

FDI-

when

the

Taiwan, where the policies

milder than in Korea, was somewhat more dependent

on foreign investment, but

its

dependence was

still

well

below the

developing country average.49

The bigger European countries did not go as far as Japan, the

USA

the

UK, France and Germany -

or Finland in regulating foreign

investment. Before the Second World War, they didn't need to - they

were mostly making, rather than receiving, foreign investments. But, after the

Second World War, when they started receiving large amounts

of American, and then Japanese, investment, they also restricted FDI flows

and imposed performance requirements. Until the

1970s, this

was done mainly through foreign exchange controls. After these controls were abolished, informal performance requirements were used. Even the ostensibly foreign-investor-friendly

used a variety of 'undertakings' and 'voluntary 95

UK

government

restrictions' regarding

BAD SAMARITANS components, production volumes and exporting.5°

local sourcing of

When Nissan established a UK plant in 1981, it was forced to procure 60% of value added locally, with a time scale over which this would rise to

sure

80%.

reported that the British government also 'put pres-

It is

GM]

on [Ford and

to achieve a better balance of trade.'^^

Even cases like Singapore and Ireland, countries that have succeeded

by

extensively relying

ments should

on FDI,

TNCs do

let

are not proof that host country govern-

whatever they want. While welcoming

foreign companies, their governments used selective policies to attract foreign investment into areas that they considered strategic for the future development of their economies. Unlike

have a

liberal

FDI

policy,

Hong Kong, which did

Singapore has always had a very targeted

approach. Ireland started genuinely prospering only

from an indiscriminate approach

ices. It also

FDI

('the

when

it

shifted

more, the merrier') to

sought to attract foreign investment in sectors

a focused strategy that like electronics,

to

pharmaceuticals, software quite and financial serv-

used performance requirements quite widely.^^

To sum up, history

is

on the

side of the regulators.

Most of today's

when they were on the Sometimes the regulation was draconian - Finland,

rich countries regulated foreign investment

receiving end.

Japan, Korea

and the

USA

(in certain sectors) are the best examples.

There were countries that succeeded by actively courting FDI, such as Singapore

and

Ireland, but even they did not adopt the laissez-faire

approach towards

TNCs

countries today by the

that

is

recommended

to the developing

Bad Samaritans.

Borderless world? Economic that, in

theory, history

and contemporary experiences

all tell

order truly to benefit from foreign direct investment, the

government needs

to regulate

it

well.

Despite

all

this,

Samaritans have been trying their best to outlaw practically lation of foreign direct investment over the last decade or so.

the

us

the all

Bad regu-

Through

World Trade Organisation, they have introduced the TRIMS

(Trade -related Investment Measures) Agreement, which bans things

96

THE FINN AND THE ELEPHANT like

local content requirements, export requirements or foreign

exchange balancing requirements. They have been pushing for further

GATS

through the current

liberalization

in Services) negotiations

and

a

(General Agreement on Trade

proposed investment agreement

at

the

World Trade Organisation.

Bilateral

ments (FTAs) and

bilateral

investment treaties (BlTs) between rich

and poor countries

also restrict the ability of developing countries to

and regional

free trade agree-

regulate FDI.^^

Forget history, say the Bad Samaritans in defending such actions.

Even

if it

did have

some merits

in the past, they argue, regulation of

foreign investment has become unnecessary and futile, thanks to global-

which has created

ization,

a

new

They argue

'borderless world'.

that

the 'death of distance' due to developments in communications and

transportation technologies has

and thus more.

- they

stateless

If firms

no grounds

made

are not attached to their

case

is

to another

less

are very

much

than

5%

of

There

its

futile, as,

being

is

'footloose',

no such

any they

regulation.

are, today, firms like Nestle that

output

the exceptions.

at

Most

home

(Switzerland), but they

large internationalized firms

than one-third of their output abroad, while the ratio in

the case of Japanese companies

some

is

country where there

vastly exaggerated.

less

countries any

argued, there are

certainly an element of truth in this argument. But the

produces

produce

home

it is

for discriminating against foreign firms. Moreover,

would move is

more and more mobile

do not have nationaHty any more,

attempt to regulate foreign firms

There

firms

is

well

below io%.54 There has been

relocation of 'core' activities (such as research

overseas, but

&

development)

usually to other developed countries,

it is

and with

a

heavy 'regional' bias (the regions here meaning North America, Europe

and Japan, which In

is

unto

a region

itself ).55

most companies, the top decision-makers

are

country nationals. Once again, there are cases the Lebanese-Brazilian

who

(Nissan) company. But he telling

example

is

is

still

like

home

runs a French (Renault) and Japanese also very

much an

exception.

the merger of Daimler-Benz, the

maker, and Chrysler, the

mostly

Carlos Ghosn,

US

car maker, in 1998. This

The most

German was

takeover of Chrysler by Benz. But, at the time of the merger,

97

car

really a it

was

BAD SAMARITANS new company, Daimlernumbers of Germans and Americans on the

depicted as a marriage of two equals. The Chrysler, even

had equal

management board. But that was only for the first few years. Soon, the Germans vastly outnumbered the Americans - usually lo or 12 to one or two, depending on the year. When they are taken over, even American firms end up run by foreigners (but then that is what take-over means). Therefore, the nationality of the firm

owns the firm determines how

move

allowed to

into higher- level activities.

on the part of developing

especially policies

still

on the assumption

matters very much.

Who

far its different subsidiaries will

would be very

It

countries, to design

be

naive,

economic

that capital does not have national roots

anymore. But then

how

no longer

it is

that

TNCs

about the argument

that,

whether necessary or not,

Now

possible in practice to regulate foreign investment?

have become more or

less 'footloose',

it is

argued, they can

punish countries that regulate foreign investment by 'voting with their feet'.

One immediate

question one can ask

is:

if

firms have

mobile as to make national regulation powerless,

why

become

are the

so

Bad

Samaritan rich countries so keen on making developing countries sign

up

to

those international agreements that restrict their ability to

all

regulate foreign investment? Following the market logic so loved

the neo-liberal orthodoxy,

ever approach they

by

why not just leave countries to choose what-

want and then

let

foreign investors punish or

reward them by choosing to invest only in those countries friendly towards foreign investors? The very

impose

these restrictions

all

fact that rich countries

international agreements reveals that regulation of FDI after

all,

contrary to what the Bad Samaritans

In any case, not tries

- such

numerous is

easy to

all

is

not yet

futile

say.

and

stuffed toys

-

for

which there are

potential investment sites because production

easily trained.

to

TNCs are equally mobile. True, there are indus-

as garments, shoes

move

want

on developing countries by means of

and, the

skills

equipment

required being low, workers can be

However, in many other industries, firms cannot move

that easily for various reasons

- the 98

existence of

immobile inputs

THE FINN AND THE ELEPHANT mineral resources, a local labour force with particular

(e.g.,

market (China

attractiveness of the domestic

a

is

the

skills),

good example), or

the supplier network that they have built up over the years

(e.g.,

sub-

contracting networks for Japanese car makers in Thailand or Malaysia). Last but not least,

is

it

simply wrong to think that

TNCs

necessarily avoid countries that regulate FDI. Contrary to

orthodoxy suggests, regulation

is

will

what the

not very important in determining

the level of inflow of foreign investment. If that were the case, countries like China

But the country a large

is

would not be

getting

much

getting

foreign investment.

around 10% of world FDI because

it

offers

and fast-growing market,

structure (roads, ports).

a good labour force and good infraThe same argument can be applied to the

19th-century US.

Surveys reveal that corporations are most interested in the market

and growth), and then

potential of the host country (market size

in

things like the quality of the labour force and infrastructure, with regulation being only a matter of minor interest. Even the World Bank, a

well-known supporter of FDI

'[t]he specific incentives

have its

less effect

liberalization,

once admitted that

and regulations governing

on how much investment

a country receives than has

general economic and political climate, and

exchange rate

As

financial

and

argument about the relationship between

and economic development, the Bad Samaritans

international trade

have got the casuality

all

wrong. They think

foreign investment regulation,

economic growth. The brutal truth latory regime, foreign firms won't offers

an

attractive

is

that,

organizing a party,

will flow in

liberalize

and help

however

liberal the regu-

into a country unless

its

market and high-quality productive

why

is

countries have failed to attract significant

growth going

you

follows, rather than causes,

come

resources (labour, infrastructure). This

giving foreign firms

that, if

more investment

economic growth. But foreign investment

to get

its

policies'.^^

in the case of their

economy

direct investment

so

many

developing

amounts of FDI,

despite

maximum degrees of freedom. Countries have before TNCs get interested in them. If you are

it is

not enough to

tell

and do whatever they want. People go 99

people that they can

to parties

come

where they know

.

BAD SAMARITANS there are already interesting things happening.

come and make

They don't

things interesting for you, whatever freedom

usually

you

give

them.

'The only thing worse than being exploited

by

capital

Like Joan Robinson, a former

!

.

Cambridge economics professor and

arguably the most famous female economist in history, the only thing that

is

believe that

I

worse than being exploited by capital

is

not

being exploited by capital. Foreign investment, especially foreign direct investment, can be a very useful tool for economic development. But

how

useful

it is

depends on the kinds of investment made and

the host country government regulates

Foreign financial investment brings

how

it.

more danger than

benefits, as

even the neo-liberals acknowledge these days. While foreign direct investment

is

no Mother

Teresa,

host country in the short run. But it

comes

to

often does bring benefits to the

it

it is

the long run that counts

may actually make economic development cult.

when

economic development. Accepting FDI unconditionally in the long

run more

Despite the hyperbole about a 'borderless world',

diffi-

TNCs remain

national firms with international operations and, therefore, are unlikely to let their subsidiaries engage in higher-level activities; at the

same

time their presence can prevent the emergence of national firms that might start

them

in the long run. This situation

damage the long-run development

is

likely to

potential of the host country.

Moreover, the long-run benefits of FDI depend partly on the magnitude and the quality of the spill-over effects that

TNCs

create,

whose

maximization requires appropriate policy intervention. Unfortunately,

many key

tools of such intervention have already

Bad Samaritans

the

(e.g., local

been outlawed by

content requirements).

Therefore, foreign direct investment can be a Faustian bargain. In the short run, ally

it

may bring benefits,

but, in the long run,

be bad for economic development. Once

Finland's success

is

unsurprising.

The country's 100

it

may actu-

this is

understood,

strategy

was based on

THE FINN AND THE ELEPHANT the recognition that,

if

foreign investment

is

HberaHzed too early

(Finland was one of the poorest European economies in the early-

20th century), there will be no space for domestic firms to develop

independent technological and managerial 17 years to

earn any profit from

its

it

is

into

today.

from

which

is

the world.57 If Finland had

early on,

Most probably, foreign

took Nokia

electronics subsidiary,

now the biggest mobile phone company in liberalized foreign investment

capabilities. It

Nokia would not be what

financial investors

who bought

Nokia would have demanded the parent company stop

cross-

subsidizing the no-hope electronics subsidiary, thus killing off the

some TNC would have bought up the electronics and made it into its own subsidiary doing second-division

business. At best,

division

work.

The

flip

investment

side of this

may

argument

is

that regulation of foreign direct

paradoxically benefit foreign companies in the long

run. If a country keeps foreign companies out or heavily regulates their activities,

run. However,

it

if

will

not be good for those companies in the short

a judicious regulation of foreign direct investment

allows a country to accumulate productive capabilities

and

at a

higher level than possible without

it, it

more

rapidly

will benefit foreign

by offering them an investment location more prosperous and possesses better productive inputs (e.g., skilled workers, good infrastructure). Finland and Korea are the best

investors in the long run that

is

examples of

this. Partly

thanks to their clever foreign investment

become richer, better educated and more dynamic and thus have become more attracinvestment sites than would have been possible without those

regulation, these countries have

technologically far tive

regulations.

may

help economic development, but

as part of a

long-term-oriented development

Foreign direct investment

only

when introduced

strategy. Policies

ment does not

should be designed so that foreign direct invest-

kill

off domestic producers,

which may hold out great

potential in the long run, while also ensuring that the advanced

technologies and managerial

foreign corporations possess are

skills

transferred to domestic business to the

Like Singapore and Ireland,

some

maximum

possible extent.

countries can succeed, and have

101

BAD SAMARITANS succeeded, through actively courting foreign capital, especially FDI.

But more countries will succeed, and have succeeded, when they more actively regulate foreign investment, including FDI. The attempt by the Bad Samaritans to make such regulation by developing countries impossible

is

likely to hinder, rather

economic development.

102

than help, their

CHAPTER 5 Man exploits man Private enterprise goody public enterprise had?

John Kenneth Galbraith, one of the most profound economic thinkers of the 20th century, once famously said: 'Under capitaHsm,

man; under communism, that there

is

no

it is

difference

would have been the

last

just the opposite.'

He was

man exploits

not suggesting

between capitalism and communism, he

person to do

so;

Galbraith was one of the

leading non-leftist critics of modern capitalism. What he was expressing

was the profound disappointment that many people failure

of communism to build the egalitarian society

Since

its rise

in the 19th century, the

movement had been

communists saw private ownership

distributive injustice of capitalism.

It is

easy to understand

same

routinely invest in producing the

rupt,

is

why

as the ultimate source of the

They believed

reason for the 'wasteful' anarchy of the market. Too

there

had promised.

key goal of the communist

But they also saw private owner-

ship as a cause of economic inefficiency.

they do not

about the

the abolition of private ownership of the 'means

of production (factories and machines). the

it

felt

that

many

it

was the

capitalists

things, they argued, because

know the investment plans of their competitors. Eventually,

over-production and some of the enterprises involved go bank-

condemning some machines to the scrap heap and laying The waste caused by this process,

perfectly employable workers idle. it

was argued, would disappear

if

the decisions of different capitalists

could be co-ordinated in advance through rational, centralized plan-

ning - after

all,

capitalist

firms are islands of planning in the

surrounding anarchic sea of the market, as Karl Marx, the leading

communist

theorist,

once put

it.

Therefore,

103

if

private property were

BAD SAMARITANS abolished,

communists

believed, the

economy could be run

were a single firm and thus managed more Unfortunately, the centrally planned

as if

it

efficiently.

economy based on

state

ownership of enterprises performed very poorly. Communists

may

have been right in saying that unfettered competition can lead to social waste, but suppressing

and universal killing off

state

all

competition through total central planning

ownership exacted enormous costs of

its

economic dynamism. Lack of competition and

top-down regulation under communism

also bred

own by

excessive

conformism,

bureaucratic red tape and corruption.

Few would now system. But

it is

a

dispute that

communism

failed as

an economic

huge leap of logic to go from that conclusion

to the

proposition that state-owned enterprises (SOEs), or public enterprises,

do not work. This judgement became popular Thatcher's pioneering privatization 1980s,

and acquired the

it

was

as if the

programme

wake of Margaret

in Britain in the early

status of a pseudo-religious credo during the

communist economies

'transformation of the former a while,

in the

in the 1990s. For

whole ex-communist world was hypnotised by

the mantra, 'private good, public bad', reminiscent of the anti-human slogan, 'four legs good,

- that

great satire of

two

legs bad', in

communism.

George Orwell's Animal Farm

Privatization of

a centrepiece of the neo-liberal agenda that the

imposed on most developing countries

State

Why do

the

SOEs has

ownership in the dock enterprises need to be

privatized? At the heart of the

argument against SOEs

but powerful idea. The idea

that people

things that are not theirs.

morning

at

When

been

in the past quarter of a century.

Bad Samaritans think state-owned

a daily basis.

also

Bad Samaritans have

We

is

do not

lies

a simple

fully take care

see the corroboration of this notion

of

on

your plumber takes his third coffee break of the

nam, you begin

to

wonder whether he would do

the

same

if he was fixing his own boiler. You know that most of those people who throw away litter in public parks would never do so in their own gardens. It seems to be human nature for people to do their best to

104

MAN EXPLOITS MAN take care of the things they

own

they do not. Therefore,

argued by the opponents of

you have

ship,

Ownership

The

owner-

state

to give people ownership, or property rights, over things

(including enterprises)

property.

it is

while maltreating those things that

if

gives the first is

you want them

to use

owner two important

the right to dispose of

them most

efficiently.^

rights in relation to his

it.

The second

the right

is

from its use. Since profits are, by definition, what owner of the property after he has paid for all the inputs

to claim the profits

are

to the

left

he has bought in order to use his property productively

and other inputs used

materials, labour

claim the profits if

is

known

owner has the

the

The problem is that, amount of the profits does

as the 'residual claim'.

residual claim, the

not concern those suppHers of inputs

By

raw

(e.g.,

in his factory), the right to

who

get fixed payments.

definition, state-owned enterprises are properties collectively

owned by salaries to

the citizens,

all

who

run them. Given that

hire professional

managers on

fixed

the citizenry that has the residual

it is

claim as the owner of the enterprise, the hired managers do not care

about the profitability of their enterprises. the 'principal', can

make

in the profitability of the

Of course,

the citizenry, as

or the hired mianagers, interested

its 'agents',

SOEs by

linking their pay to

there

a fundamental gap in information

is

when

done her best and

poor performance

that the

her control, the principal will find is

lying.

iour

is

(that

The

known

is,

'agency

it

very

manager is

due

cost'.

this

says that she has to factors

difficult to

beyond

prove that she

of the principal controlling the agent's behav-

as the 'principal-agent

problem' and the resulting costs

the reduction in profits due to poor

neo-liberal

But

difficulty

because

is

between the principals and

their agents. For example,

the hired

But such

it.

incentive systems are notoriously difficult to design. This

The principal-agent problem

is

management) the

at the centre

of the

argument against SOEs. is

not the only cause of inefficiency of

state

ownership of

enterprises. Individual citizens, even if they theoretically

own

the

public enterprises, do not have any incentives to take care of their properties (the enterprises in question) by adequately monitoring the

hired managers.

The problem

is

that

any increase

in profit resulting

from the extra monitoring of the SOE managers by some 105

citizens will

BAD SAMARITANS be shared by every

while only those citizens

citizen,

toring pay the costs

any problems). As a

alerting the relevant

government agencies

result, everyone's preferred

no one

will

on the

if

he

will

everyone free-rides, will

be the

immediately understand the 'free-rider

tries to recall

how

often he himself has monitored

the performance of any of his country's legal

if

and simply

at all

monitor the managers and poor performance

outcome. The reader problem'

of the others. But,

efforts

to

course of action will

be not to monitor the public enterprise managers to 'free-ride'

the moni-

time and energy spent in going through

(e.g.,

company accounts or

who do

SOEs

(of

which he

one of the

is

owners) - Amtrak, for example.

There

known

is

yet another

as the 'soft

argument against state-owned

enterprises,

budget constraint' problem. Being a part of the

government, the argument goes, SOEs are often able to secure additional finances

from the government

if

threatened with bankruptcy. In this way, act as if the limits

away with originally

on

make

they

it is

losses or are

argued, enterprises can

their budgets are malleable, or

'soft',

and

get

management. This theory of soft budget constraint was

lax

advanced by the famous Hungarian economist, Janos Kornai,

to explain the

behaviour of state-owned enterprises under

nist central planning,

but

capitaUst economies too.

it

commu-

can be applied to similar enterprises in

Those

'sick enterprises'

of India that never

go bankrupt are the most frequently cited example of the

soft

budget

constraint problem in relation to state-owned enterprises.^

State vs private

So the case against

state- owned enterprises, or public

ownership, seems

very powerful. The citizens, despite being the legal owners of public enterprises, have neither the ability

agents,

who

nor the incentive to monitor their

have been hired to run the enterprises. The agents

(managers) do not maximize enterprise for the principtals (citizens) to

profits,

while

it is

impossible

make them do so, because of the inherent

deficiency in information they possess about the agents' behaviour

the free-rider problem amongst the principals themselves.

106

On

and

top of

MAN EXPLOITS MAN ownership makes

this, State

it

possible for enterprises to survive through

poHtical lobbying rather than through raising productivity.

But ally

all

three arguments against state ownership of enterprises actu-

apply to large private-sector firms as well. The principal-agent

problem and the firms.

Some

owners

(e.g.,

problem

free-rider

BMW,

affect

many

large private-sector

managed by their (majority) Peugeot), but most of them are managed by hired

companies are

large

still

managers because they have dispersed share ownership. enterprise

is

run by hired managers and there are numerous share-

holders owning only small fractions of the company,

from the same problems managers

If a private

SOE

(like their

as

it

will suffer

state-owned enterprises. The hired

counterparts) will also have no incentive to

put in more than sub-optimal

levels

of effort (the principal-agent

problem), while individual shareholders will not have enough incentive to

monitor the hired managers (the

As

for politically generated soft

confined to SOEs.

free-rider problem).

budget constraints, they are not

If they are politically

important

(e.g.,

large employers

or enterprises operating in politically sensitive industries, such as

armaments or

healthcare), private firms can also expect subsidies or

even government bail-outs. Right after the Second World War, a of large private enterprises were nationalized in tries

because they were not doing

British industrial decline

lot

many European coun-

well. In the 1960s

and the

1970s, the

prompted both Labour and Conservative

governments to nationalize key firms

(Rolls

Royce in 1971 under the

Conservatives; British Steel in 1967, British Leyland in 1977, and British

Aerospace in the same year under Labour). Or, to take another example, in Greece, 43 virtually

ized between 1983

bankrupt private-sector firms were national-

and 1987 when the economy was going through

difficult patch.^ Conversely,

immune

to

market

have been shut

forces.

state-owned enterprises are not totally

Many

down and

performance - these

a

public enterprises across the world

their

managers sacked because of bad

are equivalent to corporate bankruptcies

and

corporate takeovers in the private sector. Private firms

know

budget constraints

if

that they will be able to take advantage of soft

they are important enough, and they are not shy

about exploiting the opportunity to the 107

full.

As one foreign banker

BAD SAMARITANS reportedly told the Wall Street Journal in the middle of the 1980s Third

World debt we're out to

'[w]e foreign bankers are for the free market

crisis,

make

a

buck and

when we

believe in the state

when

are about

to lose a buck'.4

Indeed,

many state bail-outs

made by avowedly

of large private sector firms have been

free-market governments. In the late 1970s, the

bankrupt Swedish shipbuilding industry was rescued through nation-

by the country's

alization

despite the fact that size

of the

state.

it

first

had come

right-wing government in 44 years, to

power with

In the early 1980s, the troubled

a pledge to reduce the

US

maker Chrysler

car

was rescued by the Republican administration under Ronald Reagan, which was

in the

vanguard of neo-liberal market reforms

Faced with the financial

crisis in 1982,

following

at the time.

premature and

its

poorly designed financial liberalization, the Chilean government rescued the entire banking sector with public money. This was General

had seized power

Pinochet's government, which

name

the

The

bloody coup in

in a

of defending the free market and private ownership.

neo-liberal case against state-owned enterprises

undermined by the

fact that there are

is

further

numerous well-functioning

SOEs in real life. Many of them are actually world-class you about some of the more important ones.

firms. Let

me

tell

State-owned success stories Singapore Airlines

is

one of the most highly regarded airUnes

world. Often voted the world's favourite airline,

Unlike most other carriers,

friendly.

in

its

it

has never

The

made

airline

is

a state-owned enterprise,

company whose

57%

sole shareholder

There

is

no agreed

holding of as

enterprise,

30%

is

in the

efficient

and

a financial loss

controlled by Temasek, is

of Finance. Temasek Holdings owns controlling '^

is

35 -year history.

the holding

A

it

definition of what

little

as

15% could

is

Singapore's Ministry stakes'^ (usually

a controlling stake in

the

an enterprise's shares.

give the shareholder effective control over an

depending on the holding structure. But,

considered a controlling stake.

108

typically, a

holding of around

MAN EXPLOITS MAN majority share) in a host of other highly efficient and profitable enterprises, called

GLCs (government-linked companies). The GLCs do not

just operate in the usual

pubUc

'utility'

industries, such as telecom-

munications, power and transport. They also operate in areas that are

owned by

the private sector in most other countries, such as semi-

conductors, shipbuilding, engineering, shipping and banking.^ The

Singapore government also runs the so-called Statutory Boards that provide certain

country

is

vital

publicly

the Housing and

goods and

services. Virtually all land in the

owned and around 85% of housing

is

provided by

Development Board. The Economic Development

Board develops industrial

estates,

incubates

new

firms and provides

business consulting services.

SOE sector is twice as big as that of Korea, when measof its contribution to national output. When measured

Singapore's

ured in terms in terms of

contribution to total national investment,

its

three times bigger.^ Korea's as that of Argentina

in terms of

and

SOE sector

five

is,

in turn,

it is

nearly

about twice as large

times bigger than that of the Philippines,

share in national income.^ Yet both Argentina and the

its

Philippines are popularly believed to have failed because of an over-

extended stories

state,

while Korea and Singapore are often hailed as success

of private-sector-driven economic development.

Korea also provides another dramatic example of a successful public enterprise in the form of the

POSCO

(Pohang Iron and

ment made an a loan to build

modern

privatized) steel maker,

Company).^ The Korean govern-

Steel

application to the its first

(now

World Bank

steel mill.

The bank

the grounds that the project was not viable. decision.

The country's

in the late 1960s for

rejected

it

on

Not an unreasonable

biggest export items at the time were fish,

cheap apparel, wigs and plywood. Korea didn't possess deposits of either of the

two key raw materials - iron ore and coking

Furthermore, the Cold

War meant

it

from nearby communist China. They had from to

Australia.

And

run the venture

as

to cap

it all,

coal.

could not even import them to

be brought

all

the

way

the Korean government proposed

an SOE. What more perfect recipe for disaster?

Yet within ten years of starting production in 1973 (the project was

financed by Japanese banks), the

company became one of

109

the

most

BAD SAMARITANS efficient steel-producers

on the planet and

is

now

the world's third

largest.

more

Taiwan's experience with state-owned enterprises has been eve

remarkable. 9 Taiwan's People's Principles' of

official

economic ideology is the so-called 'Three

Dr Sun

Yat-Sen, the founder of the Nationalist

Party (Kuomintang) that engineered the Taiwanese economic miracle.^°

These principles dictate that the key industries should be owned by the state. Accordingly, Taiwan has

Throughout the 1960s and the national output. Little of 'privatization'

of

18 (of

Taiwanese government

it

had

1970s,

it

was privatized

until 1996.

many) state-owned

still

SOE

a very large

sector.

accounted for over 16% of

Even

after the

enterprises in 1996, the

retains a controlling stake in

them

(aver-

aging 35.5%) and appoints 60% of the directors to their boardrooms. Taiwan's strategy has been to let the private sector grow by creating a

good economic environment

(including, importantly, the supply of

cheap, high-quality inputs by public enterprises) and not bothering

about privatization very much. In the past three decades of

its

economic ascendancy, China has

used a strategy similar to that of Taiwan. All Chinese industrial enterprises

had been owned by the

China's output.^^

SOE

state

under Maoist communism.

sector only accounts for

around

40%

Now

of industrial

Over the past 30 years of economic reform, some smaller

state-owned enterprises have been privatized under the slogan of

zhuada fangxiao (grabbing the fall

in the share of state

big, letting

go of the small). But the

ownership has been mainly due to the growth

of the private sector. The Chinese have also

come up with

a unique

type of enterprise based on a hybrid form of ownership, called

TVEs

(township and village enterprises). These enterprises are formally

owned by local authorities, but usually operate as if they were privately owned by powerful local political figures. It is not only in East Asia that we can find good public enterprises. The economic successes of many European economies, such as Austria, Finland, France, Norway and Italy after the Second World War, were

SOE sectors at least until the 1980s. In Finland the SOE sector was at the forefront of techno-

achieved with very large

and France

especially,

logical modernization. In Finland, public enterprises led technological

no

MAN EXPLOITS MAN modernization in

machinery and chemical its

mining,

forestry,

transport equipment, paper

steel,

industries.^^

The Finnish government gave up

controlling stake in only a few of these enterprises even after recent

may be

privatizations. In the case of France, the reader

learn that

many French household names,

like

Alcatel (telecommunications equipment), St

building materials), Usinor

(steel;

merged

surprised to

Renault (automobiles),

Gobain

and other

(glass

into Arcelor,

is now Thomson

which

part of Arcelor-Mittal, the biggest steel-maker in the world),

and

(electronics), Thales (defence electronics), Elf Aquitaine (oil

gas),

Rhone-Poulenc (pharmaceuticals; merged with the German company Hoechst to form Aventis, which to be SOEs.^^

and

tion

is

now part of Sanofi-Aventis), all

used

These firms led the country's technological moderniza-

industrial

development under

state

privatization at various points between 1986

ownership until their

and

2000.^^

Well-performing state-owned enterprises are also found in Latin America. The Brazilian state-owned class

Brasileira

ownership.

jet planes), also

Airbus and Boeing.

government allows

it

EMBRAER

is

a world-

(Empresa

became

a world-class firm

under

state

EMBRAER is now the world's biggest producer of regional

and the world's third

after

company Petrobras

de Aeronautica), the Brazilian manufacturer of 'regional jets'

(short-range

jets

oil

firm with leading-edge technologies.

still

owns

largest aircraft It

manufacturer of any kind,

was privatized

in 1994, but the Brazilian

the 'golden share' (1% of the capital), which

to veto certain deals regarding military aircraft sales

and

technology transfers to foreign countries.^^ If there are so

many successful pubUc

enterprises,

why do we

rarely

hear about them? It is partly because of the nature of reporting, whether journalistic or academic.

Newspapers tend

to report

bad things - wars,

natural disasters, epidemics, famines, crime, bankruptcy, is

natural and necessary for newspapers to focus

on

etc.

While

it

these events, the

journalistic habit tends to present the public with the bleakest possible

view of the world. In the case of SOEs, journalists and academics usually investigate

them only when

things go

corruption or negligence. Well-performing attention in the life

of a 'model

same way citizen' is

that a peaceful

unlikely to

Ill

make

SOEs

wrong -

inefficiency,

attract relatively

and productive day front-page news.

little

in the

BAD SAMARITANS There

is

more important, reason

another, perhaps

for the paucity

of positive information on state-owned enterprises. The

HberaHsm during the past couple of decades has made ship so unpopular in the public

want

mind that

successful

rise

of neo-

state

owner-

SOEs themselves

to underplay their connection with the state. Singapore Airlines

does not advertise the

POSCO

and

EMBRAER

fact that

- now

exactly hide, the fact that they

owned by the state. Renault, privatized - try to underplay, if not

it

all

is

became world-class firms under

ownership. Partial state ownership

know that

example, few people

hushed up. For

practically

the state (Land) government of Lower

Saxony (Niedersachsen), with an 18.6% in the

is

stake,

is

the largest shareholder

German carmaker Volkswagen.

The unpopularity of

state

ownership, however,

is

not

entirely, or

even mainly, due to the power of neo-liberal ideology. There are

SOEs

state

all

over the world that are not performing well.

My

many

examples

of high-performing SOEs are not meant to distract the reader's attention

away from the poorly performing ones. They

that there

enterprises

is

are given to

show

nothing 'inevitable' about poor performance by public

and

that

improving

their

performance does not necessarily

require privatization.

The I

have shown that

case for state ownership

all

the reasons cited as causes of poor

SOE

performance apply also to large private-sector firms with dispersed ownership,

if

that there are is

not always to the same degree.

many public

not the whole

stances under

story.

enterprises that

My

examples also show

do very well. But even

Economic theory shows

that

that there are circum-

which public enterprises are superior

to private-sector

firms.

One such circumstance finance a venture despite is

too

risky. Precisely

is

its

because

where private-sector investors refuse

long-term viability because they think

money can move around

to it

quickly, capital

markets have an inherent bias towards short-term gains and do not like risky, large-scale projects

with long gestation periods. 112

If

the capital

MAN EXPLOITS MAN market ^capital

setting

is

known as may do it by

too cautious to finance a viable project (this

market

among

failure'

economists), the state

is

up an SOE.

Capital market failures are

of development,

when

capital

more pronounced

in the earlier stages

markets are underdeveloped and their

conservatism greater. So, historically, countries have resorted to this

option more frequently in the earlier stages of their development, as I

mentioned

in chapter

Great (1740-86), Prussia tries like textiles (linen

In the 18th century, under Frederick the

2.

up

set

above

a

number of 'model

all),

and sugar refining/^ Emulating

factories' in indus-

metals, armaments, porcelain, silk Prussia,

its

role

model, the Meiji

Japanese state established state-owned model factories in a

of industries in the steel,

mining,

late 19th century.

textiles (cotton,

number

These included shipbuilding,

wool and

silk)

and armaments.^7 j^g

Japanese government privatized these enterprises soon after they were

some of them remained

established, but

-

heavily subsidized even after

The Korean steel more modern and more dramatic case of an SOE set up due to capital market failure. The general lesson is clear: pubUc enterprises have often been set up in order to kick-start capitalism, not to supersede it, as it is commonly believed. privatization

maker

POSCO

especially the shipbuilding firms.

is

a

State-owned enterprises can also be ideal where there

exists 'natural

monopoly'. This refers to the situation where technological conditions dictate that having only

one supplier

is

the

most

efficient

way to

serve

the market. Electricity, water, gas, railways and (landline) telephones are examples of natural

of production

is

fore, the unit cost

that use the

monopoly. In these

industries, the

main

cost

the building of the distribution network and, there-

of provision will go

network serves

suppliers each with

its

is

down if the number of customers

increased. In contrast, having multiple

own networks

of, say,

water pipes, increases

the unit cost of supplying each household. Historically, such industries in the

developed countries often started out with

many

small

competing producers but were then consolidated into large regional or national monopolies (and then often nationalized).

When ever

it

there

wants

is

a natural

to, as

monopoly, the producer can charge what-

consumers have no one 113

else to

turn

to.

But

it is

BAD SAMARITANS not just a matter of the producer 'exploiting' the consumer. This

monopoly

ation also generates a social loss that even the

cannot appropriate -

jargon/ In

nical

known

this case,

as 'allocative

may be

it

deadweight

and operate

The prises

government

third reason for the

is

equity

among

citizens.

to set

For example,

may be

remote areas

firms, people living in

services such as post, water or transport

-

up state-owned

solely interested in profit,

to the

mountain

it

denied access to

is

the government

a vital

may

public enterprise, even

one that every

citizen

altogether. If the

should be entitled

decide to run the activity

if it

means

losing

All of the above reasons for having

much

reduce their use of the

might even discontinue the service

service in question

is

of letter delivery

raise the price

areas, forcing the residents to

postal service, or

vital

the cost of delivering a letter

the firm delivering the letter

If

would

enter-

to private-sector

if left

an address in the remote mountain areas of Switzerland

higher than to an address in Geneva.

was

it

producing the socially optimal quantity.

itself,

to,

loss' in tech-

economically more efficient for

the government to take over the activity in question

to

situ-

supplier

money

itself

through a

in the process.

SOEs can

be,

and have been,

addressed by schemes whereby private enterprises operate under some

combination of government regulation and/or tax-and-subsidy scheme. For example, the government

ment-owned bank,

may finance

(through a govern-

for example) or subsidize (out of

its

tax revenue)

the private enterprise undertaking a risky, long-term venture which

may be beneficial *

The

full

argument

petitive market,

for the country's

is

somewhat

economic development, but which

technical, but the gist of

producers do not have the freedom to

it is

as follows. In a

com-

set the price, as a rival

can

them until the point where lowering the price further will result in a loss. But the monopohst firm can decide the price it charges by varying the quantity it produces, so it will produce only up to the quantity where its profit is always undercut

maximized. This socially

pay

is

level

of output

optimal one, which

the

same

as the

is

is,

under normal circumstances, lower than the

where the

minimum

maximum

price a

consumer

is

money. When the amount produced is means not serving some consumers who

than the socially optimal quantity,

lose

less

it

are perfectly willing to pay

the

minimum

price at

price that the producer requires but

which the monopoly firm can maximize

those neglected consumers

is

willing to

price that the producer requires in order not to

its

who

profit.

essentially the social cost of

114

more than

are unwilling to bear the

The

unfulfilled desire of

monopoly.

MAN EXPLOITS MAN the capital market

is

unwilling to finance.

Or

license private-sector firms to operate in natural

the government

monopoly

may

industries

but regulate the prices they can charge and also the quantity they produce.

It

can Hcense private-sector firms to provide essential serv-

ices (e.g., post, rail, water) access'.

Therefore,

it

may

on condition

that they provide 'universal

appear that SOEs are no longer necessary.

But the regulation and/or subsidy solutions are often more difficult to

manage than SOEs,

particularly for developing country

governments. Subsidies require tax revenues in the Collecting tax

first

place.

may seem straightforward, but it is not easy. It requires

capabilities to collect

and process information,

calculate the taxes

owed, and detect and punish evaders. Even in today's rich countries, it

took a long time to develop such

capabilities, as history shows. ^^

Developing countries have only limited

abilities to collect taxes

and,

consequently, to use subsidies to address the limitations of the markets. As

pointed out in chapter 3, this difficulty has been recently

I

compounded by liberalization

ularly high

budgets.

-

the reduction in tariff revenues following trade

especially for the poorest countries that have a partic-

dependence on

Good

tariff

revenues in their government

regulation has proved difficult even in the richest

countries,

which have sophisticated regulators commanding ample

resources.

The messy outcome of

which resulted

British rail privatization in 1993,

in the de facto re-nationalization of the rail tracks in

2002, or the failure of electricity deregulation in California, which resulted in the infamous blackout in 2001, are merely the

most promi-

nent examples. Developing countries are even more deficient in their capacity to write

good regulatory

rules

and

to deal with the legal

and political lobbying by the regulated firms of,

manouevring

that are often subsidiaries

or joint ventures with, gigantic well-resourced enterprises from

rich countries.

The

case of Maynilad Water Services, a French-Filipino

consortium that took over water supply for about half of Manila in 1997,

and that was once hailed by the World Bank

through

as a privatization

is

very instructive in this regard. Despite having secured,

skillful

lobbying, a series of tariff hikes that were not formally

success story,

permitted under the terms of the original contract, Maynilad walked

115

BAD SAMARITANS away from the contract when the regulator refused to grant yet another tariff

hike in 2002/^

State-owned enterprises are often more practical solutions than a system of subsidies and regulations for private- sector providers, espedeveloping countries that lack tax and regulatory capabilities.

cially in

Not only can they do

(and, in

may be

certain circumstances they

The As

-

pitfalls

have pointed out,

I

many

cases,

superior to private-sector firms.

of privatization

the alleged key causes of

all

SOE

prises.

while

are,

real,

Large private-sector firms with dispersed ownership also suffer

two

areas,

free-rider problem. So, in

forms of ownership do matter, but the

not between state and private ownership

constraint, arguably the distinction

sharper, but even here

is

politically cial

-

it is

critical divide

between concen-

and dispersed ownerships. In the case of the

trated

ship

soft

not unique to state-owned enter-

from the principal-agent problem and the these

inefficiency

and the

the principal-agent problem, the free-rider problem

budget constraint -

is

have done) well, under

it is

between

state

soft

budget

and private owner-

not absolute. For, as

we have

seen,

important private- sector firms are also able to get finan-

help from government, while

SOEs can

be, and,

on occasion, have

been, subject to hard budget constraints, including

management

change and the ultimate sanction of liquidation. If state

ownership

itself is

not

entirely,

or even predominantly, the

root cause of problems with SOEs, changing their ownership status

-

that

is,

privatization

-

more, privatization has a

The

first

idea to

sell

challenge

is

not likely to solve the problems.

is

lot

of

is

is

pitfalls.

selling the right enterprises. It

would be

a

bad

public enterprises with natural monopolies or those if

the regulatory capability of

comes

to selling off enterprises for

providing essential services, especially the state

What

when

weak. But even

which public ownership

is

government usually wants

it

is a dilemma. The performing enterprises -

not necessary, there

to sell the worst

precisely those that least interest potential buyers. Therefore, in order

116

MAN EXPLOITS MAN to generate private sector interest in a poorly

government often has

to invest heavily in

it

performance can be improved under

if its

privatize

at all?^°

it

pubUc enterprise without

restructure a

ment

Therefore, unless

to privatization, a lot of

it

performing SOE, the

and/or restructure ownership,

state

politically

is

a strong

it.

why

But

then

impossible to

government commit-

problems in public enterprises may be

solved without privatization.

Moreover, the privatized firm should be sold

citizens' assets. If

it

at the right price. Selling

duty of the government, as the trustee of the

at the right price is the

sells

them too

cheaply,

is

it

transferring public

wealth to the buyer. This raises an important distributional question. In addition, will

be a

buyer away,

is

if

if

the wealth transferred

is

loss in national wealth. This

taken outside the country, there

is

more

based abroad, but national citizens can also stash there

an open

is

when the the money

occur

likely to

capital market, as seen in the case of Russian

oligarchs' following post- communist privatization.

In order to get the right price, the privatization

be done

at the right scale

government period, this

tries to sell

and with the

too

programme must

right timing. For example, if a

many enterprises

within a relatively short

would adversely affect their prices. Such a Tire sale' weakens

the government's bargaining power, thus lowering the proceeds receives: this

is

what took place

the 1997 financial

market,

it is

crisis.

What

is

in a

number of Asian

more, given fluctuations in the stock

important to privatize only when the stock market condi-

tions are good. In this sense,

it is

a

bad idea

for privatization,

which the IMF often

governments have

also voluntarily adopted.

the government

to set a rigid deadline

insists

Such a deadline

buyers. If privatization

is

is

improve

their

will force

selling the public enterprises to the right

going to help a country's economic future,

the public enterprises need to be sold to people

it is

on and which some

to privatize regardless of market conditions.

Even more important

to

it

countries after

who

long-term productivity. Obvious as

have the ability this

may

sound,

demands that the buyer industry (as some countries have to those who are good at financial

often not done. Unless the government

has a proven track record in the done), the enterprise

may be

sold

engineering rather than at managing the enterprise in question.

117

BAD SAMARITANS More

importantly,

SOEs

are often sold off corruptly to people

who

have no competence to run them well - massive state-owned assets

were transferred in a corrupt way to the new the

fall

of

communism.

In

many

'oligarchy' in Russia after

developing countries, the very

processes of privatization have also been riddled with corruption, with a large part of the potential proceeds ending

few

insiders, rather

than in the state

sometimes be effected

done ants

legally, for

and

This

illegally,

coffers.

up

in the pockets of a

Corrupt transfers can

through bribery. But they can also be

example, where government insiders act as consult-

get high fees in the process. is

ironic, given that

one frequent argument against SOEs

that they are rife with corruption. However, the sad fact

government that

is

is

is

that a

unable to control or eliminate corruption in

its

SOEs is not suddenly going to develop the capacity to prevent corruption when it is privatizing them. Indeed, corrupt officials have an incentive to push through privatization at all costs, because it means they do not have to share the bribes with their successors and can 'cash in

all

future bribery streams

can extract from input suppliers).

(e.g.,

It

bribes that

SOE managers

should also be added that priva-

tization will not necessarily reduce corruption, for private-sector firms

can be corrupt too (see chapter

8).

Privatization of natural monopolies or essential services will also fail if

they are not subject to the right regulatory regime afterwards.

When

the

SOEs concerned

are natural monopolies, privatization

without the appropriate regulatory capability on the part of the

government may replace monopolies with For example, the the

inefficient

inefficient sale

of the

(politically) restrained

Cochabamba water system

American company Bechtel

tripling of water rates,

but

pubUc

and unrestrained private monopolies. in 1999 resulted in

in Bolivia to

an immediate

which sparked off riots that resulted

When

nationalization of the company.^^ partially privatized roads in 1990

in the re-

the Argentinian government

by awarding contractors the right

to collect tolls in return for road maintenance, '[c]ontractors in control

of a road leading to a popular beach resort sparked protests by building earthen barriers across alternative routes in order to force motorists to pass

through their pay booths. 118

And

after travellers

complained

MAN EXPLOITS MAN about the rip-off along another highway, contractors parked a of phony squad cars backing'.^^

at tollbooths to give the

Commenting on

the privatization of the Mexican state-

owned telephone company, Telmex, concluded that

fleet

appearance of poHce

in 1989, even a

World Bank study

of Telmex, along with

'the privatization

its

attendant

price-tax regulatory regime, has the result of "taxing" consumers

rather diffuse,

unorganized group - and then

among more well-defmed

-

a

distributing the gains

groups; [foreign] shareholders, employees

and the government'/^

The problem of regulatory government

In the

level.

deficit

name

is

particularly severe at the local

of political decentralization and

'bringing service providers closer to the people', the

donor governments have recently pushed smaller units

on

World Bank and

for breaking

up SOEs

into

a geographical basis, thereby leaving the regulatory

function to local authorities. This looks very good on paper, but

it

has, in effect, often resulted in regulatory vacuums.^4

Black The

picture regarding the

cat,

white cat

management of state-owned

enterprises

is

complex. There are good state-owned enterprises, and there are bad state-owned enterprises. Even for a similar problem, public ownership may be the right solution Many problems that dog SOEs

in

one context and not

in another.

also affect large private-sector firms

with dispersed ownership. Privatization sometimes works well, but

can be a recipe for

disaster, especially in

developing countries that

lack the necessary regulatory capabilities. Even

the right solution,

Of

it

may be

difficult to get

course, saying that the picture

'anything

goes'.

is

it

when

privatization

is

right in practice.

complex does not mean

that

There are some general lessons that we can draw from

economic theories and

real life

examples.

Enterprises in industries that are natural monopolies, industries that involve large investment essential services

and high risk and enterprises that provide

should be kept as SOEs, unless the government has

very high tax- raising and/or regulatory capabilities. Other things being

119

BAD SAMARITANS equal, there

a greater

is

need for SOEs in the developing countries

than in the developed countries, as they have underdeveloped capital

markets and weak regulatory and taxation politically is

capabilities. Privatizing

important enterprises on the basis of dispersed share

unlikely to resolve the underlying problems of poor

tizing, care

as

when

it

was under

must be taken

ownership.

less

When

regulatory regime thereafter

to subject the enterprise to the right

-

if this is

not done, privatization

is

work, even in industries that do not naturally favour

likely to

the

priva-

to sell the right enterprise at the right

and

price to the right buyer,

state

sales

perform-

more or

ance, because the newly privatized firm will have

same problems

SOE

not

state

ownership.

SOE performance can often be improved without privatization. One important thing to do is to review critically the goals of the enterprises and estabhsh clear priorities among them. Very often, pubUc enterprises are charged with serving too many goals - for example,

women and

social goals (e.g., affirmative action for

employment generation and industrialization. There

is

minorities),

nothing wrong

with state-owned enterprises serving multiple goals, but what the goals are

and the

relative priority

among them need

The monitoring system can

SOEs

are

to be

also be improved. In

made clear. many countries,

monitored by multiple agencies, which means either that

they are not meaningfully supervised by any particular agency or that there

is

a supervisory over-kill that disrupts daily

example, the to have

state- owned

Korean

Electricity

Company was

undergone eight government inspections,

1981 alone. In such cases, sibilities are

it

may be

helpful

if

management -

for

reported

lasting 108 days, in

the monitoring respon-

consolidated into a single agency (as they were in Korea

in 1984).

Increase in competition can also be important in improving

performance. More competition is

is

SOE

not always better, but competition

way to improve enterprise performance.^^ Public enternot natural monopolies can easily be made to compete

often the best

prises that are

with private-sector firms, both domestically or in the export market. This has been the case with

many SOEs.

Renault (fully state-owned until 1996 and 120

For example, in France,

still

30%

controlled by the

MAN EXPLOITS MAN State) faced direct

as well as

competition from the private firm Peugeot- Citroen,

from foreign producers. Even when they were virtual monop-

oHes in their domestic markets, SOEs

like

EMBRAER

and

POSCO

were required to export and, therefore, had to compete internationally.

Moreover, where

feasible,

competition can be increased by setting

up another SOE.^^ For example, SOE, Dacom,

in 1991,

South Korea

specializing in international calls,

set

up

a

new

whose competition

with the existing state-owned monopoly, Korea Telecom, greatly contributed to increasing efficiency and service quality throughout the 1990s.

Of

course,

SOEs

are often in industries

where there

is

a

natural monopoly, where increasing competition within the industry is

would be socially unproductive. But, even in some degree of competition may be injected by boosting

either impossible or

these sectors,

some 'neighbouring'

industries (airUnes vs railways). ^7

In conclusion, there

is

no hard and

fast rule as to

successful state-owned enterprise. Therefore,

when

management, we need a pragmatic attitude in the

remark by China's former leader Deng Xiao-ping: whether the

cat

is

white or black as long as

121

it

it

spirit 'it

what makes

comes

to

a

SOE

of the famous

does not matter

catches mice.'

CHAPTER Windows Is it

In the

summer

wrong

of 1997,

6

98 in 1997

to 'borrow' ideas?

was attending a conference

1

The boundless energy and commercial bustle of the

in

city

Hong Kong.

were

thrilling

even to a Korean,

who

the busy street,

noticed dozens of street hawkers selling pirated

I

is

no stranger

to such things.

Walking down

computer software and music CDs. What caught my eye was the display

Windows 98 operating system for PCs. I knew that people in Hong Kong were, like my fellow Koreans, good at pirate-copying, but how could the copy come out before the real thing? Had someone invented a time machine? Unlikely, even in Hong Kong. Someone must have smuggled out the prototype Windows of the

98 that was being given the final touch in the research labs of Microsoft

and knocked

off a bootleg version.

Computer software which

ment Bill is

is

is

notoriously easy to duplicate.

A new product

the result of hundreds of man-years of software develop-

effort

Gates

can be duplicated onto a disk in a few seconds. So,

Mr

may be exceptionally generous in his charity work, but he man when it comes to someone copying his software.

a pretty hard

The entertainment industry and same problem. This

is

why

the pharmaceutical industry have the

they are exceptionally aggressive in

promoting the strong protection of intellectual property rights (IPRs), such as patents, copyrights and trademarks. Unfortunately, this handful of industries has been driving the whole international agenda

on IPRs over the

past two decades.

They

led the

campaign to introduce the so-called TRIPS (Trade- Related Intellectual Property Rights) agreement in the World Trade Organisation. This

122

WINDOWS

98 IN 1997

agreement has widened the scope, extended the duration and height-

ened the degree of protection for IPRs to an unprecedented it much more difficuU for developing countries new knowledge they need for economic development.

making

'The fuel of interest to the

Many

fire

African countries are suffering from an

Unfortunately,

extent,

to acquire the

of genius' HIV/ AIDS epidemic*

HIV/ AIDS drugs are very expensive, costing $10-12,000

per patient per year. This

is

three to four times the annual

income

per person of even the richest African countries, such as South Africa or Botswana, both of which happen to have the most serious

epidemic in the world.

It is

HIV/ AIDS

30-40 times that of the poorest countries,

Tanzania and Uganda, which also have a high incidence of the

like

disease.^

Given

this,

it is

understandable that some African countries

have been importing 'copy' drugs from countries Thailand, which cost only $3-500, or

2-5% of

the

'real'

thing.

The African governments have not been doing anything tionary. All patent laws, including the

most pro-patentee US

a provision for restricting the rights of IPR-holders

with the public

interest. In

and

like India

when

revolu-

law,

have

they clash

such circumstances, governments can cancel

impose compulsory licensing (forcing the patent holder to it to third parties - at a reasonable fee) or allow parallel imports

patents, license

(imports of copy products from countries where the product

is

not

patented). Indeed, in the aftermath of the anthrax terror scare in 2001,

the

US government

ping

-

utilized the public interest provision to

maximum

it

used the threat of compulsory licensing to extract a whop-

80%

discount for Cipro, the patent-protected anti-anthrax drug

effect

from Bayer, the German pharmaceutical company.^ Despite the legitimacy of the

actions

of African countries

concerning the HIV/ AIDS drugs, 41 pharmaceutical companies banded together and decided to

ment and took

it

make an example of the South African govern-

to court in 2001. They argued that the country's

drug laws allowing

parallel

imports and compulsory licensing were

contrary to the TRIPS agreement. The ensuing social campaigns and

123

BAD SAMARITANS public uproar showed the drug companies in a bad light, and they

Some of them even offered substanown HIV/ AIDS drugs to African countries to

eventually withdrew the lawsuit. tial

discounts on their

make up

for the negative publicity generated

by the episode.

During the debate surrounding the HIV/ AIDS drugs, the pharmaceutical companies argued that, without patents, there will be no

more new drugs - if anyone can 'steal' their inventions, they would have no reason to invest in inventing new drugs. Citing Abraham Lincoln - the only US president to be issued a patent"^ - who said Harvey

that 'patent adds the fuel of interest to the fire of genius',

Bale,

director general of the International Federation of Pharmaceutical

Manufacturers Associations, asserted that 'without erty rights] the private sector will not invest the

of dollars needed to develop

and non-infectious

tious

went on

to say, those

who

new

[intellectual

hundreds of millions

AIDS and

vaccines for

diseases.'^ Therefore, the

other infec-

drug companies

are criticizing the patent system (and other

IPRs) are threatening the future supply of

new

undermining the very productivity of the

capitalist system.

ideas (not just drugs),

The argument sounds reasonable enough, but truth.

new

It is

not as

if

it

is

only a half-

we always have to 'bribe' clever people into inventing

things. Material incentives, while important, are not the only

things that motivate people to invest in producing

HIV/ AIDS

height of the

letter to the

new

ideas.

At the

debate, 13 fellows of the Royal Society, the

highest scientific society of the

open

prop-

UK, put

this

point powerfully in an

Financial Times: 'Patents are only one

promoting discovery and invention.

Scientific curiosity,

means

for

coupled with

the desire to benefit humanity, has been of far greater importance

throughout

history.'^

up with new

ideas

all

Countless researchers the time, even

from them. Government research *

Lincoln received

on May 22

1849.

US

and the

vessel,

all

over the world

come

they do not directly profit

institutes or universities often

Patent #6,469 for 'A Device for Buoying Vessels Over Shoals'

The invention

ship just below the waterline. air

when

thus buoyed,

ably because the extra weight

consists of a set of bellows attached to the hull of a

On is

reaching a shallow place, the bellows are

expected to float

clear. It

filled

with

was never marketed, prob-

would have increased the probability of running onto

sandbars more frequently.

124

WINDOWS explicitly refuse to take

98 IN 1997

out patents on their inventions. All these show

that a lot of research

is

not motivated by the profit from patent

monopoly. This

not a fringe phenomenon.

is

the year 2000, only

43%

28% from

the remaining

the

US were

response,

all

of research

in the

private charities

and

drugs research as there rights

-

is

would

We

-

in developing countries

new

down

is

even

made to

is

not

easy,

A

slight

is

accept a shorter

less likely to result in

should also not forget that patents are

the

lobby mantra. critical

only for some

and other chemicals, software, and

industries, such as pharmaceutical

new technology

their

be more than

today in that country.

ideas, despite the patent

entertainment, where copying

still

if

in

for example, being forced to charge

lower prices to poor people/countries or being

disappearance of

even

tomorrow and,

the country's pharmaceutical companies shut

much

life

universities.^ So,

to abolish pharmaceutical patents

weakening of patentee

patent

conducted by

itself.

research labs (which will not happen), there half as

is

US. For example, in

US drugs research funding came from the 29% came from the US government and

of

pharmaceutical industry

A lot

- even

non-profit-seeking organizations

easy.^ In

other industries, copying

and innovation automatically

gives the

inventor a temporary technological monopoly, even in the absence of

The monopoly is due to the natural advantages accorded

the patent law.

to the innovator, such as imitation lag (due to the time

others to absorb the

first

new knowledge);

it

takes for

reputational advantage (of being

and so best-known producer); and the head

start in 'racing

down learning curves' (i.e., the natural increase in productivity through experience).^

enough

The

resulting

temporary monopoly

for the innovative activity in

a popular

argument against patents

why patents do not feature

most

profit

industries. This

is

was indeed

in the 19th century.^ This

at all in the

reward

is

also

Austrian-born American econ-

omist Joseph Schumpeter's famous theory of innovation - Schumpeter

monopoly

what he

calls

the entrepreneurial

profit) that a technological innovator will enjoy

through the above

believed that the

mechanisms

is

a big

enough

rent (or

incentive for investing in generating

new

knowledge.^^ Most industries actually do not need patents and other

IPRs to generate new knowledge - although they 125

will

be more than

BAD SAMARITANS happy

them,

to take advantage of

when

patent lobby talks nonsense

if

it

they are offered to them. The

new

argues that there will be no

technological progress without patents.

Even in those industries where copying

is

easy and thus patents

(and other IPRs) are necessary, we need to get the balance right

between the

interests of the patentees

and trademarks) and the by

patents, rest

of society.

One obvious problem

definition, create monopolies,

which impose

of society. For example, the patentee could use

monopoly to is

rest

(and the holders of copyrights

doing. But

the patentee

exploit the consumers, as it is

some people

costs

is

that

on the

technological

its

believe Microsoft

not just the problem of income distribution between

and the consumers. Monopoly

by allowing the producer

to

maximize

its

also creates net social loss

profit

by producing

than socially desirable quantity, creating net social loss in chapter 5). Also, because

it

is

a 'winner takes

explained

(this is

all'

at a less

system, critics

point out, the patent system often results in the dupHcation of research

among

competitors - this

may be

wasteful from the social point of

view.

The unstated presumption costs will be

more than

innovation (that

is,

offset

in the pro-patent

argument

is

that such

by the benefits that flow from increased

higher productivity), but this

is

not guaranteed.

Indeed, in mid-i9th-century Europe, the influential anti-patent move-

ment, famously championed by the British free-market magazine. The Economist^ objected to the patent system

would be higher than

Of

its

on the grounds

that

its

costs

benefits."

course, the 19th-century anti-patent liberal economists were

wrong. They

failed to recognize that

including the patent, can create

some forms of monopoly,

more benefits than

costs.

infant industry protection does produce inefficiency

creating

monopoly power

For example,

by

artificially

for domestic firms, as free-trade econo-

mists are only too pleased to point out. But such protection justified, if

it

raises productivity in the

the damages from the

monopoly

it

may be

long run and more than offsets creates, as

I

have repeatedly

explained in the earlier chapters. In exactly the same manner,

we

advocate the protection of patents and other intellectual property rights, despite their potential to create inefficiency

126

and waste, because

WINDOWS we

98 IN 1997

more than compensate for those costs in the long run by generating new ideas that raise productivity. But accepting the believe they will

potential benefits of the patent system

there

is

no

cost involved. If

we

design

from saying

different

is it

wrong and

more

protection to the patentee, the system can create benefits, as

The

is

give too

costs than

the case with excessive infant industry protection.

from monopolies and the waste from 'winner-

inefficiency

takes-air competition are neither the only, nor the

most important,

problems with the patent system, and other similar forms of

its

potential to block

ward countries

that

intel-

The most detrimental impact

lectual property rights protection.

in

that

much

lies

knowledge flows into technologically back-

need better technologies

economies. Economic development

is all

foreign technologies. Anything that

makes

to

develop their

about absorbing advanced

more

be

it

the

patent system or a ban on the export of advanced technologies,

is

not

good the

for

economic development.

Bad Samaritan

and did everything

It is

it

difficult,

as simple as that. In the past,

rich countries themselves understood this clearly to prevent this

from happening.

John Law and the first technological arms race As water flows from high where there

is

more

to

better at absorbing the in catching

to low,

knowledge has always flowed from

where there

is less.

Those countries that are

knowledge inflow have been more successful

up with the more economically advanced

nations.

On

the

other side of the fence, those advanced nations that are good at controlling the outflow of core technologies have retained their technological

leadership for longer.

The technological 'arms

race',

between backward

countries trying to acquire advanced foreign knowledge and the

advanced countries trying

to prevent

its

outflow has always been

at

game of economic development. race started to take on a new dimension century, with the emergence of modern industrial tech-

the heart of the

The technological arms in the 18th

nologies that had

much greater potential for productivity growth than 127

BAD SAMARITANS traditional technologies.

Not

Britain.

least

The

leader in this

new technological

cies that

we

and the

world's, leading industrial power. Naturally,

discussed in chapter

to part with

its

was

race

because of the Tudor and Georgian economic poli-

was rapidly becoming Europe's,

2, it

advanced technologies.

It

even

set

was reluctant

it

up

legal barriers to

technology outflows. The other industrialising countries in Europe,

and the US, had

to violate those laws in order to acquire superior

British technologies.

new

This

technological arms race was started in

spate

full

by John

who even became France's finance minister for just under a year. Law was named Law

(1671-1729), the legendary Scottish financier-economist

the 'moneymaker' by the author of his popular biography, Janet Gleeson.^^

He was

a

moneymaker

in

more than one

sense.

He was an

extremely successful financier, making huge killings on currency speculation, setting

getting royal profits.

up and merging

monopolies

for

large

banks and trading companies,

them and

His financial scheme was too successful for

led to the Mississippi

huge

selling their shares at its

own

good.

It

Bubble - a financial bubble three times bigger

than the contemporary South Sea Bubble discussed in chapter 2 -

which wrecked the French '^^Law

financial system."^

was born into a banking family

Continent a licence

after killing a

man

the child king, Louis

Due

in Scotland. In 1694,

to set

up

he had to

nephew and

its

as a joint-stock

as

flee to

the

Law was

given

the then regent for

In 1718,

Banque Generale

notes guaranteed by the king. In the meantime.

bought the Compagnie du Mississippi (the Mississippi Company) it

known

Banque Generale.

a note-issuing bank,

d'Orleans, Louis XIV's

XV, the great-grandson of Louis XIV.

became Banque Royale, with

also

in a duel. In 1716, after years of lobbying,

by the French government

His main backer was the

Law was

company. The company absorbed other

rival

in 1717

and

Law

floated

trading companies

Compagnie Perpetuelle des Indes, although it was still commonly called Compagnie du Mississippi. The company had a royal monopoly on all overseas trading. With Law launching high-profile settlement schemes in Louisiana (French North America) and generating rumours vastly exaggerating their prospects, a speculative frenzy on the company's stocks started in the summer of 1719. The share price rose by more than 30 times between early 1719 and early 1720. So many large fortunes were made so quickly - and subsequently lost in many cases - that the term millionand, in 1719, became

aire

was coined

to describe the

new

mega-rich. In January 1720,

Law was even made

the finance minister (the Controller General of Finances). But the bubble soon burst, leaving the French financial system in ruins.

December

1720.

Law

left

The Due d'Orleans dismissed Law

France and eventually died penniless in Venice in 1729.

128

in

WINDOWS

98 IN 1997

a great gambler with an incredible ability to calculate the odds.

As an

money backed by a central bank/3 The idea that we can make worthless paper into money through economist, he advocated the use of paper

government

was

fiat

a radical notion then. At the time,

believed that only things that have a value of their silver,

own,

most people like

gold and

could serve as money.

John Law dealer

who

today remembered mainly as the financial wheeler-

is

created the Mississippi Bubble, but his understanding of

economics went

far

beyond mere

financial engineering.

He under-

stood the importance of technology in building a strong economy.

While he was expanding Mississippi

Company, he

from Britain

in

his

banking operation and building up the

also recruited

hundreds of

skilled

workers

an attempt to upgrade France's technology.^^

At the time, getting

advanced technologies.

skilled

No one

workers was the key to accessing could

say,

even today, that workers

are mindless automata repeating the same task in the manner so hilariously but poignantly depicted film.

Modern

Times.

by Charlie Chaplin

What workers know and can do

in his classic

matters greatly

in determining a firm's productivity. In earlier times, though, their

importance was even more pronounced, since they themselves

embodied

a lot of technologies.

so productivity

who

Machines were

depended very much on how

still

rather primitive,

skilled the

workers

operated them were. The scientific principles behind industrial

operations were poorly understood, so technical instructions could

not be written

down

easily in universal terms.

Once

again, the skilled

worker had to be there to run the operation smoothly. Galvanized by Law's attempt to poach skilled workers and also by a similar Russian attempt, Britain decided to introduce a

migration of skilled workers. The law, introduced in illegal to recruit skilled

ban on the

1719,

made

it

workers for jobs abroad - known as 'suborning'.

Emigrant workers who did not return

home

within six months of

being warned to do so would lose their right to lands and goods in Britain

and have

in the law

their citizenship taken

were industries such

and watch-making; but

away

Specifically

mentioned

as wool, steel, iron, brass, other metals

in practice the law covered all industries.^^

With the passage of time, machines became more complex and 129

BAD SAMARITANS began to embody more technologies. This meant that getting hold of key machinery started to become as important

as,

and increasingly

more important than, recruiting skilled workers. Britain introduced a new act in 1750 banning the export of 'tools and utensils' in the wool and silk industries. The ban was subsequently widened and strengthened to include the cotton and linen industries. In

was introduced

ban the export of many

to

1785, the Tools

different

Act

types of

machinery.^^

Other countries intent on catching up with Britain knew that they

had

advanced technologies, whether the method

to get hold of these

used to do so was 'legal'

'legal'

or

'illegal'

from the

means included apprenticeships and

The

British point of view.

factory tours.^^

The 'illegal'

means involved the governments of continental Europe and the US luring skilled workers contrary to British law. These governments also

routinely employed industrial spies. In the 1750s, the French govern-

ment appointed John Holker,

a

former Manchester

textile finisher

Jacobite officer, as Inspector-General of Foreign Manufactures. also advising

French producers on

textile technologies,

and

While

Holker 's main

job was running industrial spies and poaching skilled workers from Britain.^^

There was also a

lot

of machine smuggling. Smuggling was

hard to detect. Because machines were tively

still

quite simple

and had

few parts, they could be taken apart and smuggled out

rela-

bit

by

bit relatively quickly.

Throughout the 18th century, the technological arms race was fought viciously, using recruitment schemes, trial

machine smuggling and indus-

espionage. But by the end of the century, the nature of the

game

had changed fundamentally with the increasing importance of 'disembodied' knowledge

-

that

is,

knowledge that can be separated from the

workers and the machines that used to hold them. The development of science meant that a

be written

down

lot

principles of physics at

all

- knowledge could

in a (scientific) language that could

by anyone with appropriate by looking

of - although not

training.

An

engineer

be understood

who understood the

and mechanics could reproduce a machine simply

the technical drawings. Similarly,

if

a chemical formula

could be acquired, medicines could be easily reproduced by trained chemists.

130

WINDOWS Disembodied knowledge

is

98 IN 1997

more

difficult to protect

than knowl-

edge embodied in skilled workers or actual machines. Once an idea written

much

is

down in general scientific and engineering language, it becomes

easier to

copy

worker, there are

all

it.

When you

have to recruit a

sorts of personal

you import a machine, you may not

and

get the

skilled foreign

cultural problems.

When

maximum out of it because

you may only poorly understand its operative principles. As the importance of disembodied knowledge grew,

it

became more important

protect the ideas themselves than the workers or machines that

them. Consequently, the British ban on

skilled

to

embody

worker emigration was

abolished in 1825, while that on machinery export was dropped in 1842. In their place, the patent law

became the key instrument

in

managing

the flow of ideas.

The 1474,

patent system

first

when

machines'.

supposed to have been used by Venice

in

it

granted ten years' privileges to inventors of 'new arts and

It

was

states in the 16th

reflecting the

also

somewhat haphazardly used by some German

century and by Britain from the 17th century.^^ Then,

growing importance of disembodied knowledge,

very quickly from the the

is

late 18th century, starting

it

spread

with France in

1791,

US in 1793 and Austria in 1794. Most of today's rich countries estab-

lished their patent laws within half a century of the French patent law.^°

Other

intellectual property laws,

such as copyright law

introduced in Britain in 1709) and trademark law

(first

(first

introduced in

Britain in 1862) were adopted by most of today's rich countries in the

second half of the 19th century. Over time, there emerged international agreements on IPRs, such as the Paris Convention on patents and trademarks

(1883)^^

and the Berne Convention on copyrights

(1886).

But even these international agreements did not end the use of 'illegal'

means

in the technological

arms

race.

The lawyers The year

1905

is

known

as the

get involved

annus mirabilis of modern physics. In

that year, Albert Einstein published three papers that

changed the

course of physics for good.^^ Interestingly, at the time, Einstein was

131

BAD SAMARITANS not a professor of physics but a humble patent clerk (an assistant

which was

technical examiner) in the Swiss Patent Office,

his first

job.^3

Had

Einstein been a chemist rather than a physicist, his

first

job

could not have been in the Swiss Patent Office. For, until 1907, Switzerland

did

Switzerland, in

not

fact,

grant

patents

chemical

to

had no patent law of any kind

inventions.^4

until 1888. Its 1888

patent law accorded protection only to 'inventions that can be repre-

sented by mechanical models'.

The

clause automatically (and inten-

tionally) excluded chemical inventions

-

at the time, the

Swiss were

'borrowing' a lot of chemical and pharmaceutical technologies from

Germany, the then world leader

Only

in those fields.

It

was thus not

in their

chemical patents.

interest to grant

under the threat of trade sanctions by Germany, did

in 1907,

the Swiss decide to extend patent protection to chemical inventions.

However, even the new patent law did not protect chemical technologies to the degree expected in today's

TRIPS system. Like many other

countries at the time, the Swiss refused to grant patents for chemical

substances (as opposed to chemical processes).

The reasoning was that

those substances, unlike mechanical inventions, already existed in

nature and, therefore, the 'inventor' had merely found a

them, rather than inventing the substance

remained unpatentable

itself

way

to isolate

Chemical substances

in Switzerland until 1978.

Switzerland was not the only country at the time without a patent law.

The Netherlands

not to introduce

it

actually abolished

again until 1912.

its

When

1817 patent

the

law in 1869,

Dutch abolished the

were in no small measure influenced by the anti-patent

law, they

movement artificially

I

mentioned above - they were convinced

that patent, as

created monopoly, went against their free-trade principle.^^

Exploiting the absence of a patent law, the Dutch electronics company, Philips, a light

household name today, started out in 1891

as a

producer of

bulbs based on the patents 'borrowed' from the American

inventor,

Thomas

Edison.^^

Switzerland and the Netherlands

But throughout

much

rich countries were

may

have been extreme cases.

of the 19th century, the IPR regimes in today's

all

very bad at protecting foreigners' intellectual

132

WINDOWS

98 IN 1997

property rights. This was partly the consequence of the general laxity

of early patent laws in checking the originality of an invention. For example, in the US, before the 1836 overhaul of

were granted without any proof of

its

patent law, patents

encouraged rack-

originality; this

eteers to patent devices already in use ('phony patents')

demand money from

their users

under threat of

and then

to

suit for infringe-

ment.^7 gut the absence of protection for foreigners' intellectual

property rights was often deliberate. In most countries, including Britain, the Netherlands, Austria, France

and the US, patenting of

imported invention was explicitly allowed.

When

Durand took

Peter

out a patent in 1810 in Britain for canning technology, using the

Frenchman Nicolas Appert's stated that foreigner',

invention, the application explicitly

was an 'invention communicated

it

then a

common

proviso used

when

to

me

by a certain

taking out a patent

on

a foreigner's invention.^^

'Borrowing' ideas was not simply done in relation to inventions

was also extensive counterfeiting of the 19th century - in a manner similar to what was

that could be patented. There

trademarks in

subsequently done by Japan, Korea, Taiwan and, today, China. In 1862, Britain revised

its

trademark

law, the

Merchandise Mark Act, with the

purpose of preventing foreigners, especially the Germans,

specific

from making counterfeit English products. The revised

act required

the producer to specif)^ the place or country of manufacture as a part

of the necessary 'trade description'. ^9

The law underestimated German firms

came up with some

ingenuity,

however - the German

brilliant evasive tactics.^°

For example, they

placed the stamp indicating the country of origin on the packaging instead of on the individual articles.

customers could not nique

is

said to have

watches and

send some

tell

Once

the product's country of origin. This tech-

been particularly common in the case of imported

steel files. Alternatively,

articles, like

them assembled

the packaging was removed,

German manufacturers would

pianos and bicycles, over in pieces and have

in England.

Or they would

the country of origin where

it

was

century British journalist Ernest Williams,

German

counterfeiting.

Made

in

place the stamp indicating

practically invisible.

who wrote

a

The

19th-

book about

Germany, documents how 'One

133

BAD SAMARITANS German

firm,

which exports

to

England large numbers of sewing-

machines, conspicuously labeled 'Singer' and 'North-British Sewing Machines', places the

Made

in

Germany stamp

in small letters under-

neath the treadle. Half a dozen seamstresses might combine their strength to turn the

otherwise

it

machine bottom-upwards, and read the legend:

would go

unread'.^^

Copyrights were also routinely violated. Despite

ho

attitude towards copyright, the

foreigners' copyrights in

its

US

its

currently gung-

in the past refused to protect

1790 copyright law.

It

only signed the inter-

national copyright agreement (the Berne Convention of 1886) in 1891.

At the time, the

US was

and

a net importer of copyright materials

saw the advantage of protecting only American authors. For another century (until 1988),

it

did not recognize copyrights on materials

printed outside the US.

The historical picture is clear. Counterfeiting was not invented in modern Asia. When they were backward themselves in terms of knowledge,

all

of today's rich countries blithely violated other people's patents,

trademarks and copyrights. The Swiss 'borrowed' inventions, while the

German chemical

Germans 'borrowed' Enghsh trademarks and

the

Americans 'borrowed' British copyrighted materials - all without paying

what would today be considered

'just'

compensation.

Despite this history, the Bad Samaritan rich countries are

now

forcing developing countries to strengthen the protection of intellectual property rights to a historically

the

TRIPS agreement and

They argue

unprecedented degree through

a raft of bilateral free-trade agreements.

that stronger protection of intellectual property will

encourage the production of

new knowledge and

including the developing countries. But

is

Making Mickey Mouse In 1998, the

US

benefit everyone,

this true?

live

longer

Copyright Term Extension Act extended the period of

copyright protection from 'Ufe of the author plus 50 years, or 75 years for a

work of corporate authorship'

(as set in 1976) to 'life

of the author

plus 70 years, or 95 years for a work of corporate authorship'. Historically

134

WINDOWS

98 IN 1997

speaking, this was an incredible extension in the period of copyright

protection from the original 14 years (renewable for another 14 years)

down by

laid

the 1790 Copyright Act.

The 1998 act is from the fact

derisively

known

that Disney

Act,

as the

Mickey Mouse Protection

was heading the lobby

pation of the 75th birthday of Mickey Mouse,

(Steamboat

What

Willie).

was applied

first

for

it

created in 1928

particularly remarkable about

is

retrospectively.

in antici-

it is

that

As should be immediately obvious

it

to

anyone, extending the term of protection for existing work can never create

new

The

knowledge.^^

end with copyrights. The US pharmaceutical

story does not

industry has already successfully lobbied to extend de facto patents by

up

to eight years, using excuses like the

in

the

need to compensate for delays

drugs approval process by the

FDA

(Food and Drugs

Administration) or the need for data protection. Given that like copyright,

used to be for only 14 years,

this

means

US patents,

that the phar-

maceutical industry has effectively doubled the patent

life

for

its

inventions. It is

not just in the

US

that the terms of

IPR protection have been

lengthening. In the third quarter of the 19th century (1850-75), the

average patent

the

US

this

upward

sample of 60 countries was around

in a

life

Between 1900 and

1975, this

was extended

to 16 or 17 years.

13 years.

But recently

has played the leading role in accelerating and consolidating trend.

It

has

now made

its

20-year term for patent protec-

it in the World Trade the 6o-country average stood at 19 Organisation's TRIPS agreement

tion a global standard' through enshrining

years as of 2004.^3 Anything that goes facto extension of drug patents, the

through bilateral

free- trade

that says that 20 years

is

beyond TRIPS, such

US government has been spreading I know of no economic theory

agreements.

better than 13 years or 16 years as the

of patent protection from social point of view, but the longer

it is,

the better

As the protection of (and

its

as the de

it is

it is

term

obvious that

for the patent-holders.

intellectual

property rights involves monopoly

social costs), extending the period of protection clearly increases

- like any other strengthening of IPR is paying more for new knowledge. Of

those costs. Lengthening the term protection

- means

that society

135

BAD SAMARITANS course, those costs

may be justified if the term extension produces more

knowledge (by strengthening the incentive is

no evidence

compensate for the increased to carefully

for innovation), but there

happening -

that this has been

at least

costs of protection.

not enough to

Given

this,

we need

examine whether the current terms of IPR protection are

appropriate and shorten

them

if

necessary.

Sealed crustless sandwiches and turmeric

One

IPR laws

basic assumption behind

is

that the

new

idea that

is

awarded protection is worth protecting. This is why all such laws demand the idea to be original (to possess 'novelty' and 'non-obviousness',

the technical jargon). This

in

abstract terms, but

it is

more

may sound

difficult to

incontrovertible in

put into practice, not

least

because investors have an incentive to lobby for lowering the originality bar. I mentioned when discussing the history of Swiss many people believe that chemical substances (as opposed

For example, as patent law,

to the process) are not

who

worthy of patent protection, because those

have extracted them have not done anything really original.

For this reason, chemical and/or pharmaceutical substances could not be patented in most rich countries - such as Germany, France, Switzerland, Japan

and the Nordic countries -

1970s. Pharmaceutical products

Canada

right

up

remained unpatentable

to the early i990s.^4 Before the

most developing countries did not patents.35

and

until the 1960s or the

and

give pharmaceutical product

Most countries had never given them;

Brazil,

in Spain

TRIPS agreement,

others, such as India

had abolished the pharmaceutical product patents (process

patent as well, in the case of Brazil) that they once had.^^

Even for things whose patentability

is

not disputed, there

is

no

worthy invention. For example, when Thomas Jefferson was the US patent commissioner - quite ironic given obvious way to judge what

is

a

opposed patents (more on this later), but this was ex secretary of state - he did a very good job of rejecting patent

that he as

cations at the slightest excuse.

It is

reported that the

136

officio

appli-

number of patents

WINDOWS

98 IN 1997

granted each year trebled after Jefferson resigned from his cabinet post and thus ceased to be the patent commissioner. This was, of course, not because the Americans suddenly

became

three times

more

inventive.

Since the 1980s, the originality hurdle for patents has been sig-

book on the current

nificantly lowered in the US. In their important state

US

of the

patent system. Professors

Adam

point out that patents have been granted to like

Amazon.com's

company's

Jaffe

and Josh Lerner

some very obvious

'one-click' internet shopping, the

'sealed crustless sandwiches',

things,

Smuckers food

and even things

like a 'bread

refreshing method' (essentially toasting the stale bread) or a 'method

of swinging on a swing' (apparently 'invented' by a five-year-old). ^7 In the

two

first

cases, the patent holders

to take their competitors to court

case

and

Michigan catering company

a small

in the latter.^^

trum, they

even used their

- barnesandnoble.com

While these cases are

reflect the general

at

new

in the

rights

former

called Albie's Foods, Inc.

the wackier end of the spec-

trend that 'the

novelty and

tests for

non-obviousness, which are supposed to ensure that the patent

monopoly

granted only to truly original ideas, have become largely

is

jh^

non-operative'.^9

a 'patent explosion'. in the

of this has been what

result

Jaffe

and Lerner

They document how the number of patents granted

US grew by 1%

a year between 1930

and

1982, the year

American patent system was loosened, but grew by 5.7% 1983-2002,

when

definitely not

patents were

due

to

silly

patents?

more

liberally granted.^^

some sudden explosion

But why should the issuing

call

rest

of the world care

They should

system has encouraged the

in

'theft'

the

a year during

This increase

American if

when

is

creativity!'*^

the Americans are

care because the

new American

of ideas that are well-known in other

countries, especially developing countries, but are not legally protected precisely because they have

This

is

known

in this regard

been so well known for such a long time.

as the theft of 'traditional knowledge'. is

The best example

the patent granted in 1995 to two Indian researchers

at the University

of Mississippi for the medicinal use of turmeric,

whose wound-healing properties have been known

in India for thou-

sands of years. The patent was only cancelled thanks to the challenge

mounted

in the

American courts by the 137

New Delhi-based

Council for

BAD SAMARITANS Agriculture Research. This patent might be

still

there

if

the

wronged

country had been some small and very poor developing nation that lacked India's

human and

financial resources to fight such battles.

Shocking though these examples lowering of originality bar

is

may be,

the consequences of the

not the biggest problem with the recent

unbalancing of the intellectual property rights system. The most serious

problem

is

that the

IPR system has begun

to

be an obstacle,

rather than a spur, to technological innovation.

The tyranny of Sir Isaac is

interlocking patents

Newton once famously

said, 'if

by standing on the shoulders of

fact that ideas

them - when new

how

some people used

ideas

this as

can we say that the person all

Thomas

this

Jefferson

no problem

in

opposed patents on

you need

an argument against

who

intellectual

put the 'finishing

the glory

- and the

very basis.

profit?

He argued

that

and cannot, therefore, be owned (although he saw owning people - he himself owned many slaves). ^^

The problem

use

it

air'

is

inherent in the patent system. Ideas are the most

important inputs in producing new ideas

further,

referring to the

emerge from a ferment of

touches' to an invention should take

ideas were 'like

He was

giants'.^^

little

develop in a cumulative manner. In the early contro-

versy around patents,

endeavour,

have seen a

I

in order to develop

ideas.

But

your

own new

if

other people ideas,

own

the

you cannot

them without paying for them. This can make producing new ideas

expensive. Worse,

you run the danger of being sued

for patent infringe-

ment by your competitors, who may own patents closely related to yours. Such a lawsuit would not only waste your money but also keep you from further developing the technology patents can

become an

in dispute. In this sense,

obstacle, rather than a spur, to technological

development. Indeed, patent infringement suits have been major obstacles to technological progress in

US

industries like sewing machines (mid-

19th century), aeroplanes (early 20th century)

and semiconductors

(mid-20th century). The sewing machine industry (Singer and a few

138

WINDOWS came up with

Other companies)

problem - a 'patent licensed

all

pool',

98 IN 1997

a brilliant solution to this particular

where

all

the relevant patents to

the companies involved cross-

one another. In the cases of the

aeroplanes (the Wright brothers vs Glenn Curtiss) and the semi-

conductors (Texas Instrument vs Fairchild), the firms concerned could not reach a compromise, so the

US government

stepped in to impose

patent pools. Without these government- imposed patent pools, these industries could not have progressed as they have done.

Unfortunately, the problem of interlocking patents has recently

become worse. More and more minute pieces of knowledge have become patentable, risk

down

to the level of individual genes, thereby increasing the

of patents becoming an obstacle to technological progress. The

recent debate surrounding so-called golden rice illustrates this point

very well. In 2000, a group of scientists led by Ingo Potrykus (Swiss)

Beyer (German) announced a rice

new technology

and Peter

to genetically engineer

with extra beta carotene (which turns into Vitamin

A when

digested). Because of the natural colour of beta carotene, the rice has

a golden hue,

which gives

by some because fits

it

to millions of

staple.44 Rice

is

it its

name. The

rice

is

also considered 'golden

can potentially bring important nutritional bene-

poor people

in countries

where

nutritionally very effective, able to sustain

than wheat, given the same area of land. But

- Vitamin A. Poor people

it

lacks

At the beginning of the

is

118

more people

one critical nutrient

in rice-eating countries tend to eat

other than rice and therefore suffer from Vitamin

people in

rice is the basic

21st century,

it is

little else

A deficiency (VAD).

estimated that 124 million

countries in Africa and Asia are affected by

VAD. VAD

thought to be responsible for one or two million deaths, half a million

cases of irreversible blindness

and millions of

eye-disease, xerophthalmia, every

In 2001, Potrykus

cases of the debilitating

year.'^^

and Beyer caused controversy by selling the

tech-

nology to the multinational pharmaceutical/biotechnology firm, Syngenta (AstraZeneca

mate

partial claim

on

at the time). 4^

Syngenta already had a

the technology, thanks to

of the research through the European Union. to their credit, negotiated

its

And

legiti-

indirect funding

the two scientists,

hard with Syngenta to allow farmers making

139

BAD SAMARITANS less free.

than $10,000 a year out of golden rice to use the technology for

Even

so,

some people found

the sale of such a valuable 'public

good' technology to a profit-making firm unacceptable. In response to the criticisms, Potrykus and Beyer said they had

had

to sell their technology to Syngenta because of the difficulties

involved in negotiating licences for the other patented technologies

they needed in order to operationalize their technology. They argued that, as scientists,

the

skills to

different

they simply did not have the necessary resources or

negotiate for the 70 relevant patents belonging to 32

companies and

universities. Critics

exaggerating the difficulties.

countered that they were

They pointed out

that there are only a

dozen or so patents that are truly relevant for countries where the golden

rice

would bring about the

largest benefits.

But the point remains. The days are over when technology can be

advanced in laboratories by individual

scientists alone.

Now you need

an army of lawyers to negotiate the hazardous terrain of interlocking patents. Unless

we

find a solution to the

patents, the patent system it

was designed

problem of interlocking

impede the very innovation

rules

and developing countries

recent changes in the system of intellectual property rights have

magnified nality bar

that

actually

to encourage.

Harsh The

may

we

quality,

its

costs,

while reducing the benefits. Lowering the origi-

and the extension of patent (and other IPR)

are, in effect,

however,

is

life

paying more for each patent, whose average

lower than before. Changes in the attitudes of rich

country governments and corporations have also made cult to override the

have meant

commercial

of the public interest, as

it

more

diffi-

interests of patent holders for the sake

we saw

in the

HIV/ AIDS

case.

And making

increasingly minute pieces of knowledge patentable has worsened the

problem of interlocking patents, slowing down technological progress. These negative impacts have been

much

greater for developing

countries.

The lower

cially the

US, has made the theft of already existing traditional

originality bar set in the rich countries, espe-

140

WINDOWS

98 IN 1997

knowledge from developing countries

Much needed medi-

easier.

become far more expensive, as developing countries are not allowed to make (or import) copy drugs any more, while their cines have

weakness

political

vis-a-vis rich

country pharmaceutical companies

constrains their ability to use the public interest provision.

But the biggest problem system has of

all

is,

to put

it

bluntly, that the

made economic development more

difficult.

new IPR

When 97%

patents and the vast majority of copyrights and trademarks are

held by rich countries, the strengthening of the rights of IPR-holders

means that acquiring knowledge has become more expensive for developing countries. The World Bank estimates

that, following the

TRIPS

agreement, the increase in technology licence payments alone will cost developing countries an extra $45 billion a year, which

is

nearly half

of total foreign aid given by rich countries ($93 billion a year in

2004-5 ).'^7 Although

it is

hard to quantify^ the impact, strengthening

made education, especially higher education that uses and advanced foreign books, more costly.

of copyright has specialized

This

is

not

all.

If

it is

to

comply with the TRIPS agreement, each

developing country needs to spend a

lot

of

money

building up and

implementing a new IPR system. The system does not run

itself.

Enforcement of copyright and trademarks requires an army of inspectors.

The patent

office

needs scientists and engineers to process the

patent applications and the courts need patent lawyers to help sort

out disputes. Training and hiring

world with

more

all

finite resources, training

inspectors to hunt

these people costs money. In a

more

down DVD

patent lawyers or hiring

pirates

means

training fewer

medical doctors and teachers while hiring fewer nurses or police cers. It is

offi-

obvious which of these professions developing countries

need more.

The wretched thing

is

that developing countries are going to get

hardly anything in return for paying increased licensing fees and incurring additional expenditures to rich countries strengthen their

some

implement the new IPR system. When

IPR protection, they can

increase in innovation, even

if its

at least expect

benefits are not

enough

to

cover the increased costs arising from strengthened protection. In contrast,

most developing countries do not have the 141

capabilities to

BAD SAMARITANS conduct research. The incentive to conduct research increased, but there

story of

my son,

bility is

not there,

why even

the

is

no one

to take advantage of

Jin-Gyu, which

I

may

British financial journalist

problems and limitations), describes IPR

its

most developing countries, 'with

device' for

Uke the

the capa-

3. If

does not matter what the incentives

it

renowned

are.

This

is

Martin Wolf, a

self-proclaimed defender of globalization (despite his

of

It is

it.

discussed in chapter

have been

full

awareness

as 'a rent-extraction

potentially devastating

consequences for their ability to educate their people (because of copyright),

adapting designs for their

challenges of public health'.

As is

I

own

use (ditto) and deal with severe

^^

keep emphasizing, the foundation of economic development

the acquisition of

more productive knowledge. The stronger the is, the more difficult it is for the acquire new knowledge. This is why, historically,

international protection for IPRs

follower countries to

countries did not protect foreigners' intellectual property very well (or at like

all)

when

they needed to import knowledge.

If

knowledge

water that flows downhill, then today's IPR system

is

like a

is

dam

that turns potentially fertile fields into a technological dustbowl. This

situation clearly needs fixing.

Getting the balance right

One common

question that

IPR system

my

in

lectures

would you them under

is:

I

am

when you

I

criticize the

let

publish

their

own

names?' This

simplistic mentality that pervades

IPR regime

is

our debate on as

it

exists

symptomatic of the intellectual

today

is

am

not arguing that

we should

property

not the same as

arguing for the wholesale abolition of intellectual property I

current

are against intellectual

other people steal your research papers and

property,

rights. Criticizing the

asked

'seeing that

itself.

abolish patents, copyrights or

trademarks. They do serve useful purposes. But the fact that some protection of intellectual property rights sary, salt

does not

may

mean

that

more of

be useful in explaining

it is

this

142

is

beneficial, or

always better.

point

more

An

clearly.

even neces-

analogy with

Some

salt is

WINDOWS our

essential to

above a certain

we

erty rights

is

Some more of it makes our eating more may do some harm to our health. But, harm that salt does to our health outweighs

survival.

pleasurable, even

the benefits

98 IN 1997

though

level,

get

the

from

like this.

it

tastier food. Protection

Some minimum amount

in creating incentives for

costs than benefits so that

So the

question

real

It is

is

how we

of

may be

it

essential

knowledge creation. Some more of

bring more benefits than costs. But too

in principle.

of intellectual prop-

it

much

of

it

may

may

it

more

create

ends up harming the economy.

not whether IPR protection get the balance right

is

good or bad

between the need to

encourage people to produce new knowledge and the need to ensure

from the resulting monopoly do not exceed the bene-

that the costs

new knowledge

we need today - by

brings about. In order to do that,

fits

that the

to

weaken the degree of IPR protection prevailing

shortening the period of protection, by raising the originality bar, and

by making compulsory licensing and If a

weaker protection leads to

inventors, in.

This

national (e.g.,

parallel

which may or may not be the

may

imports

the

US

can step

case, the public sector

involve the direct conduct of research

(e.g.,

easier.

insufficient incentives for potential

by public bodies -

National Institutes of Health) or international

the International Rice Research Institute that developed the Green

Revolution varieties of rice).

It

may be done by means

of targeted

R&D

subsidies to private-sector companies, with a condition attached

regarding public access to the end product.49 national and international so

it

would not be

level, is

The public

sector, at the

already doing these things anyway,

a radical departure

from

existing practice.

simply be a matter of stepping up and redirecting existing

Above

way

all,

the international

It

would

efforts.

IPR system should be reformed

in a

become more productive by new technical knowledge at reasonable costs.

that helps developing countries

allowing them to acquire

Developing countries should be allowed to grant weaker IPRs - shorter patent

life,

lower licensing royalty rates (probably graduated according

to their abilities to pay) or easier

compulsory licensing and

parallel

imports.5°

we should not only make technology acquisideveloping countries but also help them develop the

Last but not least,

tion easier for

143

BAD SAMARITANS capabilities to use

and use

and develop more productive technologies. For

we could

purpose,

institute

this

royalties

to provide technological support to developing countries.

it

The cause may all

promoted by

also be

tional copyright system,

Like

an international tax on patent

a modification to the interna-

which makes access to academic books easier.

"^^

other institutions, intellectual property rights (patents,

copyrights and trademarks)

on how they

are designed

may

or

may

not be beneficial, depending

and where they

are used.

The challenge

is

not to decide whether to scrap them altogether or strengthen them to the hilt, but to get the balance right

IPR-holders and the

you

like).

rest

Only when we

serve the useful purpose

between the

of the society (or the

rest

interests of the

of the world,

if

IPR system serve - that is,

get the balance right will the it

was

encouraging the generation of

originally set

new

up

to

ideas at the lowest possible costs

to society.

* Access to

academic books

developing countries, as

is

crucial in

my own

enhancing the productive

capabilities of

experience with pirate-copied books, described in

the Prologue, suggests. Rich country publishers should be encouraged to allow cheap

reproduction of academic books in developing countries - they are not going to lose

much by this, because their books are too expensive for developing country consumers anyway.

We

could also

up

set

a special international

of academic books by developing country

argument can put the current ucts is

(including

if

those people

many

tourists

as long as they are

fund to subsidize the purchase

academics and students.

I

pointed out in the Prologue,

who buy counterfeit products who buy them there) can afford

the counterfeit goods.

doing

One

it

in developing countries

the genuine articles. So,

not smuggled into the rich countries and sold as the genuine

(which rarely happens), the original manufacturers lose

are, in effect,

A similar

hysteria in the rich countries about counterfeit prod-

from developing countries into perspective. As

not as

cles

libraries,

little

actual revenue

arti-

from

could even argue that the developing country consumers

free advertising for the original manufacturers. Especially in high-

growth economies, today's counterfeit consumers are going to be tomorrow's consumers of the genuine in the 1970s are

articles.

now buying

Many Koreans who

the real things.

144

used to buy fake luxury goods

CHAPTER

7

Mission impossible?

Can financial prudence go

too far?

Most people who have watched the blockbuster movie Mission must have been mightily impressed by the urban splen-

Impossible III

dour that

is

They would

Shanghai, the centre of the Chinese economic miracle. also

remember

the frantic final chase set in the quaint

but shabby neighbourhood by the canal, which seems to be stuck in

The

the 1920s.

contrast between that district

and the skyscrapers

in

the city centre symbolizes the challenge that China faces with soaring inequality

and the discontent

it is

producing.

Some who have watched previous episodes of Mission Impossible may also have had a small source of curiosity satisfied. For the first time in the series, we were told the meaning of the acronym IMF, the formidable intelligence agency for which the movie's leading character,

Ethan Hunt (Tom Cruise), works.

It is

called the Impossible

Mission Force.

The

real

IMF, the International Monetary Fund, may not send

blow up buildings or

secret agents to is

much

feared

assassinate undesirables, but

by developing countries

all

the same, for

it

it

plays the

role of gatekeeper vis-a-vis the these countries, controlling their access

to international finance.

When

developing countries get into a balance of payments

they often do, signing an agreement with the that the

IMF

itself

does not have

ment

is

IMF

is

crucial.

only a minor part of the

much money

itself. It is

'profligate'

lends

of

its

The money

story, for the

own. More important

is

seen as a guarantee that the country will

ways and adopt a

set

crisis, as

IMF

the agree-

mend

its

of 'good' policies that will ensure

145

BAD SAMARITANS its

future ability to repay

do other potential and

its

debts.

Only when such agreement

the World Bank, rich country governments - agree to continue their supplies of finance

private- sector lenders

country concerned. The agreement with the

to the

made

is

lenders -

on

accepting conditions discussed in chapter

i)

a

wide (and, indeed,

IMF

involves

ever- widening, as

I

range of economic policies, from trade liberal-

ization to the adoption of

new company

law.

But the most important

and feared of IMF conditions concern macroeconomic policies. Macroeconomic policies - monetary policy and fiscal policy - are intended to change the behaviour of the whole economy (as distinct

from the sum total of the behaviours of the individual economic actors that

make

it

may behave

up).^

The

differently

counter-intuitive idea that the

whole economy

from the sum

comes from the

total

of

its

parts

famous Cambridge economist John Maynard Keynes. Keynes argued that

what

entire

is

rational for individual actors

may

not be rational for the

economy. For example, during an economic downturn, firms

demand

see the

for their products

fall,

while workers face increased

chances of redundancy and wage cuts. In this situation, for individual firms

and workers

economic actors reduced for the

combined

effect

it is

to reduce their spending.

their expenditure, they will

of such actions

is

all

prudent

But

if all

be worse

a lower aggregate

off,

demand,

which, in turn, further increases everyone's chances of bankruptcy

and redundancy. Therefore, Keynes argued, the government, whose job

to

it is

manage

the whole economy, cannot simply use scaled- up

versions of action plans that are rational for individual economic agents.

It

should always deliberately do the opposite of what other

economic actors do. In an economic downturn, increase

its

therefore,

it

should

spending to counter the tendency of the private sector

firms and workers to reduce their spending. In an economic upturn, it

should reduce

prevent

its

expenditure and increase taxes, so that

demand from

in the level of

can

outstripping supply.

Reflecting this intellectual origin, until the 1970s, the

macroeconomic

it

policies

economic

main aim of

was reducing the magnitude of the swings activity - known as the business cycle. But

since the rise of neo-liberalism,

and its 'monetarist' approach to macro-

economics, in the 1980s, the focus of macroeconomic policies has 146

MISSION IMPOSSIBLE The

radically changed.

believe that prices rise

'monetarists' are called as such because they

when

too

much money

is

chasing after a given

quantity of goods and services. They also argue that price stability (i.e.,

keeping inflation low)

therefore, that

is

the foundation of prosperity and,

monetary discipline (which is required for price stability)

should be the paramount goal of macroeconomic policy.

When

comes

it

discipline

is

believe that

to developing countries, the

most developing countries do not have the

discipline to 'live within their means';

money and borrow a

famous

need for monetary

even more emphasized by the Bad Samaritans. They

as if there

it is

were no tomorrow. Domingo Cavallo,

(or infamous, after the financial collapse in 2002) former

finance minister of Argentina, once described his 'rebel teenager'

'grow

who

by the Bad Samaritans

and hence growth economic

own country

as a

could not control his behaviour and needed to

hand of the IMF is seen as securing macroeconomic stability

Therefore, the firm guiding

up'.^

crucial

self-

alleged that they print

policies

in

in these countries. Unfortunately, the

macro-

promoted by the IMF have produced almost the

exact opposite effect.

'Mugger, armed robber and hit man' Neo-liberals see inflation as public

once put

it

most

enemy number one. Ronald Reagan

graphically: 'inflation

armed robber and

frightening as an

is

as violent as a

mugger, as

as deadly as a hit man'.^

believe that the lower the rate of inflation

the better

is,

it is.

They

Ideally,

they want zero inflation. At most, they would accept a very low singledigit rate

of inflation. Stanley Fischer, the Northern-Rhodesia-born

American economist, who was the chief economist of the IMF between 1994 and 2001, explicitly rate.4

But

why

is

recommended 1-3%

as the target inflation

inflation considered so harmful?

To begin with,

it is

argued that inflation

is

a

form of

that unjustly robs people of their hard-earned income.

stealth tax

The late Milton

Friedman, the guru of monetarism, argued that

'inflation

is

the one

form of taxation

legislation'. 5

But the

that can be

imposed without 147

BAD SAMARITANS illegitimacy

of

of inflation tax', and the 'distributive injustice' arising out

only the beginning of the problem.

it, is

Neo-liberals argue that inflation

Most of them would hold

well.^

behind

this is as follows:

do not

like uncertainty; so

investment

flat;

American

hyperinflation in the 1980s

economic growth

as

is

economy

the

thus low inflation

countries,

likely to be.

The thinking

essential for growth; investors

is

we must keep

ment and growth. This argument has had in those Latin

for

that the lower a country's rate of

economic growth

inflation, the higher its

means keeping prices

bad

is

is

stable,

which

a prerequisite of invest-

a particularly strong appeal

where memories of disastrous

combined with collapse in economic growth

were strong (especially Argentina, Bolivia,

Brazil,

Nicaragua and Peru).

Neo-liberal economists argue that two things are essential in

achieving low inflation. the central

what

First,

bank should not

there should be

increase the

monetary

discipline

-

money supply over and above

absolutely necessary to support real growth in the economy.

is

Second, there should be financial prudence - no government should live

beyond

its

means (more on

In order to achieve controls the

money

this later).

monetary

discipline, the central bank,

supply, should be

single- mindedly. Fully

embracing

this

made

which

to pursue price stability

argument, for example.

New

Zealand in the 1980s indexed the central bank governor's salary to the rate of inflation in inverse proportion, so that he/she

very personal interest in controlling inflation.

bank

to consider other things, like

ment

goes, the political pressure

would have

Once we ask the

a

central

growth and employment, the argu-

on

it

would be unbearable. Stanley

bank given multiple and general goals may among them and will certainly be subject to political presto shift among its goals depending on the state of the electoral

Fischer argues: 'A central

choose sures

way

cycle'.7

The

central

bank from

well and,

best

more

to prevent this

politicians

'politically independent'.

its

is

to 'protect' the

(who do not understand economics very

importantly, have short time-horizons) by

bank independence tion for

from happening

is

making

it

This orthodox belief in the virtues of central

so strong that the

loans, as, for example,

following the country's currency

it

IMF

often

it

a condi-

did in the agreement with Korea

crisis in 1997.

148

makes

MISSION IMPOSSIBLE? monetary

In addition to ally

discipline, neo-liberals

have tradition-

emphasized the importance of government prudence - unless

the government lives within

would cause

inflation

its

means, the resulting budget

deficits

by creating more demands than the economy

can meet.^ More recently, following the wave of developing country

and the

financial crises in the late 1990s

means. In those

their

private-sector firms a result,

crises,

it

was recog-

in living

beyond

of the over-borrowing was by

and consumers, rather than by governments. As

an increasing emphasis has been put on the 'prudential

regulations' of the banks

among

important banks,

much

early 2000s,

monopoly

nized that governments do not have a

these

recommended by

and other is

financial-sector firms.

The most

the so-called capital adequacy ratio for

the BIS (Bank for International Settlements),

the club of central banks based in the Swiss city of Basel (more this later).

There Inflation

bad

is

is

for

inflation

growth -

and there

this

inflation

is

has become one of the most widely

accepted economic nostrums of our age. But see it

During the 1960s and the

grew

at

2005, during

was one of the

world for those two decades -

income If

between 1996 and

which time

Brazil

embraced the neo-liberal orthodoxy,

macroeconomic

grew

at

*

when

and the its

its

inflation rate aver-

only 1.3% a year.

are not entirely persuaded

in the 1980s

policy,

lower 7.1% a year. But during this period, per capita

in Brazil

standable, given that hyperinflation

years,

growing

a year during this period. In contrast,

much

you

fastest

was

per capita income

especially in relation to

aged a

about

its

in the

4.5%

feel

1970s, Brazil's average inflation rate

a year.9 Despite this, Brazil

economies

how you

of information.

after digesting the following piece

42%

on

"^

early 1990s

by the

went

at

7%

- under-

by side with low growth

side

- how about

economy was growing

Brazilian case

this?

During

its

'miracle'

a year in per capita terms,

This ratio recommends that the total lending of a bank should not be more than

a certain multiple of

its

capital base (12.5

is

149

the

recommended

ratio).

BAD SAMARITANS Korea had inflation in the 1970s.

rates close to

These were

20%-iy.4%

rates higher

American countries, and

in the 1960s

and 19.8%

than those found in several Latin

totally contrary to the cultural stereotypes

of the hyper-saving, prudent East Asian versus fun-loving, profligate Latinos (more on cultural stereotypes in chapter

Koreas inflation

rate

9).

In the 1960s,

was much higher than that of five Latin American

countries (Venezuela, Bolivia, Mexico, Peru and Colombia) and not

much

lower than that infamous 'rebel teenager', Argentina.^° In the

Korean inflation

1970s, the

rate

was higher than that found

Venezuela, Ecuador and Mexico, and not

Colombia and

Are you

Bolivia."

still

much

in

lower than that of

convinced that inflation

is

incompatible with economic success?

With these examples,

When

am

I

not arguing that

economic

calculation.

the early 1990s

is

1

The experience of Argentina

is

good.

basis of rational in the 1980s

and

quite illustrative in this regard. ^^ In January 1977, a

carton of milk cost cost over

inflation

all

undermine they very

prices rise very fast, they

1

peso. Fourteen years later, the

billion pesos.

Between 1977 and

same container

1991, inflation ran at

an

annual rate of 333%. There was a twelve-month period, ending in 1990, during

during

which actual

inflation

was 20,266%. The story has

this period, prices rose so fast that

it

that,

some supermarkets resorted is no question that

to using blackboards rather than price tags. There this

kind of price inflation makes long-range planning impossible.

Without sions

a reasonably long time-horizon, rational investment deci-

become

impossible.

growth becomes very But there tive

is

And

without robust investment, economic

difficult.

a big logical

jump between acknowledging the

destruc-

nature of hyperinflation and arguing that the lower the rate of

inflation, the better. ^^

As the examples of

inflation rate does not have to

and most neo-liberals want,

many

Brazil

and Korea show, the

be in the 1-3% range,

for

an economy to do

neo-liberal economists admit that,

as Stanley Fischer well. Indeed,

below 10%,

inflation does

not seem to have any adverse effect on economic growth.^^

Bank economists, Michael Bruno, once the William

Easterly,

have shown

that,

correlation between a country's inflation rate

150

j^q World

chief economist,

below 40%, there

and

is

its

even

and

no systematic growth

rate.^5

MISSION IMPOSSIBLE? They even argue

that,

ciated with higher

below 20%, higher

necessarily harmful, but

and employment tion

and there

inflation

is

creation.

economy

changes, so

where there are But,

lots

moderate

if

be asso-

infla-

not only not

is

Prices change because the

up in an economy new demand. why are neo-liberals so

natural that prices go

it is

of

40%)

High

We may even say that some degree of infla-

new

activities creating

inflation

not harmful,

is

would argue

obsessed with

it?

or not - is

objectionable, because

still

to

even be compatible with rapid growth

dynamic economy.

inevitable in a

is

may

inflation.

is

harmful, but moderate inflation (up to

is

seemed

growth during some time periods.

In other words, there tion

inflation

Neo-liberals

that

all

inflation

- moderate

disproportionately hurts people

it

on fixed incomes - notably wage earners and pensioners, who are the most vulnerable sections of the population. Paul Volcker, the chairman of the

US

Federal Reserve Board (the

Reagan (1979-87), argued: 'Inflation the cruellest, tax because

unplanned way, and But

this is

only half the

needed to generate

the future.

needed

Why

is

this

this?

central bank)

demand

level

and maybe

many-sectored way, in an

Lower

is

inflation

may mean

that

what

better protected, but the policies that

outcome may reduce what they can earn

The

tight

monetary and

to lower inflation, especially to a very

reduce the

under Ronald

cruel,

people on a fixed income hardest V^

story.

the workers have already earned are

US

thought of as a

hits in a

it

hits the

it

is

of economic

activity,

low

fiscal

in

poHcies that are

level, are likely also to

which, in turn, will lower the

and thus increase unemployment and reduce wages. So a tough control on inflation is a two-edged sword for workers - it for labour

protects their existing incomes better, but

it

reduces their future incomes.

It is

only the pensioners and others (including, significantly, the finan-

cial

industry)

whose incomes

derive

returns for whom lower inflation

the labour market, tough

is

from

financial assets with fixed

a pure blessing. Since they are outside

macroeconomic

policies that lower inflation

cannot adversely affect their future employment opportunities and wages, while the incomes they already have are better protected.

made a big deal out of the fact that inflation hurts as we can see from the earlier quote from Volcker.

Neo-liberals have

the general public,

But

this populist rhetoric

obscures the fact that the policies needed to

151

BAD SAMARITANS generate low inflation are likely to reduce the future earnings of most

working people by reducing their employment prospects and wage rates.

The Upon

price of price stability

taking power from the apartheid regime in 1994, the

new ANC

(African National Congress) government of South Africa declared that it

would pursue an IMF-style macroeconomic

policy.

Such a cautious

approach was considered necessary if it was not to scare away investors, given

its

leftwing, revolutionary history.

In order to maintain price at their

peak in the

stability, interest rates

were 10-12%. Thanks to such tight monetary

rates

has been able to keep

gu^

year.^7

its

country

policy, the

inflation rate during this period at

^^3 achieved

i\^[^

were kept high;

1990s and the early 2000s, the real interest

late

at a

huge cost

to

growth and

6.3% a

jobs.

Given

that the average non-financial firm in South Africa has a profit rate

of

than 6%,

less

could borrow to tion of

GDP)

real interest rates invest.^^

from the

fell

in the early 1980s)

down

historical

that

is

its .

ically wise), the

and

economy has not done too badly -

going to engage in a major programme

is

country has an

Unemployment

is

no welfare

groups in the country

jobs, so that

official

is

to generate rapid

more people can

join the

(e.g., selling

This

is

known

as

growth

economic

their living standards. Currently, the

unemployment

rate of

26-8%, one of is

way too

rates in developing countries underestimate the true extent of

as

many poor

people cannot afford to remain unemployed (as there

up working in extremely low-productivity on the street, catching doors for people for small changes). 'disguised unemployment' among economists.

state)

jobs

econom-

neither politically feasible nor

the highest in the world'^; a 1.8% annual growth rate

unemployment,

levels

.

mainstream and improve

'^

low

only way to reduce the huge gap in living standards

racial

more

create

was once over 30%

per capita income grew at 1.8% a year. But

is

of redistribution (which

between the

(it

.'

only 'considering

Unless South Africa

20-25%

propor-

(as a

to about 15%.^^ Considering such

of investment, the South African

between 1994 and 2005,

of 10-12% meant that few firms

No wonder the investment rate

and, therefore, end

trinkets

152

MISSION IMPOSSIBLE? inadequate to bring about a serious reduction in unemployment and poverty. In the last few years, the South African

government has

thankfully seen the folly of this approach and has brought the interest

down, but

rates

real interest rates, at

around 8%,

are

still

too high

for vigorous investment.

In

most

is

above that

bonds, rather than invest

level,

money

sense for potential investors to put their

all

make

countries, firms outside the financial sector

profit.^^ Therefore, if real interest

it

3-7% makes more a

in the bank, or

buy

in a productive firm. Also taking into account

it

managing productive

the trouble involved in

- labour

enterprises

problems, problems with delivery of parts, trouble with payments by customers,

etc.

- the threshold

in developing countries have

borrowing more

rate

capital

little

means

difficult

is

what has happened

other developing countries

in turn,

much. This

means low growth and

scarce

South Africa and numerous

in Brazil,

when

that firms

accumulated internally, making

that firms cannot invest

low investment, which,

results in

jobs. This

may even be lower. Given

they followed the Bad Samaritans'

advice and pursued a very low rate of inflation.

However, the reader would be surprised to learn that the rich

Bad Samaritan

countries,

which are so keen

to preach to developing

countries the importance of high real interest rates as a key to

monetary

tary discipline, themselves have resorted to lax

when they have needed

to generate

income and

of their post-Second-World- War growth the rich countries were

and

'735

when

all

all

boom,

jobs.

mone-

policies

At the height

real interest rates in

very low - or even negative. Between i960

the latter half of the 'Golden

Age of Capitalism'

(1950-73),

of today's rich nations achieved high investment and rapid

growth, the average real interest rates were 2.6% in Germany, 1.8% in

France, 1.5%

in

the

USA, 1.4%

in

Sweden and -1.0%

in

Switzerland.^^

Monetary policy

that

is

too tight lowers investment. Lower invest-

ment slows down growth and job problem

creation. This

not be a huge

for rich countries with already high standards of living,

generous welfare

state provision

and low

for developing countries that desperately

and often

may

poverty, but

a disaster

need more income and jobs

are trying to deal with a high degree of

153

it is

income inequality

BAD SAMARITANS without resorting to a large-scale redistribution programme

may

anyway,

more problems than

create

Given the costs of pursuing a

it

that,

solves.

monetary

restrictive

policy, giving

independence to the central bank with the sole aim of controlling inflation

is

the

thing a developing country should do, because

it

entrench monetarist macroeconomic policy that

is

last

will institutionally

particularly unsuitable for developing countries. This

when

so

there

is

independence even lowers the tries, let

is all

the

actually no clear evidence that greater central rate of inflation in developing

more bank

coun-

alone helps to achieve other desirable aims, like higher growth

and lower unemployment.-^ a

It is is

well

myth

known

that central bankers are non-partisan technocrats.

It

that they tend to listen very closely to the view of the

financial sector

and implement

policies that help

it,

if

necessary

at

the cost of the manufacturing industry or wage-earners. So, giving

them independence

own bias

allows

them

to

pursue policies that benefit their

natural constituencies without appearing to do so.

would be even worse

if

we

them

explicitly tell

The

policy

that they should

not worry about any policy objectives other than inflation.

Moreover, central bank independence democratic accountability (more on

raises

the argument that central bankers can take their jobs

an important issue for

this in chapter 8).

do not depend on making the

The

flip

side of

good decisions only because

electorate

happy

is

that they

can pursue policies that hurt the majority of people with impunity -

worry about anything other than the

especially if they are told not to rate of inflation. Central bankers cians, so that they

popular

will.

This

Board defines tary policy

is

need to be supervised by elected

can be, even exactly

its first

why

if at

one remove, responsive

the charter of the

US

to the

Federal Reserve

responsibility as conducting the nation's

by influencing the monetary and

politi-

mone-

credit conditions in the

economy in pursuit of maximum employmem, stable prices, and moderate long-term interest rates

[italics

subject to regular grilling

ment

added] '^^ and

by Congress.

acts internationally as a

why

the Fed chairman

Ironic, then, that the

is

US govern-

Bad Samaritan and encourages

devel-

oping countries to create an independent central banks solely focused

on

inflation.

154

MISSION IMPOSSIBLE?

When

prudence

isn't

prudent

Gordon Brown, who was UK chancellor of the exchequer (finance minister) before becoming Prime Minister, prided himself on having earned the nickname the iron chancellor. This sobriquet used to be associated with the former

German

chancellor (prime minister). Otto

von Bismarck, but, unlike Bismarck's 'ironmongery', which was in foreign policy. Brown's 'ironmongery' was in the area of public finance.

He

has been praised for his resolve in not giving in to the

for deficit spending,

who were

coming from

understandably clamouring for more

Conservative budget cuts. tance of prudence in

Brown

fiscal

demand

his supporters in the public sector,

money

after years

of

constantly emphasized the impor-

management, so much so

that William

Keegan, a leading British financial journalist, called his book on Brown's economic policy The Prudence of Mr. Gordon Brown. Prudence, it

become the supreme virtue Emphasis on fiscal prudence has been

seems, has

liberal

that

government should not

theme

in the neo-

its

beyond

live

means and must always

its

budget. Deficit spending, they argue, only leads to infla-

and undermines economic stability, which, in turn, reduces growth

and diminishes the

Once

again,

who

living standards of people

thing, being

balance

its

on

fixed income.

can argue against prudence? But, as in the case of

inflation, the real question

one

a central

macroeconomics promoted by the Bad Samaritans. They argue

balance tion

in a finance minister.

is

what

exactly

it

means

to be prudent. For

prudent does not mean that the government has to

books every

year, as

preached to developing countries by

is

the

Bad Samaritans. The government budget may have

but

this

needs to be achieved over a business

year The year

is

an extremely

artificial

to be balanced,

cycle, rather

unit of time in

than every

economic terms,

we followed this logic, why not tell governments to balance its books every month or even every and there

is

nothing sacred about

it.

Indeed,

week? As Keynes's central message had

it,

what

if

is

important

is

that,

over

the business cycle, the government acts as a counterweight to the behav-

iour of the private sector, engages in deficit spending during economic

downturns and generates a budget surplus during economic upturns.

155

BAD SAMARITANS For a developing country,

on

deficit

a

permanent

resulting debt

sustainable.

is

perfectly prudent to

a

young family and

higher. Similarly,

it

may

medium

Even

to re-pay the debt

means and thereby

current

its

the country succeeds in accelerating will

of individuals,

it

is

are studying or raising

when your earning power

for a developing country to

from future generations' by running budget

beyond

term, as long as the

at the level

borrow money when you

makes sense

it

even make sense to run a budget

basis in the

deficits in

accelerate

is

'borrow

order to invest

economic growth.

If

growth, future generations

its

be rewarded with higher standards of living than would have been

possible without such

Despite

this,

all

government

the

IMF

governments balancing the books every cycles or longer-term

spending.

deficit

obsessed with developing country

is

development

year, regardless

strategy.

So

of business

imposes budget

it

balancing conditions, or even the requirement to run a surplus on countries in deficit

macroeconomic

crisis that

could actually benefit from

spending by the government.

For example,

December 1997

when Korea in the

IMF

in

was required

to

signed an agreement with the

wake of

a currency crisis,

generate budget surplus equivalent to

1%

of

it

GDP. Given

that a

huge

exodus of foreign capital was already pushing the country into a deep recession,

budget

-

should have been allowed to increase government

any country could afford to do

deficits. If

at the time,

as a

it

it

proportion of

Despite Little

this,

the

wonder

this, it

was Korea

had one of the smallest stocks of government debt

GDP

in the world, including all the rich nations.

IMF barred the country from using deficit spending.

that the

economy

nose-dived. In the early

months of

day were going bankrupt and the unemployment rate nearly trebled - no surprise, then, that some Koreans dubbed the IMF 'I'M Fired'. Only when this uncontrollable downward economic spiral looked set to continue did the IMF relent and allow the Korean government to run a budget deficit - but only a 1998, over 100 firms a

very small one (up to 0.8% of GDP).^^ In a more extreme example, following

its

financial crisis in the

instructed by the subsidies.

IMF

to cut

When combined

same

year,

Indonesia was also

government spending,

with a

especially food

rise in interest rates to

156

80%, the

MISSION IMPOSSIBLE? was widespread corporate bankruptcy, mass unemployment

result

and urban

riots.

As

saw

a result, Indonesia

a massive

16%

fall

in

output in 1998.^5 they were in similar circumstances, the rich Bad Samaritan coun-

If

would never do what they

tries

the poor countries to do. Instead

tell

they would cut interest rates and increase government deficit spending in order to boost

stupid

enough

demand. No

rich country finance minister

When

economic downturns.

US economy was

the

would be

and run budget surplus during

to raise interest rates

reeling

from the

aftermath of the burst of the so-called dot.com bubble and the

September

11

bombing of

the

World Trade Center

at the

the 21st century, the solution taken by the supposedly

'fiscally

anti-Keynesian republican government of George

sible',

- you've guessed

it

- government

deficit

monetary policy of unprecedented

beginning of respon-

W. Bush was

spending (combined with a 2003 and 2004, the

laxity). In

US

budget deficit reached nearly 4% of its GDP. Other rich country govern-

ments have done the same. During 1991-1995, downturn, the

5.6%

in the

ratio of

UK, 3.3%

The 'prudent'

government

deficit to

in the Netherlands

GDP was 8%

and

financial sector policies

a period of

3%

in

economic

in

Sweden,

Germany. ^^

recommended by

the

Bad

Samaritans have also created other problems for macroeconomic management in developing countries. The BIS capital adequacy ratio,

which

I

explained above, has been particularly important in this

regard.

The BIS changes in

make up and

fall

ratio requires that a bank's lending its

capital base.

a bank's capital base go

when

it is

not, this

changes in line with

Given that the prices of the

up when the economy

means

is

assets that

doing well

that the capital base grows

and

shrinks along with the economic cycle. As a result, banks are able to increase their loans in

ment

good times even without any inherent improve-

in the quality of the assets that they hold, simply because their

capital base

expands due to

boom, overheating

asset price inflation. This feeds into the

the economy. During a downturn, the capital base

of the banks shrinks, as asset prices

fall,

which, in turn, pushes the economy

forcing

down

them

further.

to call in loans,

While

it

may be

prudent for individual banks to observe the BIS capital adequacy ratio,

157

BAD SAMARITANS if all

the banks follow

it,

the business cycle will be greatly magnified,

ultimately hurting the banks themselves."^

When

the economic fluctuations

become

bigger, the swings in fiscal

policy have to

become bigger too,

cyclical role.

But big adjustments in government spending generate

problems.

if

they are to play an adequate counter-

On the one hand, a big increase in government spending during

an economic downturn makes

On

ill-prepared projects.

more

it

likely that the

the other hand,

making

ment spending during an economic upturn Given

resistance.

this,

is

spending goes into

large cuts in govern-

difficult

the greater volatility created

by

due

to political

strictly

enforcing

the BIS ratio (and the opening-up of capital markets, as discussed in

chapter 4) has actually made good fiscal policy more difficult to conduct.^^

Keynesianism for the

rich,

monetarism

for the

poor

Gore Vidal, the American writer, once described the American economic system as

'free enterprise for

the poor and socialism for the

Macroeconomic policy on the

global scale

is

rich'.^^

a bit like that.

It

is

Keynesianism for the rich countries and monetarism for the poor.

When

the rich countries get into recession, they usually relax

tary policy

and increase budget

in developing countries, the

them

deficits.

or even generate budget surplus

equivalent to only for several

similar

More

- even

riots in the streets.

financial crisis in 1997, the

the

mone-

same thing happens

Bad Samaritans, through the IMF,

to raise interest rates to absurd levels

ployment and spark

*

When

if

and balance

force

their budgets,

unem-

these actions treble

As noted above, during Korea s

IMF allowed the country to run budget deficits

0.8% of

GDP

(and, at that, after trying the opposite

months, with disastrous consequences); when Sweden had a

problem (due to the ill-managed opening-up of its capital market,

recently, the

BIS has suggested an even more 'prudent' system called BIS

the loans are weighted by their risk rating. For example, riskier loans

lending) need to be supported by a larger capital base than safer loans loans for house purchase) of the

same nominal

(e.g., (e.g.,

II,

where

corporate

mortgaged

value. This will be particularly

bad

for

developing countries, whose firms have low credit ratings, as this means that banks would

have a particular incentive to reduce their lending to developing country corporations.

158

MISSION IMPOSSIBLE? as

was the case with Korea

in 1997) in the early 1990s,

were, in proportional terms, ten times that Ironically,

when

its

budget

deficits

(8% of its GDP).

the citizens of developing countries voluntarily

tighten their belts, they are derided for not understanding basic

Keynesian economics. For example,

campaigned

when some Korean housewives

for voluntary austerity measures, including serving

home

smaller meals at

in the

wake of the 1997

financial crisis, the

Financial Times correspondent in Korea sneered at their stupidity,

saying that such actions 'could deepen the country's plunge into recession since growth'. ^9

it

would further reduce the demand needed

But what

is

to bolster

the difference between what these Korean house-

wives were doing and the spending cuts imposed by the IMF, which

FT correspondent

the

thought were eminently sensible?

The Bad Samaritans have imposed macroeconomic

policies

on

developing countries that seriously hamper their ability to invest, grow

and

create jobs in the long run.

denunciation of for

them

to

'living

'borrow to

beyond

invest' in

The

categorical

one's means' has

- and

made

simplistic

it

-

impossible

order to accelerate economic growth.

we categorically denounce people for living beyond their means, we should, amongst other things, condemn young people for If

borrowing

to invest in their career

development or

in their children's

education. That cannot be right. Living beyond one's

may

not be right;

country

Mr

is

in

it all

means may or

depends on the stage of development that the

and the use

to

which the borrowed money

Cavallo, the Argentine finance minister,

may

in saying that developing countries are like 'rebel teenagers' to 'grow up'.

But acting

like a

grown-up

is

put.

is

have been right

who need

not really growing up. The

teenager needs to get an education and find a proper job;

enough

just to pretend that

he

is

grown up and

it

is

not

quit his school so

that he can increase his savings. Similarly, in order really to 'grow up', it

is

not enough for developing countries to use poHcies that suit

'grown-up' countries.

What

they need to do

is

to invest in their future.

In order to do that, they should be allowed to pursue policies that are

macroeconomic

more pro-investment and pro-growth than the ones

used by the rich countries, and that are a

lot

more aggressive than

those they are allowed to pursue today by the Bad Samaritans.

159

CHAPTER

8

Zaire vs Indonesia Should we turn our backs on corrupt and undemocratic countries?

Zaire: In 1961, Zaire

(now the Democratic Republic of

was a desperately poor country with $67.

Mobutu

Sese Seko

He

ruled until 1997.

is

came

to

the

a per capita annual

power

in a military

coup

Congo)

income of in 1965

and

estimated to have stolen $5 billion during his

32-year rule, or about 4.5 times the country's national

income

in 1961

($1.1 billion).

Indonesia: In that same year, with a per capita annual income of only $49, Indonesia

power

was even poorer than

in a military

coup

Zaire.

Mohamed

and ruled

in 1966

until 1998.

Suharto came to

He

to have stolen at least $15 billion during his 32-year rule.

the figure

is

estimated

Some

suggest

may even have been as high as $35 billion. His children became

some of the

country's richest business people. If

we

take the mid-point

of these two estimates ($25 billion), Suharto has stolen the equivalent of

5.2

Zaire's

times his country's national income in 1961 ($4.8 billion).

income per

Mobutu was

capita in purchasing powder terms in 1997, vs^hen

deposed, was one third of

its

level in 1965,

to power. In 1997, the country stood 141st for

which the

The HDI

UN

calculated a

life

expectancy and

Considering the corruption

performed even worse than fell

when he came

the 174 countries

'human development index (HDI).

takes into account not only

measured by

among

income but

also 'quality of

life'

literacy. statistics,

Zaire. Yet

by three times during Mobutu's

Indonesia should have

where

Zaire's living standards

rule, Indonesia's rose

160

by more than

ZAIRE VS INDONESIA three times during Suharto's rule.

- not the score of

where

The Zaire-Indonesia

had

it

is

one of the

ranking in 1997 was 105th

started.

contrast shows the limitations of the increas-

by the Bad Samaritans that corrup-

ingly popular view propagated

tion

HDI

economy, but creditable nonetheless,

a 'miracle'

especially considering

Its

biggest, if not necessarily the biggest, obstacle to

economic development. The argument goes that there

is

no point

in

helping poor countries with corrupt leaders, because they will 'do a

Mobutu' and waste the money. This view

is

reflected in the

World

Bank's recent anti-corruption drive, under the leadership of former

US deputy defence

secretary Paul Wolfowitz,

against corruption

is

because corruption

who

declared: 'The fight

a part of the fight against poverty, not just

is

wrong and bad but because

it

really retards

economic development'.^ After Wolfowitz assumed leadership

in

January 2005, the World Bank suspended loan disbursements to several developing countries on grounds of corruption.^ Wolfowitz resigned

from the Bank in 2007, but Corruption the

is

a big

Bad Samaritans

its

campaign against corruption continues.

problem

are using

it

in

many

developing countries. But

as a convenient justification for the

reduction in their aid commitments, despite the fact that cutting aid will hurt the

poor more than

it

will a country's dishonest leaders,

especially in the poorst countries (which tend to be

reasons

I

shall explain).^

more

corrupt, for

Moreover, they are increasingly using corrup-

tion as an 'explanation' for the failures of the neo-liberal policies that

they have promoted over the past two and a half decades. Those policies

have failed because they were wrong, not because they have been

overwhelmed by

local anti-developmental factors, like corruption or

'wrong' culture (as

I

will discuss in the next chapter).

Does corruption hurt economic development? Corruption

is

a violation of the trust vested

holders of offices in any organization, be tion, a trade

union or even an

it

by

its

'stakeholders' in the

a government, a corpora-

NGO (non-governmental organization). 161

BAD SAMARITANS True, there can be instances of 'noble cause corruption; one such

example being Oscar Schindler's bribing of Nazi

officials that

saved

the lives of hundreds of Jews, as immortalized in the Steven Spielberg

movie, Schindler's List^ But they are the exceptions, and corruption

is,

in general, morally objectionable.

would be simpler

Life

if

morally objectionable things

like

corrup-

had unambiguously negative economic consequences. But

tion also

the reality

is

a lot messier.

Looking

at just the last half a century, there

are certainly countries, like Zaire

Duvalier,

under Mobutu or Haiti under

whose economy was ruined by rampant corruption. At the

we have countries like Finland, Sweden and Singapore, which are known for their cleanliness and have also done very well economically. Then we have countries like Indonesia that were very corrupt but performed well economically. Some other countries Italy, Japan, Korea, Taiwan and China come to mind - have done even other extreme,

better than Indonesia during this period, despite ingrained corrup-

on

tion

a widespread

and often massive

scale

(though not as serious

as in Indonesia).

And

corruption

is

not just a 20th-century phenomenon. Most of

today's rich countries successfully industrialised despite the fact that their public life

open

was spectacularly

corrupt.'^ In Britain

and France, the

of public offices (not to speak of honours) was a

sale

common

practice at least until the 18th century^ In Britain, until the early 19th

century, their

it

was considered

perfectly

normal

departmental funds for personal

ments of high-ranking

civil

for ministers to 'borrow'

profit.^ Until 1870,

servants in Britain were

appoint-

made on the basis

of patronage, rather than merit. The government chief whip (equivalent to the majority leader in the

US

Congress) was then actually

called the patronage secretary of the Treasury, because distributing *

Their corruption was such that the very definition of corruption was different from

what

prevails today.

Walpole the a

freely

most

When he was accused of corruption in Parhament in 1730, Robert

admitted that he had great estates and asked: 'having held some of

lucrative offices for nearly 20 years,

crime to get estates by great

them, 'how

much

office'.

greater a crime

it

what could anyone

He turned

must be

the tables

to get

an

on

estate

expect, unless

his accusers

out of lesser

it

was

by asking

offices.'

See

Nield (2002), Public Corruption - The Dark Side of Social Evolution (Anthem Press,

London),

p. 62.

162

ZAIRE VS INDONESIA patronage was his main job/ In the USA, the

pubUc less

were allocated to the

offices

loyalists

'spoils'

system, where

of the ruling party regard-

of their professional qualifications, became entrenched in the early

19th century

and was

Not

Civil War.

US

a period

when

the

for a

federal bureaucrat

an open, competitive process

was

rampant

particularly

a single

few decades

until the 1883 Pendleton Act.^

US was one

of the

after the

was appointed through

fastest

But

this

growing economies

in the world.

The

electoral process

was

also spectacularly venal. In Britain,

done by giving

bribery, 'treating' (typically

promises of jobs and threats to voters were

affiliated public houses),

widespread in elections until the Corrupt and 1883.

Even

free drinks in party-

after the Act, electoral

corruption persisted well into the

20th century in local elections. In the US, public

used for party to electoral

political

officials

were often

campaigns (including being forced

campaign funds).

Act of

Illegal Practices

Electoral fraud

to

donate

and vote-buying were

widespread. Elections in the US, where there were a lot of immigrants, involved turning ineligible aliens into instant citizens

who

could vote,

which was done 'with no more solemnity than, and quite celerity as,

is

much

as

displayed in converting swine into pork in a Cincinnati

packing house', according to the expensive election campaigns,

it

New

With

was no big surprise that many elected

sought bribes. In the

officials actively

York Tribune in 1868. ^

late 19th century, legislative

corruption in the US, especially in state assemblies, got so bad that

US

the future

president Theodore Roosevelt lamented that the

York assemblymen, who engaged

in the

open

selling

New

of votes to

lobbying groups, 'had the same idea about Public Life and Civil Service that a vulture has of a

dead

sheep'.^°

How is it possible that corruption has such different economic consequences in different economies? (e.g.,

Zaire, Haiti),

while

still

others

some

do very well

post-Second- World- War question,

we need

stand

inner workings.

its

A bribe

is

to

Many corrupt countries do disastrously

others have (e.g.,

done decently

the

US

(e.g.,

Indonesia),

in the late 19th century

and

East Asian countries). In order to answer the

open the

'black box' called corruption

a transfer of wealth

from one person 163

and under-

to another.

It

does

BAD SAMARITANS not necessarily have negative

some other

minister (or

If the

capitalist

on economic efficiency and growth.

public official) taking a bribe from a

money

investing that

is

effects

in another project that

is

at least as

productive as that which the capitalist would have otherwise invested

he not had to pay the bribe), the venality involved

in (had

no

on the economy

effect

difference it is

is

that the capitalist

a question of

Of

course,

income

The only poorer and the minister richer - i.e.,

is

distribution.

always possible that the

it is

money

minister as productively as by the capitalist. his ill-gotten gains in

not used by the

is

The minister may blow

conspicuous consumption, while the

might have invested the same money But

may have

in terms of efficiency or growth.

wisely. This

capitalist

often the case.

is

many bureaumany uses the money

cannot be assumed to be so a priori. Historically,

it

and

crats

capitalists

proved to be wily investors, while

politicians have

squandered their fortunes.

If the

minister

more effectively than the capitalist, corruption may even help economic growth.

A

critical issue in this

regard

the country. If the bribe

is

is

whether the dirty money

deposited in a Swiss bank,

it

stays in

cannot

contribute to creating further income and jobs through investment

which itself

is

one way

in

And, indeed,

-

which such odious money can

partially 'redeem'

one of the main reasons

for the difference

this

is

between Zaire and Indonesia. In Indonesia, the money from corruption mostly stayed inside the country, creating jobs Zaire,

much

of the corrupt

you must have corrupt loot at

money was shipped

leaders,

at least

out of the country.

want them

If

to keep their

home.

Whether or not the income a

you

and incomes. In

more

transfer

due

to corruption results in

money

(or less) productive use of the

paid out as bribes,

corruption can create a variety of economic problems by 'distorting'

government

decisions.

For example,

if

a bribe allows a less efficient

licence to build, say, a efficiency. But,

clusion.

It

new

steel mill,

it

will

once again, such an outcome

is

likely to

be the 164

most

lower the economy's

is

has been argued that the producer

the highest bribe

producer to get the

not a foregone con-

who

efficient

is

willing to pay

producer - as the

ZAIRE VS INDONESIA

who

producer be,

expects to

make more money out of the Hcence would

by definition, wiUing to

offer the bigger bribe to secure the Ucence.

Hcence to the producer paying the

If that is the case, giving the

highest bribe

is

essentially the

same

as a

government auctioning the

and is thus the best way to choose the most efficient producer - except that the potential auction income goes to the licence off

unscrupulous

official,

rather than to the state exchequer, as

have done in a transparent auction. unofficial (and efficient) auction'

Of

it

would

course, this 'bribing as an

argument

falls

apart

if

the

more

producers are morally upright and refuse to pay bribes, in

efficient

which case corruption

will allow a less efficient

producer to get the

licence.

Corruption

may

also 'distort'

regulation. If a water

government decisions by hampering

company supplying sub-standard water can

continue the practice by bribing the relevant negative economic consequences -

officials,

there will be

a higher incidence of water-borne

diseases that will increase health care costs and, in turn, reduce labour

productivity, for example.

But

the regulation was an 'unnecessary' one, corruption

if

economic

increase

2000, opening

efficiency.

a factory in

For example, before

its

legal

may

reform in

Vietnam required the submission of

dozens of documents (including the applicant's character references

and medical ment;

it

prepare

is

all

certificates),

between

the paperwork and get

such a situation, relevant

including 20 or so issued by the govern-

said to have taken

it

may be

government

investor wins

better

officials

if

all

six

and twelve months

the necessary approvals." In

the potential investor bribes the

and

by earning more money,

gets the licence quickly. it

demand

ment

by getting richer (though there

satisfied

The

may be argued, the consumer

gains by having his official gains

to

more

quickly,

and the governis

a breach of

confidence and the government loses legitimate revenue). For this reason,

it

economic market

has often been argued that bribery efficiency of an over-regulated

forces, if

through

illegal

may enhance

the

economy by re-introducing

means. This

is

what the American

veteran political scientist Samuel Huntington meant in his classic passage: 'In terms of

economic growth, the only thing worse than 165

a

BAD SAMARITANS society with a rigid, over-centralized dishonest bureaucracy

is

one

with a rigid, over-centrahzed honest bureaucracy.'^^ Once again, bribery that

lets

enterprises subvert regulations

economically beneficial

(if

still

may

and

illegal

or

may

morally

best

at

not be

ambiguous), depending on the nature of the regulation. So the economic consequences of corruption depend on which decisions the corrupt act affects,

how

the bribes are used by the recipients

and what would have been done with the money had there been no corruption.

could have also talked about things

I

of corruption

(e.g., is

by the corrupt market

is

to predict. This

that the is

the predictability

there a 'fixed price' for a certain kind of 'service'

official?)

or the degree of 'monopoly' in the bribery

how many people do you

(e.g.,

But the point

like

combined

why we

have to bribe to get a licence?).

result of all these factors

difficult

is

observe such vast differences across coun-

terms of the relationship between corruption and economic

tries in

performance.

Prosperity and honesty impact of corruption on economic development

If the

how about

the latter's impact

economic development makes there

is

As

on the former?

I

that

to reduce corruption.

no country

country has to

rise

that

is

is

buy

their dignity

their votes for a

difficult to control.

very poor

is

When

- starving people

bag of

will often fail to resist the

flour,

it

can

fact

signifi-

people are poor, find

it

difficult

while under-paid

civil

temptation to take a bribe. But

just a matter of personal dignity.

The

very clean suggests that

above absolute poverty before

cantly reduce venality in the system.

sell

is

discussed earlier, history shows that, at earlier stages of

that today

easy to

answer

easier to reduce corruption, but that

economic development, corruption a

My

ambiguous,

no automatic relationship. Quite a lot depends on the conscious

made

efforts

it

is

it is

not to

servants it is

not

There are also more structural

causes.

Economic

activities in

developing countries are mostly dispersed

166

ZAIRE VS INDONESIA number of small

across a large

shops, hawkers'

ground

stalls

units

(e.g.,

small peasant farms, corner

and backyard workshops). This provides

for petty corruption,

which may be too numerous

for under-resourced developing country governments.

economic units

also have very poor, if at

accounts,

all,

a fertile

to detect

These small

making them

purposes. This invisibility combines with the lack of

'invisible' for tax

administrative resources within revenue services to produce low tax collection capacity. This inability to collect taxes limits the govern-

ment budget, which,

in turn, encourages corruption in a

number of

ways.

of all, low government revenue makes

First

salaries to public officials, It is

difficult to

pay decent

which makes them vulnerable

to bribery.

actually quite remarkable

ment

how so many developing country govern-

honestly despite being paid a pittance. But, the

officials live

poorer the

salaries are, the higher the

to the temptation. Also, a limited

chance that officials will succumb

government budget leads

(or even absent) welfare state. So the

from

politicians

it

who

for votes. In order to

poor have

to rely

to a

weak

on patronage

give out loyalty-based welfare benefits in return

do

this,

the politicians need money, so they take

bribes from corporations, national and international, that need their favour. Finally, a limited

government

to

government budget makes

it

difficult for the

spend resources on fighting corruption. In detecting

and prosecuting dishonest

officials,

the government needs to hire (in-

house or from outside) expensive accountants and lawyers. Fighting corruption

With

not cheap.

is

better living conditions, people can achieve higher behav-

Economic development also increases the capacity of the government to collect taxes - as economic activities become

ioural standards.

more

'visible'

and

in turn, allows

it

as

government administrative capacity

to increase public salaries,

rises.

expand the welfare

This, state

and spend more resources on detecting and punishing malfeasance

among

officials

Having said

-

all

of which help reduce corruption.

all this, it is

important to point out that economic

development does not automatically create a more honest example, the

US was more

in that century, as

I

society.

For

corrupt in the late 19th century than earlier

mentioned

earlier.

167

Moreover, some rich countries

BAD SAMARITANS are far at the

more corrupt than poor

ones. To illustrate this point,

let's

look

Corruption Perception Index published in 2005 by Transparency

International, the influential anti-corruption watchdog.'^ According to the index, Japan {per capita

ranked

21st

Italy ($26,120)

income

income $37,180

in 2004)

was

jointly

with Chile ($4,910), a country with barely 13% of its income.

level,

ranked joint 40th with Korea ($13,980), with half

and Hungary

($8,270), with one-third

its

income

its

level.

Botswana ($4,340) and Uruguay ($3,950), despite having per capita incomes only about 15% that of Italy or 30% that of Korea, ranked well ahead of them, at joint 32nd. These examples suggest that

economic development does not automatically reduce corruption. Deliberate actions need to be taken to achieve that goal.^^

Too many market Not only

are the

forces

Bad Samaritans using corruption

as

an unwarranted

'explanation for the failures of neo-liberal policies (for they believe that those policies cannot be

wrong) but the solution to the corrup-

problem that they have been promoting has often worsened,

tion

rather than alleviated,

it.

The Bad Samaritans, basing *

The index should be taken with

their

a grain of

salt.

argument on neo-liberal As the name makes

it

clear,

it is

only measuring the 'perception' revealed in surveys of technical experts and busi-

nessmen,

who

a subjective in the

have their

measure

is

limited knowledge and biases.

by the

fact that the

Asian countries affected by the 1997 financial

after the crisis, despite

Chang

H-J.

own

well illustrated

having almost constantly

[2000], 'The

World Development,

The problem with such

perceptions of corruption

suddenly rose significantly

crisis

fallen in the

preceding decade (see

Hazard of Moral Hazard - Untangling the Asian

vol. 28, no. 4). Also,

what

is

Crisis',

perceived as corruption depends

on

the country, thus affecting the expert perception too. For example, in a lot of countries,

US-style spoils disbursement of government jobs will be considered corrupt,

but

it is

the

US more

not considered so in the US. Applying, corrupt than

is

say,

the Finnish definition will

captured by the index (the

US was

ranked the

make 17th).

Also, a lot of corruption in developing countries involves firms (or sometimes even

governments) from rich countries paying bribes, which

is

not captured in the percep-

tion of corruption in the rich countries themselves. So the rich countries

may be

more corrupt than they appear, once we include their overseas activities. The index can be downloaded from http://www.transparency.org/content/download/1516/7919.

168

ZAIRE VS INDONESIA economics, say that the best way to tackle corruption

more market

forces into

is

to introduce

both the private and the pubHc sectors - a

solution that neatly dovetails

into

market-fundamentalist

their

economic programme. They argue that freeing the market forces in the private sector - that is, deregulation - will not only increase economic cians give

efficiency but also reduce corruption

and bureaucrats of the very powers

them

by depriving

to allocate resources that

the ability to extract bribes in the

first place.

In addition,

Bad Samaritans have implemented measures based on

the

New

called

Management (NPM), which

Public

politi-

tries

the so-

to increase

more - more frequent contracting

administrative efficiency and reduce corruption by introducing

market forces into the government

more

out, a

contracts

and

and private

active use of

a

more

active

itself

performance- related pay and short-term exchange of personnel between the public

sectors.

Unfortunately,

NPM- inspired reforms have often increased, rather

than reduced, corruption. Increased contracting out has meant more contracts with the private sector, creating bribes.

new

The increased flow of people between

opportunities for

the public

had an even more insidious effect. Once employment becomes a possibility, public

sectors has

sector

and private

lucrative privateofficials

may be

tempted to befriend future employers by bending, or even breaking,

They may do

the rules for them. right away.

It

no corruption has occurred) and,

at

can be accused of bad judgment. But the payoff

may

not even be

made by

the

move

to a

built

up

do favours

his reputation as a

a private law firm, a lobbying

set

up

for the private sector civil

He may even

a private equity fund.

servants are

becomes

made

all

use his

The incen-

the greater

if

insecure through short-

term contracting in the name of increasing market

know

in the future.

that benefited

plum job with

organization or even an international agency.

the careers of the

is

offi-

euphemistically, a 'reformer', he

pro-business credentials to tive to

it

more

*pro-business' person or, even later

most, the

same corporations

from the original decision. Having can

even without being paid for

With no money changing hands, no law has been broken

(and, therefore, cial

this

discipline. If they

that they are not going to stay in the civil service very long,

169

BAD SAMARITANS they will have

ment

all

the

more

incentive to cultivate their future employ-

prospects."^

In addition to the impact of the introduction of

Management,

neo-liberal policies have also indirectly,

tionally, increased

New

Public

and uninten-

corruption by promoting trade liberalization, which

weakens government finances, which, in turn, makes corruption more likely

and

difficult to fight/4

Also, deregulation, another key

component of the neo-liberal policy

package, has increased corruption in the private sector. Private sector

crookedness tion

is

is

often ignored in the

economic literature because corrup-

usually defined as the abuse of public office for personal gain.^5

But dishonesty

exists in the private sector too. Financial deregulation

and relaxation of accounting standards have false

accounting even in rich

company Enron, and and

their

nations -

led to insider trading

recall cases like the

and

energy

company WorldCom

the telecommunications

accountancy firm Arthur Andersen in the 'Roaring Nineties'

in the US.^^ Deregulation can also increase the

power of private-sector

monopolies, which expands the opportunities for their unscrupulous purchasing managers to take bribes from sub-contractors.

Corruption often

exists

many market

because there are too

forces,

not too few. Corrupt countries have shadow markets in the wrong things, such as

government

only after they

made

contracts, jobs

and

licences. Indeed,

it is

the sale of things like government offices illegal

that today's rich countries could significantly reduce profiteering

through the abuse of public

office.

Unleashing more market forces

through deregulation, as the neo-liberal orthodoxy constantly pushes for,

may worsen

increased,

the situation. This

rather than decreased, in

why many

is

corruption has often

developing countries

following liberalization pushed by the Bad Samaritans. racketeering seen in the process of liberalization "^

is

The marked

and

The extreme

privatization in

increase in corruption in post-Thatclier Britain, the pioneer of

a salutary lesson regarding market-based anti-corruption campaigns.

NPM,

Commenting

on the experience, Robert Nield, a retired Cambridge economics professor and a member of the famous 1968 Fulton civil service reform committee, laments that 'I cannot think of another instance where a modern democracy has systematically undone the system by which incorrupt public services were brought into being' See Nield (2002), Public Corruption (Anthem Press, London), p. 198.

170

ZAIRE VS INDONESIA post-communist Russia has become notorious, but similar phenomena have been observed in

many

developing countries.

Democracy and In addition to corruption, there

the free market

another

is

^'^

political issue that

an important place in the neo-liberal policy agenda. But democracy, especially is

its

relationship with

complex and highly charged

a

the

is

democracy.

It is

economic development,

on

issue. So, unlike

trade, inflation or privatization, there

occupies

no united

issues like free

position

on

it

among

Bad Samaritans.

Some ment, as

suggest that democracy it

protects citizens

essential for

is

economic develop-

from arbitrary expropriation by the

rulers;

without such protection, there will be no incentive to accumulate

USAID

wealth; thus the

argues that '[e]xpanding democracy improves

individual opportunity for prosperity and improved well-beingV^

Others think that democracy

may be

sacrificed if

it

becomes neces-

sary in defence of a free market, as evidenced by the strong support offered by

some

neo-liberal economists to the Pinochet dictatorship

in Chile. Still others think that

the

democracy will naturally develop once

economy develops (which, of course, can be best achieved by free-

trade, free-market policies), because class that naturally

it

will

produce an educated middle

wants democracy. Yet others sing the praises of

democracy all the time but keep quiet when the undemocratic country in question is a 'friend' - in keeping with the realpolitik tradition

by Franklin Roosevelt's famous comment on the

represented

Nicaraguan bitch, but

dictator, Anastasio

he

our son of a

is

Somoza, that

Despite this diversity of views, there neo-liberals that other.

Of

that

if

may be

a son of a

is

a strong consensus

among

democracy and economic development reinforce each

course, neo-liberals are not unique in holding such a view.

But what distinguishes them mainly,

'he

bitch'.^^

is

their belief that this relationship

not exclusively, mediated by the

democracy promotes

free markets,

(free)

is

market. They argue

which, in turn, promote

economic development, which then promotes democracy: 'The market 171

BAD SAMARITANS underpins democracy, just as democracy should normally strengthen the market', writes Martin Wolf, the British financial journalist, in his

renowned book, Why

Globalisation Works.^^

According to the neo-liberal view, democracy promotes

fi-ee

markets

because a government that can be unseated without resorting to violent

measures has to be restrained in

predatory behaviour.

its

If

they don't

have to worry about losing power, rulers can impose excessive taxes with impunity and even confiscate private property, as numerous autocrats

When

have done throughout history.

invest

and generate wealth

are destroyed

impeding economic development. By

this

contrast,

predatory behaviour of the government

happens, incentives to

and market

forces distorted,

under democracy, the

and thus

free

markets can flourish, promoting economic development. In turn,

free

is

restrained

markets promote democracy because they lead to economic devel-

opment, which produces wealth-holders independent of the government, who will demand a mechanism through which they can counter

- democracy. This

the arbitrary actions of the politicians

former

US

president

Bill

said in support

WTO:

China's people

become more

'as

mobile, prosperous, and aware of alternative ways of seek greater say in the decisions that affect their

market

is

what the

mind when he

of China's accession to the

Leaving aside for the

is

Clinton had in

moment

lives'.

life,

they will

^^

the question as to whether the free

the best vehicle for economic development (to which

repeatedly said

I

have

no throughout this book), can we at least say that democ-

racy and (free) markets are, indeed, natural partners and reinforce each other?

The answer

is

no. Unlike

what neo -liberals

racy clash at a fundamental

of 'one

man

level.

(one person), one

ciple of 'one dollar,

one

vote'.

market and democthe principle

The market runs on

vote'. Naturally,

the prin-

the former gives equal weight

money

to each person, regardless of the

say,

Democracy runs on

she/he has. The latter gives

greater weight to richer people. Therefore, democratic decisions usually

subvert the logic of market. Indeed, most 19th-century liberals opposed

democracy because they thought market.^^

They argued

that

to introduce policies that

it

was not compatible with

a free

democracy would allow the poor majority

would

exploit the rich minority (e.g., a

172

ZAIRE VS INDONESIA income

progressive

tax, nationalization

of private property), thus

destroying the incentive for wealth creation.

Influenced by such thinking,

of today's rich countries

all

initially

gave voting rights only to those who owned more than a certain amount of property or earned enough income to pay more than a certain amount of tax. Some of them had qualifications related to

even educational achievement

literacy or

German

states, a university

(so, for

example, in some

degree gave you one extra vote) - which

were, of course, closely related to people's economic status anyway

and were usually used So, in England, the

18% of men could

in conjunction with property/tax conditions.

supposed birthplace of modern democracy, only

famous

vote, even after the

1832

Reform

Act.^-"^

In

France, before the introduction of universal male suffrage in 1848 (the

around

2%

of the male population could vote

first

in the world), only

due

to restrictions regarding age (you

importantly,

payment of tax.^'^ In

had

Italy,

to

even

be over 30) and, more

after the

voting age to 21 in 1882, only around two million

lowering of the

men

(equivalent to

about 15% of the male population) could vote, due to tax payment

and hteracy requirements.^^ jhe economic

famous colonial American slogan against 'no taxation without representation' - there was also to

was, then, the the British,

qualification for suffrage

flip

side of the

be 'no representation without

taxation'.

By pointing out the contradiction between democracy and the market,

I

am

communism,

not saying that market logic should be rejected. Under total rejection

of the 'one dollar, one vote' principle not

only created economic inefficiency but also propagated inequities

based on other

criteria

logical credentials. leveller. It

It

- political power, personal connections or ideo-

should also be noted that

money can be a greater

can work as a powerful solvent of undesirable prejudices

against people of particular races, social castes or occupational groups.

much

make people treat members of discriminated groups better if the latter have money (that is, when they are potential customers or investors). The fact that even the openly racist It

is

easier to

apartheid regime in South Africa gave the Japanese 'honorary white' status

is

a powerful testimony to the 'liberating'

But, however positive market logic

173

may

power of the market.

be in some respects, we

BAD SAMARITANS should not, and cannot, run society solely on the principle of 'one dollar,

one

Leaving everything to the market means that the rich

vote'.

may be able to

realize

even the most frivolous element of their desires,

may

not be able even to survive - thus the world

while the poor

money on slimming

spends twenty times more research

on malaria, which claims more than millions

more

a million lives

in developing countries every year.

certain things that should simply not be

drugs than

and

debilitates

Moreover, there are

bought and sold - even

for

the sake of having healthy markets. Judicial decisions, public offices,

academic degrees and qualifications for certain professions (lawyers, medical doctors, teachers, driving instructors) are such examples.

If

these things can be bought, there will be serious problems not just

with the legitimacy of the society in question but also with economic efficiency:

sub-standard medical doctors or unqualified teachers can

lower the quality of the labour forces; venal judicial decisions will

undermine the

efficacy of the contract law.

Democracy and markets

are

both fundamental building blocks for

a decent society. But they clash at a

balance them. at

When we add

fundamental

it is

democracy, the

(as

I

need to

good

have shown throughout

difficult to say that there is a

free

We

the fact that free markets are not

promoting economic development

the book),

level.

virtuous circle linking

market and economic development, contrary to

what the Bad Samaritans argue.

When

democracies undermine democracy

Free market policies

more

areas of our

In so far as there racy, this if

that

means

is

promoted by the Bad Samaritans have brought

life

a natural tension

that

dollar,

one

vote' rule of market.

between

free

markets and democ-

under the 'one

democracy

is

constrained by such policies, even

was not the intention. But there

is

more. The Bad Samaritans

have recommended policies that actively seek to undermine democracy in developing countries (although they would never put

them

in

those terms).

The argument

starts

reasonably enough. Neo-liberal economists

174

ZAIRE VS INDONESIA worry that

politics

opens the door for perversion of market ration-

ahty: inefficient firms or farmers

get tariffs to

and

subsidies,

may lobby

the parliamentarians to

imposing costs on the

rest

of society that has

buy expensive domestic products; populist politicians may put pres-

sure

on the central bank to 'print money' in time for election campaign,

which causes

inflation

and hurts people

in the longer run.

So

far,

so

good.

The

neo-liberals' solution to this

problem

to 'depoliticize' the

is

economy. They argue that the very scope of government

activity

should be reduced - through privatization and liberalization - to a

minimal

room

the

state.

In those few areas where

it is still

allowed to operate,

for policy discretion should be minimized.

It is

argued that

such restraints are particularly needed in developing nations where the leaders are less competent

and more corrupt. Such

restraints

can

be provided by rigid rules that constrain government choices - for example, a law requiring a balanced budget - or by the establish-

ment of

politically

independent policy agencies - an independent

central bank, independent regulatory agencies

(known

pendent tax

office

and

Uganda and

tried in

as particularly

as

and even an inde-

ARA, or autonomous revenue authority,

Peru^^). For developing countries,

it is

seen

important to sign up to international agreements -

for example, the

WTO agreements, bilateral/regional free trade agree-

ments or investment agreements - because responsible and thus

more

likely to stray

their leaders are less

from the righteous path of

neo-liberal policy.

The

first

problem with

this

argument

for de-politicization

is

the

assumption that we can clearly know where economics should end

and politics should begin. But that - the domain of economics - are Markets are

not possible because markets

political constructs in so far as all

property rights and

The

polit-

of economic rights can be seen in the fact that

many

other rights that underpin ical origins

is

political constructs themselves.

them have

political origins.

of them that are seen as natural today were hotly contested politically in the past

accepted by

many

- examples include the

right to

own

ideas (not

before the introduction of intellectual property

rights in the 19th century)

and the 175

right not to have to

work when

BAD SAMARITANS young (denied still

to

many poor

children). ^^

When

these rights were

were plenty of 'economic' arguments

politically contested, there

why honouring them was incompatible with the free market. ^^ Given this, when neo-liberals propose de-politicizing the economy, as to

they are presuming that the particular demarcation between

economics and This

is

politics that they

want

to

draw

is

the correct one.

unwarranted.

More importantly

our concern in

for

this chapter, in

pushing

economy, the Bad Samaritans are

for the depoliticization of the

undermining democracy. Depoliticization of policy decisions in a democratic polity means - let's not mince our words - weakening democracy.

If all

the really important decisions are taken away from

democratically elected governments and put in the hands of un-

what

elected technocrats in the 'politically independent' agencies, is

the point of having democracy? In other words,

acceptable to neo-liberals only in so far as the free market; this

is

why some

it

democracy

is

does not contradict

of them saw no contradiction

between supporting the Pinochet dictatorship and praising democTo put it bluntly, they want democracy only if it is largely powerless - or as Ken Livingstone, the current left-wing mayor of racy.

London Abolish

Thus

said in a 1987

title.

If Voting

Changed Anything They'd

It.^9

seen, like the old liberals, neo-liberals believe deep

that giving political existing

book

power

to those

who

economic system will inevitably result

fication of the status

quo

down

'do not have a stake' in the in

an 'irrational' modi-

in terms of distribution of property

(and

other economic) rights. However, unlike their intellectual predecessors, neo-liberals live in

an era when they cannot openly oppose

democracy, so they try to do

By

it

by discrediting

politics in general?^

discrediting politics in general, they gain legitimacy for their

actions that take

away decision powers from the democratically elected

representatives. In doing so, neo-liberals have succeeded in dimin-

ishing the scope of democratic control without ever openly criticizing

democracy

itself.

The consequence has been

in developing countries,

to

particularly

damaging

where the Bad Samaritans have been able

push through 'anti-democratic' actions well beyond what would 176

ZAIRE VS INDONESIA be acceptable in rich countries (such as poHtical independence for the tax office)/

Democracy and economic development Democracy and economic development obviously influence each other, but the relationship is much more complex than what is envisaged in the neo-liberal argument, where democracy promotes economic development by making private property more secure and markets

freer.

To begin with, given the fundamental tension between democracy

and market, it is unlikely that democracy will promote economic devel-

opment through promoting feared that (e.g.,

the free market. Indeed, the old liberals

democracy may discourage investment and thus growth

excessive taxation, nationalization of enterprises).^^

hand, democracy

On the other

may promote economic development through

other

channels. For example, democracy may re-direct government spending into

more productive

areas

-

e.g.,

away from military spending

to

education or infrastructure investment. This will help economic devel-

opment. As another example, democracy may promote economic growth by creating the welfare

state.

Contrary to the popular percep-

tion, a well-designed welfare state, especially if

retraining

programme, can reduce the

workers and thus make them productivity highest

'*

All this

(it

is

number of is,

combined with

less resistant to

a

good

unemployment

to the

automation that

raises

cost of

not a coincidence that Sweden has the world's industrial robots per worker).

I

could mention

of course, not to deny that a certain degree of de-politicization of the

resource allocation process cation process

is

may be

necessary. For

at least, to a degree,

society, the political legitimacy

one thing, unless the resource

accepted as 'objective' by the

of the economic system

itself

may be

Moreover, high costs would be incurred in search and bargaining allocative decision

is

allo-

members of

the

threatened.

activities if

every

regarded as potentially contestable, as was the case in the ex-

communist countries. However, this is not the same as arguing, as the neo-liberals do, that no market under any circumstance should be subject to political modifications, because, in the final analysis, there is no market that can be really free from politics.

177

BAD SAMARITANS some more

which democracy may

possible channels through

influ-

ence economic development, positively or negatively, but the point that the relationship It is

is

very complex.

is

no wonder, then,

opment. Studies that have

no systematic evidence

either

democracy helps economic

devel-

that there

for or against the proposition that

is

tried to identify statistical regularities across

countries in terms of the relationship between democracy and

economic growth have way.^^

Even

failed to

at the individual

come up with a systematic result either level, we see a huge diversity of

country

Some developing countries did terribly in economic terms under dictatorships - the Philippines under Marcos, Zaire under outcomes.

Mobutu

or Haiti under Duvalier are the best-known examples. But

there are cases like Indonesia under Suharto or

Museveni, where dictatorship resulted in decent,

economic performance. Then there

are cases like

Uganda under not spectacular,

if

South Korea, Taiwan,

Singapore and Brazil in the 1960s and the 1970s or today's China that

have done very well economically under dictatorship. By contrast, today's rich countries notched

when

up

economic record

their best-ever

they significantly extended democracy between the end of the

Second World War and the 1970s - during

this period,

many

of them

adopted universal suffrage (Australia, Belgium, Canada, Finland, France, Germany,

Italy,

Japan, Switzerland and the US), strengthened

minority rights and intensified the dreaded 'exploitation' of the rich

by the poor (such sive

income tax

as nationalization of enterprises or a rise in progres-

to finance,

Of course, we

among

don't need to

economic growth

in order to

other things, a welfare

show

that

democracy

be able to support

it.

state).

positively affects

As Amartya Sen,

the Nobel Laureate economist, argues, democracy has an intrinsic

value and should be a criterion in any reasonable definition of develop-

ment.^^

Democracy contributes

making

certain things

immune

to building a decent society

by

to the 'one dollar, one vote' rule of

the market

- public

tions, as

discussed earlier. Participation in democratic political

I

offices, judicial decisions,

processes has intrinsic values that

monetary affected

value.

And

may

not be easily translated into

so on. Therefore, even

economic growth, we might 178

educational qualifica-

still

if

democracy negatively

support

it

for

its

intrinsic

ZAIRE VS INDONESIA

when there even more strongly.

values. Especially

support If

it

is

the impact of democracy

no evidence

that

on development

does,

it

is

we may

ambiguous, the

impact of economic development on democracy seems more straightforward.

seems

It

fairly safe to say that, in the

development brings democracy. But

this

long run, economic

broad picture should not

obscure the fact that some countries have sustained democracy even when they were fairly poor, while many others have not become democracies until they are very rich.

Without people actually fighting

democracy does not automatically grow out of economic

Norway was

the second true

universal suffrage in 1913, after that

it

(it

in

Europe

it,

introduced

Zealand in 1907), despite the

was one of the poorest economies

contrast, the US, racies,

democracy in the world

New

for

prosperity.^^

fact

at the time.

By

Canada, Australia and Switzerland became democ-

even in the purely formal sense of giving everyone a vote, only

in the 1960s

and the

1970s,

when

they were already very rich. Canada

gave native Americans voting rights only in i960. Australia abandoned its

'White Australia' policy and allowed non-whites to vote as

1962.

Only

in 1965 did the

Americans to like

states in the

vote, thanks to the civil rights

Martin Luther King,

late as 1971

Southern

(even later

if

Jr.^^

US

movement

Switzerland allowed

late as

allow African led

by people

women

to vote as

you count the two renegade cantons, Appenzell

Ausser Rhoden and Appenzell Inner Rhoden, which refused to give

women votes may be made

until 1989

and

1991 respectively). Similar observations

in relation to developing countries today. Despite being

one of the world's poorest countries tained democracy well for the

last six

until recently, India has

main-

decades, while Korea and Taiwan

were not democracies until the late-i98os, when they had become fairly

prosperous.

Politics

and economic development

Corruption and lack of democracy are big problems in

many

devel-

oping countries. But the relationships between them and economic

development are

far

more complex than 179

the

Bad Samaritans

suggest.

BAD SAMARITANS The

failure to think

through the complexity of the corruption issue

why so many developing country politicians who come

is,

for example,

to

power on an anti-corruption platform not only

fail

up the

to clean

system but often end up being ousted or even jailed for corruption themselves. Latin American presidents, like Brazil's Fernando Collor

de Mello and Peru's Alberto Fujimori, come to mind.

When

market, which, in turn, promotes economic development, problematic. There

is

a strong tension

market, while a free market

opment.

If

comes

it

view that democracy promotes a

to democracy, the neo-liberal

is

highly

is

between democracy and a

unlikely to

promote economic

democracy promotes economic development,

through some other channel than the promotion of a

it is

free

free

devel-

usually

free market,

contrary to what the Bad Samaritans argue.

Moreover, what the Bad Samaritans have recommended in these areas have not solved the

problems of corruption and lack of democ-

have often made them worse. Deregulation of the economy in general, and the introduction of greater market forces in the management of the government more specifically, has often racy. In fact, they

increased, rather than reduced, corruption. alization, the

Bad Samaritans have

corruption; the resulting

fall

in

By forcing trade

also inadvertently

encouraged

government revenue has depressed

public salaries and thus encouraged petty corruption. While

time paying

lip service to

promoted measures

liber-

all

the

democracy, the Bad Samaritans have

that have

weakened democracy. Some of

happened through deregulation

itself,

this

which expanded the domain

of the market and thus reduced the domain of democracy. But the rest

of

ments

it

happened through

deliberate measures: binding govern-

to rigid domestic laws or international treaties,

political

independence to

and giving

the central bank and other government

agencies.

Having once dismissed political

factors as

minor

details that

should

not get in the way of good economics, neo-liberals have recently

become very interested in them. The reason is obvious - their economic

programme

for developing countries as

Trinity of the

IMF, World Bank and

implemented by the Unholy

WTO

ures (just think of Argentina in the 1990s)

180

has had spectacular

and very few

fail-

successes.

ZAIRE VS INDONESIA unthinkable to the Bad Samaritans that free trade, priva-

Because

it is

tization

and the

rest

tion' for policy failure

as politics

and

of their policies could be wrong, the 'explanais

found

increasingly

in non-policy factors, such

culture.

In this chapter,

I

have shown

how the neo-liberal attempt to explain

the failures of their policies with poHtical problems such as corruption

and lack of democracy

is

not convincing.

that their alleged solutions to these

worse. In the next chapter, culture,

opment of

which

is

failure,

I

I

have also pointed out

problems have often made things

will turn to

another non-policy

factor,

rapidly becoming a fashionable explanation for devel-

thanks to the recent popularity of the idea of a 'clash

civilizations'.

181

CHAPTER

9

Lazy Japanese and thieving

Germans Are some cultures incapable of economic development? Having toured

lots

of factories in a developing country, an Australian

management consultant told the government officials who had invited him: 'My impression as to your cheap labour was soon disillusioned

No doubt they are lowly paid, but the return is equally so; to see your men at work made me feel that you are a very satisfied easy-going race who reckon time is no object. When I spoke to some managers they informed me that it was imposwhen

saw your people

I

sible to

at

work.

change the habits of national

heritage.'

This Australian consultant was understandably worried that the

workers of the country he was visiting did not have the right work ethic. In fact,

just called

he was being quite

them

lazy.

polite.

No wonder

He

could have been blunt and

the country was poor

- not

dirt

poor, but with an income level that was less than a quarter of Australia's.

For their part, the country's managers agreed with the Australian, but were smart enough to understand that the 'habits of national heritage', or culture,

century

cannot be changed

easily, if at all.

As the 19th-

German economist-cum-sociologist Max Weber opined in his

seminal work. The Protestant Work Ethic and the Spirit of Capitalism, there are to

some cultures, like Protestantism, that are simply better suited

economic development than

The country

in question, however,

feel quite right that

for

its

ability to

this

is

how most

others.

someone from

was Japan

in 1915.^

Australia (a nation

have a good time) could

call

It

doesn't

known today

the Japanese lazy. But

westerners saw Japan a century ago.

In his 1903 book. Evolution of the Japanese, the American missionary

182

.

LAZY JAPANESE AND THIEVING GERMANS many

Sidney Gulick observed that

Japanese 'give an impression

of being lazy and utterly indifferent to the passage of

was no casual observer. He

.

.

Gulick

time'.^

lived in Japan for 25 years (1888-1913), fully

mastered the Japanese language and taught in Japanese universities.

known

After his return to the US, he was equality

for his

campaign

for racial

on behalf of Asian Americans. Nevertheless, he saw ample

confirmation of the cultural stereotype of the Japanese as an 'easygoing'

and 'emotional' people who possessed

of heart, freedom from present'.^

The

similarity

Africa, in this case

a

all

between

this

observation and that of today's

by an African himself- Daniel Etounga-Manguelle,

Cameroonian engineer and writer -

anchored in only repeat

qualities like 'lightness

anxiety for the future, living chiefly for the

his ancestral culture, itself that

is

is

striking:

'The African,

so convinced that the past can

he worries only superficially about the future.

However, without a dynamic perception of the future, there

is

no

planning, no foresight, no scenario building; in other words, no policy to affect the course of events'.'*

After her tour of Asia in 1911-1912, Beatrice

Webb, the famous

leader of British Fabian socialism, described the Japanese as having

and

'objectionable notions of leisure

a quite intolerable personal

independence'.^ She said that, in Japan, 'there to teach people to think'.^

is

evidently

no

desire

She was even more scathing about

my

ancestors. She described the Koreans as '12 millions of dirty, degraded, sullen, lazy

and

who slouch about in dirty white who live in filthy mudhuts'.^

religionless savages

garments of the most inept kind and

No wonder

she thought that

'[i]f

anyone can

of their present state of barbarism

I

raise the

think the Japanese

Koreans out will',

despite

her rather low opinion of the Japanese.^ This was not just a western prejudice against eastern peoples. The British used to say similar things

about the Germans. Before their

economic take-off in the mid-i9th century, the Germans were described by the British as

word

that

'the

dull

and heavy

people'.^ 'Indolence'

was frequently associated with the Germanic

Shelley, the

ticularly

'a

nature.^°

author of FrankensteiUy wrote in exasperation

frustrating altercation with her

Germans never hurry

'.^^

It

German

was a

Mary

after a par-

coach-driver:

wasn't just the British.

183

typically

A

French

BAD SAMARITANS who employed German

manufacturer

'work as and when they

The

Germans

British also considered the

According to John Russell, a

were a 'plodding,

workers complained that they

please'/^

easily

to be slow-witted.

travel writer of the 1820s, the

contented people

.

.

.

endowed

Germans

neither with

great acuteness of perception nor quickness of feeling'. In particular,

according to Russell, they were not open to [a

German] can be brought

new

to

him, and

it is

as

rouse

difficult to

No wonder that they were 'not

new ideas; 'it

is

long before

comprehend the bearings of what

to

him

to

ardour in

is

its pursuit.'^^

distinguished by enterprise or

activity',

another mid-i9th century British traveller remarked.^'*

Germans were

also

deemed

to co-operate with each other.

to be too individualistic

The Germans'

and unable

inability to co-operate

was, in the view of the British, most strongly manifested in the poor quality

bad

and maintenance of

that John

McPherson,

their public infrastructure,

to treacherous road conditions), wrote,

Germany this

that

with a

I

directed

comment by

my

and

a lack of

'I

found the roads so bad in

course to Italy '.^^

Once

the African observer that

team in which, as

'African societies are like a football rivalries

team

one player

spirit,

another out of fear that the

latter

- 'the tradesman and

again, I

compare

quoted above:

a result of personal

not pass the ball to

will

might score a

goal'.^^

British travellers in the early 19th century also

dishonest

which was so

a viceroy of India (and, therefore, well used

found the Germans

the shopkeeper take advantage of you

wherever they can, and to the smallest imaginable amount rather than not take advantage of you Sir

at all

.

.

.

This knavery

is

universal',

observed

Arthur Brooke Faulkner, a physician serving in the British army.^^ Finally, the British

thought the Germans to be overly emotional.

Today many British seem to think that Germans have an almost genetic emotional deficiency. Yet talking about excessive German emotion.

Arthur observed that 'some will always indulge in

will

laugh

melancholy '.^^

Sir

all

Sir

sorrows away and others

Arthur was an Irishman, so

Germans emotional would be akin to a Finn calling Jamaicans a gloomy lot, according to the cultural stereotypes

his calling the

the

prevailing now.

So there you

are.

A century ago, the Japanese were lazy rather than 184

LAZY JAPANESE AND THIEVING GERMANS hardworking; excessively independent-minded (even for a British sociahst!) rather than loyal 'worker ants';

emotional rather than

inscrutable; light-hearted rather than serious; living for today instead

of considering the future (as manifested in their sky-high savings rates).

A century and half ago, the Germans were

efficient; individualistic rather

indolent rather than

than co-operative; emotional rather

than rational; stupid rather than clever; dishonest and thieving rather than law-abiding; easy-going rather than disciplined.

These characterizations are puzzling for two reasons. Japanese and the

become

Germans had such

so rich? Second,

why were the

'bad' cultures,

Japanese and the

so different from their descendants today?

How

the

First, if

how

have they

Germans then

could they have so

completely changed their 'habits of national heritage'? I

need

will

answer these questions in due course. But before

I

do,

I

up some widespread misunderstandings about

first to clear

the relationship between culture and economic development.

Does culture influence economic development? The view

that cultural differences explain the variations in

been around

economic

The

development across

societies has

underlying insight

obvious. Different cultures produce people with

different values, iour.

is

which manifest themselves

for a long time.

in different

forms of behav-

As some of these forms of behaviour are more helpful for

economic development than that produces

others, those countries with a culture

more pro-developmental forms of behaviour

will

do

better than others economically.

Samuel Huntington, the veteran American

political scientist

and

author of the controversial book. The Clash of Civilizations, put

this

idea succinctly. In explaining the

economic divergence between South

Korea and Ghana, two countries that were

development

in the 1960s,

played a

but

tion.

role,

.

.

.

of economic

had

to be a large part of the explana-

thrift,

investment, hard work, education.

culture

South Koreans valued

at similar levels

he argued: 'Undoubtedly, many factors

185

BAD SAMARITANS organization,

and

discipline.

Ghanaians had different values. In short,

cultures countV^

Few of us would iour like

'thrift,

discipline' will

say

that.

They argue

some people not

display forms of behav-

theorists,

however,

that these forms of behaviour are

or even entirely, fixed because they are determined by culture.

If economic success is really

is

who

be economically successful. Cultural

more than

largely,

dispute that people

investment, hard work, education, organization, and

much

determined by 'habits of national heritage',

are destined to be

more

done about

that can be

successful than others,

Some poor

it.

and there

countries will just

have to stay that way.

Culture-based explanations for economic development were

popular right up to the 1960s. But in the era of

civil rights

and de-

had

colonization, people began to feel that these explanations

cultural-supremacist

(if

not necessarily

into disrepute as a result.

racist) overtones.

They

fell

Such explanations have, however, made a

past decade or so. They have come back into fashion more dominant cultures (narrowly Anglo-American, more

comeback in the just as the

broadly European) have started to

- Confucianism politics

in the

feel 'threatened'

economic sphere; Islam

by other cultures in the

realm of

relations.^" They also offered a very convenBad Samaritans - neo-liberal policies have not

and international

ient excuse to the

worked very well, not because of some inherent problems but because the people practising

them had 'wrong' values

that diminished their

effectiveness.

In the current renaissance of such views,

do not

actually talk about culture per

se.

some

cultural theorists

Recognising that culture

is

too broad and amorphous a concept, they try to isolate only those

components

that they think are

most

development. For example, in his 1995 book. the neo-con

American

political

economic

closely related to Trust, Francis

Fukuyama,

commentator, argues that the

tence or otherwise of trust extending beyond family critically affects

some

extent) Korea

effectively,

members

economic development. He argues that the absence

of such trust in the cultures of countries (to

exis-

makes

which are key

to

it

like

difficult for

China, France, Italy and

them

to

run large firms

modern economic development. This 186

is,

LAZY JAPANESE AND THIEVING GERMANS

why

according to Fukuyama,

Germany and

high-trust societies, such as Japan,

the US, are economically

But whether or not the word

argument ently,

is

the

same -

more developed.

'culture'

different cultures

is

used, the essence of the

make people behave

differ-

with resulting differences in economic development across

different societies.

historian

and

that 'culture

David Landes, the distinguished American economic

a leader in the renaissance of culturalist theories, claims

makes

all

the difference

.'^^

Different cultures produce peoples with different attitudes towards

work, saving, education, cooperation,

trust, authority

and countless

other things that affect a society's economic progress. But this proposition does

not get us very

far.

As we

difficult to define cultures precisely.

to establish clearly

bad

for

What

standable.

With

if

we

mistake

me

me

can,

all

does not understand

for a Chinese or Japanese.

good or

-

It is

under-

and prominent

at least to a

westerner

the subtle differences in facial features,

who

Chinese or Japanese,

them

tell

not possible

a culture?

is

countries. To westerners I

very

explain.

'look the same'

all

it is

it is

inherently

is

mannerisms and dress sense among people from

all

moment,

'slanted' eyes, straight black hair

cheekbones. East Asians

who

Even

whether a particular culture

economic development. Let

Many westerners

shall see in a

different East Asian

apologise for mistaking it's

me

for a

OK, because most Koreans call some Europeans might

westerners 'Americans' - a notion that

find disagreeable. To the uninitiated Korean,

I

tell

them,

erners look the same, with their big noses, round eyes and

all

west-

excessive

facial hair.

This experience warns against excessively broad categorization of people.

Of course, what

of the categorisation. of, say,

If

is

'excessively broad'

we

are

depends on the purpose

comparing the human brain with that

the dolphin, even the over-arching category of

may be good enough. But difference to

if

we

are studying

how

economic development, even the 187

Homo

culture

relatively

sapiens

makes

a

narrow

BAD SAMARITANS category 'Korean'

may

be problematic. Broader categories,

'Christian' or 'Muslim', obscure

In

most

culturalist

much more

than they

like

reveal.

arguments, however, cultures are defined very

We are often offered incredibly coarse categories, such as EastWest, which I am not even going to bother to criticize. Very often, we loosely.

are offered to time

which

broad 'religious' categories, like Christian (which from time

lumped together with Judaism

is

regularly divided into Catholic

is

Jewish, Buddhist,

Hindu and Confucian

ularly controversial, because

not a

it is

into Judaeo-Christian,

and

(this latter

category

and

Muslim,

Protestant),

is

partic-

religion)."^

Yet think for a minute about these categories. Within the ostensibly

we have both the ultra- conservative Opus Dei movement, which has become well-known through Dan

homogeneous group

'Catholic',

Brown's bestselling novel, The

of Olinda and Recife,

they

call

call

me

me

Dom

and left-wing

Helder Camara: 'When

When

a saint.

a communist.'

Vinci Code,

liberation

famous saying by the Brazilian archbishop

theology, epitomized in the

poor, they

Da

I

ask

why

I

give food to the

the poor have

no food,

These two 'Catholic' sub-cultures produce

people with very different attitudes towards wealth accumulation,

income redistribution and

social obligations.

Muslim societies that seriously limit women's public participation. Yet more than half the professional staff at the Malaysian central bank are women - a much higher proportion than at any central bank in the supposedly more 'feminist' Christian countries. And here is another example: some people believe that Japan succeeded economically because of its unique variety of Confucianism, which Or, to take another example, there are ultra-conservative

emphasizes loyalty rather than the personal edification stressed in the Chinese *

and Korean

Confucianism

is

varieties. ^^

Whether or not one agrees with

named after Confticius, the Latinized name of the great Chinese Kong Zi, who hved in the 6th century BC. Confticianism is not

political philosopher,

a religion, as

and

ethics,

it

but

monies and

does not have gods or heaven and it

also has a bearing

etiquette.

Although

it

has had

remained the basis of Chinese culture since the

Han Dynasty

(206

BC

to

AD

hell. It is

mainly about pohtics

on the organization of family

220).

It

it

its

life,

social cere-

ups and downs, Confucianism has

became the official

state

ideology during

spread to other East Asian countries, like

Korea, Japan and Vietnam, over the next several hundred years.

188

LAZY JAPANESE AND THIEVING GERMANS this particular generalization

(more on

this later),

it

shows that

there isn't just one kind of Confucianism. If categories like

Confucian or Muslim are too broad,

how about

taking countries as cultural units? Unfortunately, this does not solve the problem. As the culturalists themselves

would be prepared

to

acknowledge, a country often contains different cultural groups, espe-

and

cially in large

even in a country

culturally diverse ones, like India

like

and China. But

Korea, one of the most culturally

homogeneous

societies in the world, there are significant cultural differences

regions. In particular, people

between

from the south-east (Kyungsang) think

of those from the south-west {Cholla) as clever but totally untrust-

worthy double-dealers. South-westerners return the compliment by regarding the south-easterners as a crude and aggressive, albeit deter-

mined and well-organized, bunch of

people.

far-fetched to say that the stereotypes of these similar to the stereotypes the French other.

The

cultural animosity

some

into families

from the other region. So

or not? And,

if

need

about other countries?

I

I

think

I

have

is

The

culturalists

is

so

marry

there a single 'Korean' culture

made

do we even

the point that broad cate-

simply too crude to be analyti-

meaningful, and that even a country

to generalize about.

do

is

things are as complicated as that for Korea,

gories, like 'Catholic' or 'Chinese', are

to

two Korean regions are

and the Germans have of each

families won't even allow their children to

could go on, but

cally

wouldn't be too

between the two regions of Korea

intense that

to talk

It

may

is

too big a cultural unit

well retort that

all

we have

work with finer categories like Mormon or Japanese Confucian,

rather than broader ones like Christian or Confucian. If only matters

were that simple. There are more fundamental problems with culturalist theories, to

which

I

Dr

turn now.

Jekyll vs

Mr Hyde

Ever since the East Asian economic 'miracle', to argue that

it

it

has

become very popular

was Confucian culture that was responsible,

partly, for the region's

economic

successes.

189

at least

Confucian culture,

it

was

BAD SAMARITANS pointed out, emphasizes hard work, education, frugaUty, co-operation

and obedience

to authority.

seemed obvious

It

human

encourages the accumulation of

education) and physical capital (with

that a culture that

capital (with

its

its

emphasis on

emphasis on while

thrift),

encouraging co-operation and discipline, must be good for economic development.

economic 'miracle', people used

But, before the East Asian

to

blame

Confucianism for the region's underdevelopment. And they were For Confucianism does have a

lot

me mention

economic development. Let

right.

of aspects that are inimical to the

most important ones.

Confucianism discourages people from taking up professions

like

business and engineering that are necessary for economic develop-

ment. At the pinnacle of the traditional Confucian social system were

They formed the

scholar-bureaucrats. professional soldiers,

who were

ruling class, together with the

second-class rulers. This ruling class

commoners made up of peasants, artiorder (below them were slaves). But there

presides over a hierarchy of

sans and merchants, in that

was

a

fundamental divide between the peasantry and the other subor-

dinate classes. At least in theory, individual peasants could gain entry into the ruling class

if

they passed the competitive

ination (and they occasionally did). Artisans

were not even allowed to

sit

civil service

and merchants, however,

for the examination.

To make matters worse, the

civil service

examination only tested

people for their scholastic knowledge of the Confucian

made

exam-

classics,

which

the ruling class scornful of practical knowledge. In the i8th

century, Korean Confucian politicians slaughtered rival factions in a

row over how long

the king should wear

mourning following

his

mother's death (one year or three years?). Scholar-bureaucrats were

supposed to different)

In the

live in 'clean

and thus they

modern

setting,

to study law or

poverty' (although the practice was often

actively

looked

down upon money-making.

Confucian culture encourages talented people

economics in order

to

become

bureaucrats, rather

than engineers (artisans) or businessmen (merchants) - occupations that contribute

much more

Confucianism

directly to

economic development.

also discourages creativity

has a rigid social hierarchy and, as

190

I

and entrepreneurship.

It

have noted, prevents certain

LAZY JAPANESE AND THIEVING GERMANS segments of society rigid hierarchy

is

(artisans,

merchants) from moving upwards. This

sustained by an emphasis on loyalty to superiors

and deference creativity.

to authority, which breeds conformism and stifles The cultural stereotype of East Asians being good at mechan-

things that do not need

ical

much

creativity has a basis in this aspect

of Confucianism.

Confucianism,

it

can also be argued, hampers the rule of law.

people, particularly neo-liberals, believe that the rule of law for

economic development, because

it is

will

make people

may

Without the

can be no security of property

said, there

and

reluctant to invest

not encourage arbitrary rule, but

the rule of law, which

it

crucial

the ultimate guarantor against

arbitrary expropriation of property by rulers. it is

is

Many

rights,

Confucianism

create wealth.

true that

it is

rule of law,

which, in turn,

does not

it

like

regards as ineffectual, as seen in the following

famous passage from Confucius: Tf the people be

by

led

laws,

and

uniformity sought to be given them by punishments, they will try to avoid the punishment, but have no sense of shame.

and uniformity sought

virtue,

good.'

agree.

I

With

strict legal sanctions,

out of fear of punishment, but too

them

feel that

they be led by

them by

to be given

propriety, they will have the sense of shame,

If

the rules of

and moreover will become

people will abide by the law

much emphasis on

law can make

they are not trusted as moral actors. Without that trust,

people will not go that extra mile that makes their behaviour moral

and not

just law-abiding.

Having said

all this,

however,

it

cannot be

denied that Confucian denigration of the rule of law makes the system vulnerable to arbitrary rule

-

for

what do you do when your

ruler

is

not virtuous?

So which values

is

'thrift,

discipline', as

an accurate portrait of Confucianism?

A

culture that

investment, hard work, education, organization, and

Huntington put

it

in relation to

South Korea, or a culture

that disparages practical pursuits, discourages entrepreneurship

and

retards the rule of law?

Both are that are

In

fact,

right, except that the first singles

good

for

out only those elements

economic development and the second only the bad.

creating a one-sided view of Confucianism does not even have

to involve selecting different elements.

191

The same

cultural element can

BAD SAMARITANS be interpreted as having positive or negative implications, depending

on the resuh you above,

The

seek.

some people think

best example

that the emphasis

the Japanese variety of Confucianism

opment than other

varieties.

loyalty to be exactly

what

is

more

As

loyalty.

is

on

loyalty

suited to

mentioned

I

what makes

is

economic devel-

Other people judge the emphasis on

wrong with Confucianism,

since

it

stifles

independent thinking and thus innovation. not just Confucianism, however, that has a

It is

like the

Hyde.

protagonist in Robert Louis Stevenson's

We

personality

split

Dr

Jekyll

and

Mr

can perform the same exercise with any culture's belief

system. Take the case of Islam.

Muslim

culture

development.

Its

is

today considered by many to hold back economic

intolerance of diversity discourages entrepreneur-

on the

makes

believers less

interested in worldly things, like wealth accumulation

and produc-

ship

and

creativity. Its fixation

tivity growth.^^

The

limits

afterlife

on what women

are allowed to

do not only

wastes the talents of half the population but also lowers the likely quality of the future labour force; poorly educated mothers provide

poor nutrition and

little

educational help to their children, thereby

diminishing their achievements

at school.

The

'militaristic'

tendency

(exemplified by the concept oi jihad, or holy war, against the infidels) glorifies

making war, not money. In

Alternatively,

short, a perfect

Mr

Hyde.

we could say that, unlike many other cultures, Muslim is why many

culture does not have a fixed social hierarchy (which

low

caste

Hindus have converted

to Islam in

people

who work hard and

in the

Confucian hierarchy, there

business activities.

And

South Asia). Therefore,

creatively are rewarded. Moreover, unlike

Muhammad, the

is

no disdain

for industrial or

Prophet, was a merchant himself

being a merchant's religion, Islam has a highly developed sense

of contracts - even

wedding ceremonies, marriage contracts

at

signed. This orientation encourages the rule of law

and

are

justice^^

_

Muslim countries had trained judges hundreds of years before Christian countries. There

-

is

also

an emphasis on rational thinking and learning

the Prophet notably said that 'the ink of the scholar

than the blood of the martyr'. This

Arab world once

led the

is

is

more

sacred

one of the reasons why the

world in mathematics, science and medicine. 192

LAZY JAPANESE AND THIEVING GERMANS What

is

more, although there are conflicting interpretations of the

no question that, in practice, most pre-modern Muslim were far more tolerant than Christian societies - after all,

Koran, there societies this

is

is

why many

Iberian Jews escaped to the

Ottoman Empire

after

the Christian reconquista of Spain in 1492.

Such are the roots of the Dr

Jekyll picture

of Muslim culture:

it

encourages social mobility and entrepreneurship, respects commerce, has a contractual frame of mind, emphasizes rational thinking, and is

tolerant of diversity

and thus

creativity.

This Jekyll- and- Hyde exercise of ours shows that there that

is

either unequivocally

good or bad

for

is

no culture

economic development.

Everything depends on what people do with the 'raw material' of their culture. Positive elements

may

societies at different points in

locations,

ical

predominate, or negative ones.

Two

time or located in different geograph-

and working with the same raw material

(Islam,

Confucianism or Christianity), can produce, and have produced, markedly different behavioural patterns.

Not being

able to see this, culture-based explanations for

development have usually been cations based

on

little

more than

economic

ex post facto

justifi-

a 20/20 hindsight vision. So, in the early days of

when most economically successful countries happened to be Protestant Christian, many people argued that Protestantism was capitalism,

uniquely suited to economic development. Italy,

Austria and southern

after the

became

When

Germany developed

Second World War,

Catholic France,

rapidly, particularly

Christianity, rather than Protestantism,

the magic culture. Until Japan

became

rich,

many

people

thought East Asia had not developed because of Confucianism. But

when Japan

succeeded, this thesis was revised to say that Japan was

developing so

fast

because

its

unique form of Confucianism empha-

sized co-operation over individual edification,

which the Chinese and

Korean versions allegedly valued more

And

highly.

then

Hong Kong,

Singapore, Taiwan and Korea also started doing well, so this judge-

ment about

the different varieties of Confucianism was forgotten.

Indeed, Confucianism as a whole suddenly became the best culture for

development because

and submission

it

emphasized hard work, saving, education

to authority. Today,

193

when we

see

Muslim Malaysia

BAD SAMARITANS and Indonesia, Buddhist Thailand and even Hindu India doing well

we can soon expect

economically,

trumpet

will

how

development (and

uniquely

how

all

to encounter

new

theories that

these cultures are suited for

known about

their authors have

economic

it all

along).

Lazy Japanese and thieving Germans So

far, I

have shown

how difficult

stand their complexities,

let

to explain

something

to define cultures

alone finding

economic development. But,

for

it is

else (say,

if

and

some kind of

defining culture

to under-

ideal culture

is difficult,

economic development)

trying

in terms of

it

seems to be an exercise fraught with even greater problems. All this to

is

not to deny that

how

people behave makes a difference

economic development. But the point

is

that people's behaviour

not determined by culture. Moreover, cultures change; so

it is

is

wrong

many culturalists are wont to do. To go back for a moment to those puzzles of the

to treat culture as destiny, as

understand

this, let's

lazy Japanese

One bad tries

for

reason

why

Japanese or

economic development

German is

culture in the past looked so

that observers

from richer coun-

tended to be prejudiced against foreigners (especially poor

foreigners). tion'

and the thieving Germans.

due

But there was also an element of genuine 'misinterpreta-

to the fact that rich countries are very differently organized

from poor countries. Take laziness - the most frequently

cited 'cultural' trait of people in

poor countries. People from rich countries routinely believe that poor countries are poor because their people are lazy. But

poor countries actually work long hours

What makes them appear lazy is of time.

When you work

don't have to keep time factory,

it's

essential.

many

people in

in backbreaking conditions.

often their lack of an 'industrial' sense

with basic tools or simple machinery, you

strictly. If

you

are

working in an automated

People from rich countries often interpret this

difference in sense of time as laziness.

Of course,

it

was not

all

prejudice or misinterpretation. Early-i9th-

century Germans and early-20th-century Japanese were, on average,

194

LAZY JAPANESE AND THIEVING GERMANS not as organized, rational, disciplined, successflil countries

today's

Germany

of the time

the citizens of the

etc. as

matter, as people are in

or, for that

or Japan. But the question

whether we can

is

really

describe the origins of those 'negative' forms of behaviour as 'cultural' in the sense that they are rooted in beliefs, values

have been passed on through generations and cult, if

My

are, therefore,

very

that

diffi-

not necessarily impossible, to change. short answer

that there are a lot is it

and outlooks

no. Let us consider 'laziness' again.

is

more people 'lazing around'

It is

true

poor countries. But

in

because those people culturally prefer lounging about to working

hard? Usually not.

people

who

are

jobs but do not have result of

mainly because poor countries have a

It is

unemployed or underemployed enough work

grants from poor countries with

past,

when

a country

means

ment, which

they

to lets

is

make

'lazy'

fully).

The

lot

of

may have

This

fact that

is

the

immi-

work much harder

cultures

to rich countries proves the point.

poor, people often resort to unethical, or even

a living. Poverty also

people get away with

breaking the law more

How

move

culture.

people

once much-vaunted 'dishonesty' of the Germans in the

for the

when

illegal,

occupy them

economic conditions rather than

than the locals

As

to

(i.e.,

means weak law

illegal

enforce-

behaviour, and makes

'culturally' acceptable.

about the 'excessive emotions' of the Japanese and the

Germans? Rational thinking, whose absence

is

often manifested as

excessive emotion, develops largely as a result of

economic develop-

ment. Modern economies require a rational organization of

activity,

which then changes people's understanding of the world. 'Living for today' or being 'easy-going' - words that many people associate with Africa and Latin America nowadays - are also the consequences of economic conditions. In a slowly changing economy, there

much need to plan for the future; people plan for the future only when they anticipate new opportunities (e.g., new careers) or unexpected shocks (e.g., a sudden inflow of new imports). Moreover,

is

not

poor economies future

offer

(e.g., credit,

In other words,

Japanese and

few devices with which people can plan for the

insurance, contracts).

many

Germans

of the 'negative' forms of behaviour of the in the past

195

were largely the outcomes of

BAD SAMARITANS economic conditions

common

to

all

economically underdeveloped

countries, rather than of their specific cultures. This

Germans and the Japanese in the past were 'culturally'

is

why

the

more similar Germans and

far

to people in today's developing countries than to the

the Japanese of today.

Many of these apparently unchangeable 'habits of national heritage' can be, and have been, transformed quite quickly by changes in

economic conditions. This in late-i9th-century

Gulick, the

what some observers actually witnessed

is

Germany and

American missionary

early-20th-century Japan. Sidney

whom

I

cited previously, observed

that 'the Japanese give the double impression of being industrious

and

diligent

on the one hand and, on the

utterly indifferent to the passage of in the at

new

factories, they

time'. ^^

other, of being lazy

if you

looked

at the

looked very industrious. But

if

under- employed farmers and carpenters, they looked

and

workers

you looked 'lazy'.

With

economic development, people would also develop an 'industrial' sense of time very quickly.

My country, Korea, offers an interesting example

in this regard. Twenty,

maybe even

expression, 'Korean time'.

It

feel

sorry about

and

faster,

the expression

it.

we used

to have the

described the widespread practice whereby

people could be an hour or two

ized

15, years ago,

late for

an appointment and not even

Nowadays, with the pace of

life far

more organ-

such behaviour has almost disappeared, and with

it

itself.

In other words, culture changes with economic development."^ That is

why the

Japanese and the

German

cultures of today are so different

from those of their ancestors. Culture of economic development. '^

Of

least

course, culture, with

It

is

the

result, as

would be

far

more

economic stagnation, can

also

well as the cause,

accurate to say that

change for the worse

from the point of view of economic development). The Muslim world used

be rational and tolerant, but, following centuries of economic stagnation,

(at

to

many

Muslim countries have turned ultra-religious and intolerant. These 'negative' elements have become stronger because of economic stagnation and lack of future prospects. The fact that such forms of behaviour are not an inevitable manifestation of Muslim culture

is

proven by the rational thinking and tolerance prevalent in

ous Muslim empires in the like Malaysia,

as

all

past. It

is

also corroborated

whose economic prosperity has made

those female central bankers

I

wrote about

196

its

many

prosper-

by contemporary examples, Islam tolerant and rational,

earlier will tell you.

LAZY JAPANESE AND THIEVING GERMANS countries

become 'hardworking and

*good' cultural traits) because of

the other

(and acquire other

economic development, rather than

way around.

Many culturalists accept, tice

'disciplined'

most of them

But in prac-

in theory, that cultures change.

treat culture as pretty

immutable. This

is

why, despite

endless contemporary accounts to the contrary, culturalists today describe

the Japanese tering light.

on the cusp of economic development

most

in the

flat-

David Landes, a leading proponent of the cultural theory

of economic development,

'The Japanese went about moderniza-

says:

and system. They were ready

for

virtue of a tradition (recollection) of effective government,

by

their

their

work

tion with characteristic intensity

high

levels

ethic

and

of

by

literacy,

self- discipline,

by

their tight family structure,

by their sense of national

intensity

by

it

and inherent

superiority?^ Despite the frequent contemporary observation that the

Japanese were

lazy,

Fukuyama

claims in his book, TrusU that there was

'the Japanese counterpart to the Protestant

around the same time?^ 'high-trust' society, rich,

when

he

classifies

work ethic, formulated at Germany as an inherently

he is also oblivious to the fact that, before they became

many foreigners thought

the

Germans were cheating

others

all

the

time and unable to co-operate with one another.

A good cultural argument should be able to admit that the Germans and the Japanese were able to explain ists,

a pretty hopeless

bunch

in the past

and

blinded by their conviction that only countries with the

value systems can develop, re-interpret so as to 'explain' their subsequent

The

still

be

how they developed their economies. But most cultural-

fact that culture

changes

German

economic

far

more

or Japanese histories

success.

quickly than the culturalists

assume should give us hope. Negative behavioural or lack of creativity, do

'right'

traits, like laziness

hamper economic development. If these traits we would need

are fully, or even predominantly, culturally determined,

a 'cultural revolution' in order to get rid of

development.^^

If

we need

them and

start

economic

a cultural revolution before

we can develop

would be next

to impossible,

the economy, economic development since cultural revolutions rarely,

Chinese Cultural Revolution,

if ever,

albeit

The

failure

of the

launched for other reasons than

economic development, should serve 197

succeed.

as a salutary warning.

BAD SAMARITANS Fortunately,

we do

not need a cultural revolution before economic

A

development can happen.

good

to be

of behavioural

lot

economic development

for

than be prerequisites

meant

traits that are

will follow from, rather

economic development. Countries can

for,

get

development going through means other than a cultural revolution, as

explained in the preceding chapters.

I

gets going,

lying

it

will

Once economic development

change people's behaviour and even the beliefs under-

(namely, culture) in ways that help economic development.

it

A Virtuous

circle'

of economic development and cultural values can

be created. This is

is,

what will happen

recent

economic

how Hindu is

in all future

success,

culture

in India (recall the

-

what happened

essentially,

development

all

economic success sure

we

stories.

Given

it

India's

soon see books that say

will

sluggish growth

once-popular expression, 'Hindu rate of growth'^^) If

in the 2060s,

how Mozambique

am

and Germany. And

- once considered the source of

helping India grow.

comes true

I

in Japan

my Mozambique

we

fantasy in the Prologue

then be reading books discussing

will

has had a culture uniquely suited to economic

along.

Changing culture So

far, I

result of

have argued that culture

is

not immutable and changes as a

economic development. However,

this

is

not to say that

we

can change culture only through changing the underlying economic conditions. Culture can be changed deliberately through persuasion.

This

is

a point rightly

fatalists (for is

the

emphasized by those

fatalists,

culture

is

culturalists

who

are not

almost impossible to change, so

it

destiny).

The problem

is

that those culturalists tend to believe that cultural

changes require only attitudes',

in

the

Underdevelopment that can be

'activities that

promote progressive values and

words of Lawrence Harrison, the author of is

a State ofMind?^ But there

made through

is

a limit to changes

ideological exhortation alone. In a society

without enough jobs, preaching hard work 198

will

not be very effective

LAZY JAPANESE AND THIEVING GERMANS in

changing people's work habits. In a society with

Uttle industry,

telHng people that disparaging the engineering profession will

not make

societies

upon

will fall

many young

people choose to pursue

where workers are treated badly, appealing deaf, if not cynical, ears.

be supported by

Changes

changes - in economic

real

it

is

wrong

as a career. In

for co-operation

in attitudes

need to

activities, institutions

and

policies.

Take the fabled Japanese culture of company loyalty. Many observers believe

it is

the manifestation of an ingrained cultural trait rooted in

the Japanese variety of Confucianism emphasizing loyalty. true,

Now,

if

such an attitude should have been more pronounced as we go

back further in time.

Yet, a

century ago, Beatrice

Webb remarked

that

the Japanese have a 'quite intolerable personal independence'.^^ Indeed,

Japanese workers used to be a pretty militant bunch until

Between

1955

and

1964, Japan

lost

fairly recently.

more days per worker

in strikes

than Britain or France, countries which were not exactly famous for co-operative industrial relations at the time.^^ Co-operation and loyalty

came about only because Japanese workers were given institutions such as lifetime employment and company welfare schemes. Ideological campaigns (and government bashing of militant communist trade unions) did play a their

role,

but they would not have been enough on

own.

Similarly, despite its current reputation for peaceful industrial relations, lost

Sweden used

to have a terrible labour problem. In the 1920s,

more man-hours per worker due to

strikes

it

than any other country.

But after the 'corporatist' compromise of the 1930s (the 1938 Saltjobaden Agreement),

it

all

wage demands and

changed. In return for workers restraining their strike activities, the country's capitalists delivered

a generous welfare state

combined with good

Ideological exhortation alone

When

Korea started

government

its

retraining

programmes.

would not have been convincing.

industrialization drive in the 1960s, the

tried to persuade people to

abandon the

traditional

Confucian disdain for industrial professions. The country needed

more engineers and scientists. But with few decent engineering jobs, not many bright young people wanted to become engineers. So the government increased funding and the number of places 199

in university

BAD SAMARITANS for engineering

and science departments, while doing the

relative terms) in

reverse (in

humanities departments. In the 1960s there were

only 0.6 engineering and science graduates for every humanities graduate,

but the ratio became one-to-one by the early

the policy fast

worked ultimately because the economy was

and, as a result, there were

engineers and scientists.

It

more and more

was thanks

logical exhortation, educational policy just

i98os.3^

to the

and

promotion of 'progressive values and

Of course,

industrializing

well-paid jobs for

combination of ideo-

industrialization attitudes'

-

- and not

that Korea has

come to boast one of the best-trained armies of engineers in the world. The above examples show that ideological persuasion is important but not, by

itself,

enough

in

changing culture.

It

has to be accom-

panied by changes in policies and institutions that can sustain the desired forms of behaviour over an extended period of time so that that they turn into 'cultural' traits.

Reinventing culture Culture influences a country's economic performance. At a given point in time, a particular culture

ioural traits that are

may produce people with particular behav-

more conducive

to achieving certain social goals,

including economic development, than other cultures. At this abstract level,

the proposition seems uncontroversial.

But when we try to apply proves elusive. is.

It is

this general principle to actual cases,

it

very difficult to define what the culture of a nation

Things are complicated further by the fact that very different cultural

traditions

may

geneous' ones

some

positive

all this, it is

co-exist in a single country, even in allegedly like

'homo-

Korea. All cultures have multiple characteristics,

and others negative

for

economic development. Given

not possible, nor useful, to 'explain' a country's economic

success or failure in terms of

its

culture, as

some Bad Samaritans have

tried to do.

More

importantly, even though having people with certain behav-

ioural traits

may be

better for

economic development, a country does

not need a 'cultural revolution' before

200

it

can develop. Though culture

LAZY JAPANESE AND THIEVING GERMANS and economic development influence each

other, the causality

far

is

stronger from the latter to the former; economic development to a large extent creates a culture that

ture change the

needs. Changes in economic struc-

it

way people live and interact with one another, which, way they understand the world and behave. As I

in turn, changes the

have shown with the cases of Japan, Germany and Korea, behavioural (e.g.,

traits that are

hard work, time-keeping, frugality) are actually

rather than

its

many

of the

supposed to 'explain economic development its

consequences,

causes.

Saying that culture changes largely as a result of economic devel-

opment

not to say that culture cannot be changed by ideological

is

persuasion. Actually, this

^Underdevelopment fore, the

is

is

what some optimistic

a state of mind', they declare. For them, there-

obvious solution to underdevelopment

people think through ideological exhortation.

an exercise

may be

helpful, or even

tures

and

complementary changes

I

is

to

change the way

don't deny that such

important in certain

changing culture. But a cultural revolution' there are

culturalists believe.

will

cases, for

not take root unless

in the underlying

economic

struc-

institutions.

So, in order to

promote behavioural

economic development, we need tation, policy

a

traits that are helpful for

combination of ideological exhor-

measures to promote economic development and the

institutional changes that foster the desired cultural changes.

an easy job to get

this

mix

right,

like

not

but once you do, culture can be

changed much more quickly than

what seemed

It is

is

normally assumed. Very often

an eternal national character can change within a

couple of decades,

if

there are sufficient supporting changes in the

underlying economic structure and institutions. The rather rapid disappearance of the Japanese 'national heritage' of laziness since the 1920s, the quick

development of co-operative industrial relations

in

Sweden since the 1930s, and the end of 'Korean time' in the 1990s are some prominent examples. The fact that culture can be deliberately changed - through economic policies, institution building and ideological campaigns gives us hope.

of

its

culture.

No country is condemned to underdevelopment because But

at the

same time we must not 201

forget that culture

BAD SAMARITANS cannot be reinvented

communism to

work with

We ment

is

a

at will

- the

good proof of

failure to create the

that.

The

existing cultural attitudes

*new man' under

cultural 'reformer'

still

has

and symbols.

need to understand the role of culture in economic develop-

in

its

true complexity

difficult to define. It

development

affects

does it

and importance. Culture

affect

is

complex and

economic development, but economic

more than

the other

way around. Culture

is

can be changed through a mutually reinforcing

not immutable.

It

interaction with

economic development; ideological persuasion; and

complementary policies and

institutions that

encourage certain forms

of behaviour, which over time turn into cultural

we

free

those those

traits.

Only then can

our imaginations both from the unwarranted pessimism of

who who

believe culture

is

destiny

and from the naive optimism of

believe they can persuade people to think differently

bring about economic development that way.

202

and

EPILOGUE Sao Paulo, October 2037

Can

Luiz Soares

is

things get better?

man. His family engineering firm - Scares

a worried

Tecnologia, S.A.y which his grandfather, Jose Antonio, founded in 1997

-

is

on the brink of

The

first

rate policy, its

collapse.

years of Soares Tecnologia were difficult.

which

ability to

lasted

The high

interest

between 1994 and 2009, severely constrained

borrow and expand. But, by

2013,

it

had grown

into a

soHd middle-sized firm producing watch parts and other precision equipment, thanks to Jose Antonio's In 2015, Luiz's father, Paulo,

skills

and determination.

came back with a Ph.D.

from Cambridge and persuaded Jose Antonio

in nano-physics

to set

up

a

nano-

technology division, which he headed. That proved a lucky escape.

The

Tallinn

trial tariffs

Round of the WTO concluded in

2017 abolished

all

indus-

except for a handful of 'reserved' sectors for each country.

As a result, most manufacturing industries, other than low-technology, low- wage ones, got wiped out in most developing countries, including Brazil.

The

Brazilian nano-technology industry survived the so-called

Tallinn tsunami only because Paulo's foresight paid off. after Jose Antonio's yacht

(a result

it

was one of the

Soon

after

'reserved' industries.

he took over the firm in 2023,

sank in a freak hurricane in the Caribbean

of global warming, they said), Soares Tecnologia launched a

molecular machine which converted sea water into fresh water with greater efficiency than in a

its

American or Finnish

rivals. It

due to global warming - by that time, the Amazon

40%

was a big

hit

country that was suffering from increasingly frequent droughts

of

its

1970 size

due

forest

to lack of rain (with a helping

203

was barely

hand from

BAD SAMARITANS pasture-hungry

Paulo was even selected as

cattle ranchers). In 2028,

one of the world's 500 leading technology entrepreneurs by the Shanghai-based Qiye (Enterprise), the world's most influential business magazine.

Then

disaster struck. In 2029,

China was

hit

by

a massive finan-

commemorating the looth anniversary of the foundation of its ruling Communist Party, China had decided to join the OECD (Organisation for Economic Co-operation and Development), the club of rich countries. Opening up its capital market was to be the price of its membership. China had already been cial crisis.

Back

resisting for

in 2021,

some years

the pressure from the rich countries to behave

'responsibly' as the world's second biggest its

financial market, but

accession, there

was

20%

still

once

it

economy and

open up

to

started negotiating the terms of

OECD

was no escape. Some urged caution, saying that China

a relatively

poor country, with an income

level that

was only

of that of the US, but most others were confident that China

would do

as well in finance as in

manufacturing, where

seemed unstoppable. Wang Xing-Guo, the

its

ascendancy

pro-liberalization governor

of the People's Bank of China, the central bank (granted

full

inde-

summed up this optimism perfectly: 'What are we afraid of? The money game is in our genes - after all, paper money is a Chinese invention!' When it joined the organization in 2024, China

pendence

revalued its

in 2017),

its

currency, the renminbi, by four times

capital market.

and

fully

opened

For a while, the Chinese economy boomed as though

the sky was the limit. But the resulting real estate and stock market

bubbles burst in 2029, requiring the largest

IMF

rescue package in

history.

Soaring unemployment and IMF-imposed cuts to government food subsidies led to riots

Gongchandang

(Real

resentment of the

and eventually

in the space of less

the rise of the Yuan-

Communist) movement,

'losers' in a society that

absolute equality of Maoist

been contained,

to

communism

fuelled

by the seething

had moved from the near-

to Brazilian- style inequality

than two generations. The Real Communists have

at least for the

moment, following

the arrest of

their leaders in 2035, but the resulting political turmoil

unrest

marked

the

end of the Chinese economic miracle. 204

and

all

social

SAO PAULO, OCTOBER 203/ The Chinese economy being

down with

world

it.

so big by then,

What came

to be

known

no end

in sight.

With

its

largest export

brought the whole

Second Great

as the

now and

Depression has been going on for several years to be

it

there seems

market collapsing, Brazil

some other

has suffered greatly, although not as heavily as

countries.

The other leading Asian economies - such as India, Japan and Vietnam - went belly up. Many African countries could not survive the collapse of what, by then, was the biggest buyer of their raw materials.

The US economy suffered withdrawal symptoms from the massive

flight

of Chinese capital from

deep recession in the

its

Treasury

US economy

market. The ensuing

bill

triggered an even deeper one in

Mexico, leading to an armed uprising by the Nuevos Zapatistas, the left-wing guerrillas claiming to be the legitimate heirs of the legendary

early-20th century revolutionary Emiliano

Integration Agreement)

Zapata.

Mexico out of the lAIA

Zapatistas swore to take

The Nuevos

(Inter- American

- the high-octane version of NAFTA

was

that

formed by the US, Canada, Mexico, Guatemala, Chile and Colombia in 2020.

The

guerrillas

were narrowly defeated

operation, aided by the

US

air force

after a brutal military

and the Colombian army.

The Second Great Depression was bad enough for Soares Tecnologia, but then came the coup de grace. In 2033, driven by his free trade convictions

means

to

bully the

president, Alfredo

and using the

dire

economic situation

as a

opposition, the maverick Korean-Brazilian

Kim, a former chief economist of the World Bank,

took the country into the lAIA. For the Brazilian nano-technology industry, a part of the terms of entry into the lAIA,

all

and government procurement programmes -

- were phased out within

a catastrophe.

federal

R8cD

lifelines for

had survived the

vis-a-vis the

overall level of technology

firms,

was

still

20,

Tallinn

As

subsidies

the industry

and

three years. Tariffs in nano-technology

a few other 'reserved' sectors that

immediately scrapped

it

Round were

lAIA member countries. With the perhaps even 30, years behind

US

most Brazilian nano-technology companies collapsed. Even Soares

Tecnologia, considered to be Brazil's best, survived only by selling a stake to a firm

from - of

all

countries!

surprisingly well after forming the Bolivarian

205

45%

- Ecuador. Ecuador had done Economic Union with

BAD SAMARITANS - the

Venezuela, Bolivia, Cuba, Nicaragua and Argentina in 2010

members

left

the

But even survivors

new

extended

on

its

patent

life

By contrast,

now come

WTO

The US had already

into force.

from 28 years

Brazil

to the 20-year patent

lete

Soares Tecnologia were devastated by the

like

patent law that had

in 2030.

BEU

WTO in 2012 in protest at the Tallinn Round agenda.

(instituted in 2018) to 40 years

was one of the few countries

life

clinging

allowed under the increasingly obso-

TRIPS agreement of

1995 (most others having

28 years or even 40 years, in the case of the

moved

lAIA countries).

main concession

Brazil joined the lAIA, the

still

had

it

to

When

make -

to

return for the abolition of beef and cotton subsidies in the

US

in (to

be phased in over the next 25 years) - was the patent law, which the Americans insisted should be applied retrospectively. At one stroke, the Brazilian

nano-technology firms became

liable to patent

and American nano-technology corporations parachuted in army of patent lawyers. With no tariffs against American imports, disappearing subsidies and shrivelling government procurement programmes, compounded by a flood of lawsuits, Soares Tecnologia was in a dire state when Paulo - may his soul rest in peace - had a massive stroke and died suits,

their

in 2035.

As

a result, Luiz

was forced

to quit his

MBA

course at the

Singapore campus of INSEAD, the French business school (which, by that time,

was considered

to

be better than the original campus in

Fontainebleau), break up with Miriam, his half-Xhosa/half- Uzbek girlfriend (a distant cousin of Nelson

Mandela on her Xhosa

side),

and

return to Brazil to take over the family firm at the age of 27.

Things have not improved

much

since Luiz took over. True, he has

successfully fought off several patent suits.

of the three that are

he

will face ruin.

still

But

pending (none of them

if is

he loses even one looking hopeful),

His Ecuadorian partner, Nanotecnologia Andina,

already threatening to

sell

off

its

share in the company.

When his

is

firm

disappears with the rest of the Brazilian nano-technology industry,

most of

Brazil's

manufacturing industries - except for aerospace and

alcohol fuel, in which Brazil

had established

a

world

class position in

the late 20th century before the rise of neo-liberalism

disappeared. Brazil will be back to square one.

206

-

will

have

SAO PAULO, OCTOBER 2037 Unlikely? Yes

- and

I

hope

and independent-minded had

a

stays that way. Brazil

it

to sign

something

former World Bank chief economist

like

as

mend

its

ways before

Chinese leadership

is

is

it

fully

thrown into

too smart

lAIA, even

president.

movements

has enough wise people and vibrant popular to

its

far

is

my

to

if it

Mexico be able

The

a full-scale civil war.

aware of the threats posed by the country's

widening inequality. They also know the dangers of any premature opening of

its

capital market, thanks to the 1997 Asian crisis.

mighty US patent lobby would fmd tive application

it

Even the

difficult to secure a retrospec-

of 40 -year patents in any international agreement.

a growing consensus that something has to be

There

is

global

warming soon. The next round of

WTO

the

talks

done about not

is

likely

to lead to a near-total abolition of industrial tariffs.

But what

Many ated,

I

have just sketched out

of the things

but they

all

I

have

is

not an impossible scenario.

made up have been

have a strong basis in

deliberately exagger-

reality.

For example, the near-total abolition of industrial

my

imaginary Tallinn Round

little

-

it

not

may sound

fanciful,

milder than what was proposed by the

US

but

at the

far off

from what other

WTO

rich countries are proposing.^ is

actually a

it is

in

2002

by 2015 - and

called for a total abolition of industrial tariffs

American Integration Agreement

following

tariffs

My

really a (geographically)

is

Inter-

broader

and stronger (content-wise) version of NAFTA (North American Free Trade Agreement). The countries mentioned as possible members of the Bolivarian

Economic Union

have deliberately omitted

Of

these, Venezuela,

are already

Brazil, a

Cuba and

member

working together

closely

(I

my story). formed ALBA

of this group, in

Bolivia have already

(Alternativa Bolivariana para las Americas: Bolivarian Alternatives for the Americas).

Given the growing importance of the Chinese economy, totally fanciful that a

major economic

crisis in

China

could turn into a Second Great Depression, especially political

it is

not

in the late 2020s if

there was

turmoil in the country. The chances of upheaval in such

circumstances would be strongly influenced by the gravity of

its

inequality problem which, while not yet at the Brazilian level, as in

my story,

could reach that in another generation,

207

if

no counteraction

BAD SAMARITANS is

As

taken.

for a civil

but, in today's Mexico,

been, in

effect,

war

we

the conflict to escalate

economic

armed

ruled by an

Subcomandante Marcos,

crisis,

may sound

in Mexico, this

like a fantasy,

already have one state, Chiapas, which has guerrilla group, the Zapatistas

since 1994.

under

would not be impossible

for

the country were thrown into a major

if

especially

It

had continued

if it

two decades

for another

with the neo-liberal policies that have so ill-served

it

in the past

two

decades.

My US

patent scenario

is

certainly exaggerated, but

ceutical patents can already be de facto extended

up

US pharma-

to 28 years

through

data protection and in consideration of the time needed for

(Food and Drugs Administration) approval. The that these provisions are written into

And,

US

as

I

all its

has

made

FDA sure

free trade agreements.

Mouse

discussed in the story of Mickey

US

in chapter 6, in 1998,

copyright was retrospectively extended.

The reader may prematurely open

find

its

particularly implausible that

it

capital market.

the second biggest in the world, 'responsibly'. This is exactly

to revalue

its

China would

But when your economy becomes

it is

hard to

resist

the pressure to act

what happened to Japan when

it

was made

currency by three times almost overnight in the 1985

Plaza Accord. That currency revaluation was an important cause of Japan's

huge

whose bursting

asset bubble,

in the early 1990s

(and the

incompetent management of its aftermath) resulted in economic nation for a decade. As for

my saying that China would join the OECD Communist Party, that was But countries can become over-confi-

to celebrate the looth birthday of

certainly said tongue-in-cheek.

dent

when

its

they are very successful, as the case of Korea shows. Until

the late 1980s, Korea

economic

stag-

had

skilfully

used capital controls to great

benefit. But, in the mid-1990s,

opened

it

its

capital

market

wide, and without careful planning. This was partly due to American pressure, but also because, after three decades of its

the country

had become too

full

and

time,

per capita income was

its

act like a rich

decided to join the

OECD

really wasn't one.

At the

only one-third that of most

OECD

of itself.

still

member countries and one quarter that above the level China

is

It

country when

in 1996

likely to

economic 'miracle',

it

of the richest ones (or slightly

reach by the mid-2020s). The outcome 208

SAO PAULO, OCTOBER 203/ was the 1997 financial crisis. So my imaginary China story is really a combination of what actually happened in Japan in the 1980s and Korea in the 1990s. plausible that Brazil

Is it really

would

sign

up

the lAIA? Absolutely not in today's world, but a

world

to

something

am

I

like

talking about

middle of the Second Great Depression and an

in the

economy ravaged by another quarter of a century of neo-liberalism. we should not underestimate how political leaders driven by

Also,

ideological convictions can

do things which

with their countries' history,

if

are so 'out of character'

they are there in the right place at

the right time. For example, despite the

famous

British tradition of

gradualism and pragmatism, Margaret Thatcher was radical and ideologically driven.

Her government changed the character of British

politics for the foreseeable future. Likewise, Brazil

may have

a history

of independent-minded and pragmatic foreign policy, but that

not an absolute guarantee against someone driving

own

into the lAIA, especially

it

when

like

my

is

Kim

Alfredo

Brazil does not lack

its

supply of free-market ideologues.

So,

my 'alternative

grounded

history of the future'

in reality a lot

more

not a total fantasy.

is

strongly than

may

have been deliberately pessimistic in painting

remind the reader how big the

from now,

I

will

stakes are.

I

appear

at first. If

this scenario,

really

hope

be proved completely wrong. But

that, if

It is

it

is

I

to

30 years

the world

continues with neo-liberal policies currently propagated by the Bad Samaritans,

many of the events that I 'document' in the story, or some-

thing very like them, could happen.

Throughout

how

policies,

this

book,

I

have

sorts of areas in order to help

future'.

ize these suggestions,

to be

and the

rules

we and make

changed

countries

I

if

detailed proposals as to

need

to

be changed in

have just described in

In this concluding chapter,

I

will

all

to avert

my 'history

not repeat or summar-

but rather discuss the key principles that

lie

show how national economic of international economic interactions need

behind them. In the process, policies

globally,

poor countries develop and

the kind of disaster scenario that

of the

made many

both nationally and

are to

I

hope

to

promote economic development

the world a better place.

209

in

poor

BAD SAMARITANS

Defying the market As

I

have constantly stressed, markets have a strong tendency to rein-

force the status quo.

what they

The

free

aheady good

are

market dictates that countries

means

Stated bluntly, this

at.

stick to

that

poor

countries are supposed to continue with their current engagement in

low-productivity

activities.

But their engagement in those

what makes them poor.

exactly

they have

to def)^

If

activities is

they want to leave poverty behind,

the market and do the

more

difficult things that

bring them higher incomes - there are no two ways about 'Defying the market' tries

not

failed

market? But

may sound

radical

-

after

all,

have

it.

many coun-

miserably because they have tried to go against the

something that

it is

is

done by business managers

all

the

time. Business managers, of course, get judged ultimately by the market,

but they - especially the successful ones - do not accept market forces blindly.

They have

their long-term plans for their

companies, and these

sometimes demand that they buck market trends for considerable periods of time. They foster the growth of their subsidiaries in the sectors they choose to

move into and make up

from their subsidiaries

in the existing sectors.

ling electronics business for 17 years with

logging, rubber boots

and

electric cable.

for the losses with profits

Nokia subsidized

money from

refining. If they

way developing would

still

be

had

and Samsung

advanced industries

The trouble

is

if

fledg-

its

infant

in textiles

market signals in the

Bad Samaritans, Nokia

refining

Likewise, countries should defy the market

its

businesses in

money made

faithfully followed

countries are told to by the

felling trees

its

Samsung subsidized

electronics subsidiaries for over a decade with

and sugar

new

imported sugar cane.

and enter

difficult

and more

they want to escape poverty.

that there are

tries (or, for that matter,

good reasons why low-earning coun-

low-earning firms or individuals) are engaged

- they lack the capabilities to do more backyard motor repair shop in Maputo simply

in less productive activities

productive ones.

A

cannot produce a Beetle, even

if

Volkswagen were

necessary drawings and instruction manuals, because nological

and organizational

capacities that

210

to give it

it all

the

lacks the tech-

Volkswagen enjoys. This

SAO PAULO, OCTOBER 2037 is

why, free market economists would argue, Mozambicans should be

realistic

and not mess around with things

The

free

good

market recommendation

that

- one

day. In fact, they

capabilities

the

does not

this

determination and the right investment,

firm level and at the national

abilities.

After

all,

level, in

sacrifices.

say,

accumulating the

a backyard auto repair

famous Korean car maker, Hyundai,

Needless to

term

is

- growing cashew nuts. correct - in the short run,

Mozambicans should not produce something like a Beetle need to - if they are going to make progress.

at the

necessary

how

at

cannot be changed very much. But

And they can - given enough both

alone hydrogen

should just concentrate on what they are

fuel cells!); instead they

already (at least 'comparatively')

when mean

like cars (let

shop

exactly

is

started in the 1940s.

investment in capability-building requires short-

But that

is

not a reason not to do

free-trade economists say. In fact,

we

it,

contrary to what

often see individuals

making

short-term sacrifices for a long-term increase in their capacities, and

Suppose a low-skilled worker quits

heartily approve of them.

paying job and attends a training course to acquire

someone were is

now

to say the

worker

is

making

new

his lowskills.

If

a big mistake because he

not able to earn even the low wage he used to earn, most of

us would criticize that person for being short-sighted; an increase in a person's future earning

power

Likewise, countries need to

build

up

their

justifies

such short-term

make short-term

long-term productive

temporary reduction it is

refusing to

new abilities - by buying

improving their organization and training their

workers - and become

be totally

sacrifice.

they are to

capabilities. If tariff barriers or

subsidies allow domestic firms to accumulate better machinery,

sacrifices if

internationally competitive in the process, the

in the country's level of

consumption (because

buy higher- quality, lower-price foreign goods) may

justified.

This simple but powerful principle - sacrificing the present to

improve the future -

why the Americans refused to practise free trade in the 19th century. It is why Finland did not want foreign investment until recently. It is why the Korean government set up steel mills in the late 1960s, despite the objections of the World Bank. It is why is

the Swiss did not issue patents

and the Americans did not protect 211

BAD SAMARITANS foreigners' copyrights until the late 19th century. all,

why

I

my

send

And

it is,

to cap

it

six-year-old son, Jin-Gyu, to school rather than

making him work and earn

his living.

Investment in capacity-building can take quite a long time to bear

may not go

Zhou Enlai, the long-time prime minister of China under Mao Zedong - when asked to comment on the impact fruit. I

as far as

of the French Revolution, he replied that

when

say long,

I

I

mean

electronics division of just the beginning.

and subsidies even

at the

to

It

long.

Nokia

I

have just mentioned that

17 years to

lower end of

Henry VII

it

profit,

But

took the

but that

is

it.

It

was

in the international car market,

good 60 years before

a It

it

became

took nearly 100 years from the

up with the Low Countries in US 130 years to develop its economy

for Britain to catch

woollen manufacturing.

enough

make any

tell'.

took Toyota more than 30 years of protection

become competitive

one of the world's top car makers. days of

too early to

'it is

It

took the

about doing away with

to feel confident

long time horizons, Japan might

still

tariffs.

Without such

be mainly exporting

silk,

Britain

wool and the US cotton. Unfortunately, these are time frames that are not compatible with the neo-liberal policies

trade

demands

that

recommended by

the

Bad Samaritans. Free

poor countries compete immediately with more

advanced foreign producers, leading to the demise of firms before they can acquire

new

capabilities.

A liberal foreign

which allows superior foreign firms into

a developing country, will,

in the long run, restrict the range of capabilities

firms,

investment policy,

accumulated in

local

whether independent or owned by foreign companies. Free

capital markets,

with their pro-cyclical herd behaviour, make long-

term projects vulnerable.

A

high interest rate policy raises the 'price

making long-term investment unviable. No wonder neo-liberalism makes economic development difficult - it of

future', so to speak,

makes the acquisition of new productive

capabilities difficult.

Like any other investment, of course, investment in capability-

Some countries (as well as firms or individuals) make it; some don't. Some countries will be more successful than others. And even the most successful countries will bungle things in certain areas (but then, when we talk about 'success', building does not guarantee success.

212

SAO PAULO, OCTOBER 203/ we

are talking about batting averages, rather than infaUibihty). But

economic development without investment in enhancing productive capabilities is a near impossibility. History - recent and more distant

-

tells

us that, as

I

have shown throughout this book.

Why

manufacturing matters

Having accepted that increasing capabilities is important, where exactly should a country invest in order to increase them? Industry - or, more precisely,

that

manufacturing industry"^ -

is

my answer. It is also the answer

would have been given by generations of

successful engineers of

economic development from Robert Walpole onwards, had they been asked the same question.

Of

course, this

is

not to say that

it is

impossible to

by relying on natural resources: Argentina was

become

century through the trans- Atlantic export of wheat and beef

once the

fifth richest

tries are rich

rich

rich in the early 20th (it

was

country in the world); today, a number of coun-

mainly due to

oil.

But one has to have a huge stock of

natural resources in order to be able to base high living standards

on them. Few countries are so fortunate. Moreover, natural resources can run out - mineral deposits are finite, while over- exploita-

solely

tion of renewable resources (e.g., fish, forests)

whose supplies

are, in principle, infinite

can make them disappear. Worse, wealth based on

natural resources can be rapidly eroded,

if

technologically

advanced nations come up with synthetic alternatives 19th century, Guatemala's wealth, based

more mid-

in the

on the highly prized crimson

dye extracted from the insect, cochinilla (cochineal), was almost instantly

wiped out when the Europeans invented

artificial dye.

History has repeatedly shown that the single most important thing that distinguishes rich countries capabilities in

and,

more

from poor ones

is

basically their higher

manufacturing, where productivity

is

generally higher,

importantly, where productivity tends to (although does

not always) grow faster than in agriculture or services. Walpole "^

In

some

definitions, industry includes activities like

distribution of electricity or gas.

213

knew

mining or the generation and

BAD SAMARITANS this nearly

300 years ago, when he asked George

ParUament: 'nothing so

much

I

to say in the British

contributes to promote the

pubhc

well-

being as the exportation of manufactured goods and the importation of foreign raw material', as

Alexander Hamilton knew

famous economist,

Adam

I

it

mentioned

when he

in chapter

2.

In the US,

defied the world's then

most

Smith, and argued that his country should

promote 'infant industries'. Many developing countries pursued import substitution 'industrialization' in the mid-2oth century precisely for this reason. tries

Contrary to the advice of the Bad Samaritans, poor coun-

should deliberately promote manufacturing industries.

Of

who challenge this view on the now living in a post-industrial era and that selling therefore the way to go. Some of them even argue that

course, today there are those

grounds that we are services

is

developing countries can, and really should, skip industrialization and

move India,

economy. In

directly to the service

particular,

many

people in

encouraged by that country's recent success in service

outsourcing, seem to be quite taken by this idea.

There are certainly some services that have high productivity and considerable scope for further productivity growth - banking and

other financial services,

management

and IT support come

to

productivity and,

growth due to

more

consulting, technical consulting

mind. But most other services have low

importantly, have

their very nature

little

dresser, a nurse or a call centre telephonist

the quality of their services^.).

of

demand

manufacturing

develop high-productivity services. This

If I

become without

on the

say this,

basis of

its

is

sector,

why no country has become

The Third Man.

summed up

'In Italy for thirty years

had warfare,

terror,

a country like

industries like

tempting to take the rather condescending

but popular view of Switzerland

'they

impossible to

service sector.

some of you may wonder: what about become rich thanks to service It is

diluting

manufacturing

it is

Switzerland, which has

banking and tourism?

a hair-

Moreover, the most important sources

for those high-productivity services are

firms. So, without a strong

rich solely

scope for productivity

(how much more 'efficient' can

brilliantly in the

under the

Borgias,'

movie.

he

said,

murder, bloodshed, but they produced

Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland,

214

SAO PAULO, OCTOBER 203/ they had brotherly love - they had

and peace, and what did

of the Swiss economy, however, Switzerland its

secretive

is

is

hundred years of democracy

five

that produce?

The cuckoo

a total misconception.

money

not a country living off black

banks and

cow bells and cuckoo

ized country in the world.

manufacturing output

It is,

in fact, literally the

As of 2002,

in the

world by

deposited in

buying tacky souvenirs

gullible tourists

clocks.

view

clock.^ This

it

most

like

industrial-

had the highest per capita - 24% more than that of

far

Japan, the second highest; 2.2 times that of the US; 34 times that of

China, today's 'workshop of the world'; and 156 times that of India.^ Similarly, Singapore,

commonly

considered to be a city state that has

succeeded as a financial centre and trading port,

is

a highly industrial-

35% more manufacturing output per head 'industrial powerhouse' Korea and 18% more

ized country, producing

of population than the

than the US.4 Despite what the free trade economists

recommend

(concentrating

on agriculture) or the prophets of post-industrial economy tout oping services), manufacturing

is

the

most important, though not the

There are good theoretical reasons for

only, route to prosperity.

and an abundance of historical examples not look

at spectacular

based success,

like

(devel-

to prove the point.

We

this,

must

contemporary examples of manufacturing-

Switzerland and Singapore, and mistakenly think

that they prove the opposite.

It

may be

that the Swiss

and the

Singaporeans are playing us along because they don't want other people to find out the real secret of their success!

Don't try So

far, I

have shown that

the market

and

it is

deliberately

I

home

important for developing countries to defy

promote economic

their productivity in the long

manufacturing industries.

this at

run -

activities that will raise

mainly, though not exclusively,

have argued that

this involves capability-

building, which, in turn, requires sacrificing certain short-term gains for

the sake of raising long-term productivity (and thus standards of living)

-

possibly for decades.

215

BAD SAMARITANS But neo-liberal economists

may respond by asking: what about the

low capacities of developing country governments that are supposed to orchestrate all this? If these countries are to defy the logic of the

market, someone has to choose which industries to promote and what capabilities to invest in.

But capable government

officials are

the last

thing that developing countries have. If those making these import-

ant choices are incompetent, their intervention can only

make

things

worse.

This was the argument used by the World Bank in

its

famous East

Asian Miracle report, pubhshed in 1993. Advising other developing countries against emulating interventionist Japanese and Korean trade

and

industrial policies,

argued that such poUcies cannot work in

it

countries without 'the competence, insulation, and relative lack of corruptibility of the public administrations in Japan

that

is,

practically

all

and Korea'5 -

developing countries. Alan Winters, a professor

of economics at the University of Sussex and the director of the

Development Research Group at the World Bank, was even more blunt.

He argued that 'the

application of second-best economics [economics

that allows for imperfect markets

government intervention its

and therefore potentially

my note]

needs

first-best

beneficial

economists, not

complement of third- and fourth-raters'.^ The message is - 'Do not try this at home', as TV captions say when showing

usual

clear

people doing dangerous stunts.

There can be no dispute

ment

officials are

that, in

many developing countries, govern-

not highly trained. But

it

is

also not true that

countries like Japan, Korea and Taiwan succeeded with interventionist policies because their bureaucracies

well-trained government officials.

were manned by exceptionally

They were not -

at least in the

beginning.

Korea used to send places

- Pakistan and

was then

its

bureaucrats for extra training to - of

all

the Philippines until the late 1960s. Pakistan

a 'star pupil' of the

World Bank, while the Philippines was

the second-richest country in Asia after Japan. Years ago, as a grad-

uate student,

I

had

a chance to

documents of Korea and

compare the

India.

The

early

economic planning

early Indian plans were cutting-

edge stuff for their time. They were based on a sophisticated economic 216

SAO PAULO, OCTOBER 2037 model developed by the world-famous Mahalanobis. The Korean ones,

I

am

embarrassed to

nitely written

by Professor Winters's

fourth-raters'.

But the Korean economy did

one. Perhaps

economic

we

Prasanta Chandra

statistician

'usual

were

say,

defi-

complement of third- and far better

than the Indian

good

don't need 'first-best economists' to run

policy.

Indeed, Professor Winters's first-best economists are one thing that the East Asian economies did not have. Japanese economic officials

may

have been

'first-best',

but they were certainly not economists -

they were mostly lawyers by training. Until the 1980s, what

little

economics they knew were mostly of the 'wrong' kind - the economies of Karl

Marx and

Adam

Friedrich List, rather than of

Smith and

Milton Friedman. In Taiwan, most key economic bureaucrats were engineers and scientists, rather than economists, as today.7

is

the case in China

Korea also had a high proportion of lawyers in

its

economic

bureaucracy until the i970s.^ The brains behind President Park's Heavy

and Chemical

Industrialisation

Won-Chul, was an engineer by It is

(HCI) programme in the

entirely reasonable to say that

good economic

policy.

may

Oh

we need smart people

to

run

But those 'smart people' do not have to be

Professor Winters's 'first-best economists'. Actually, the omists'

1970s,

training.

'first

not be very good for economic development,

best econif

they are

trained in neo-liberal economics. Moreover, the quality of the bureau-

cracy can be improved as

we go

along.

Such improvement, of course,

requires investment in bureaucratic capabilities. But

experiments with 'difficult' policies. 'easy' policies, like free trade,

run

'difficult' policies.

become good enough

If the

it

also needs

bureaucrats stick to (allegedly)

they will never develop the

You need some to appear

on

'trying at home', if

TV

some

with your

own

abilities to

you

aspire to

stunt act.

Tilting the playing field

Knowing what not enough.

policies are right for

your particular circumstances

is

A country must be able to implement them. Over the past

quarter of a century, the

Bad Samaritans have made 217

it

increasingly

BAD SAMARITANS difficult for

developing countries to pursue the

'right' policies for their

development. They have used the Unholy Trinity of the IMF, the World

WTO,

Bank and the

the regional multilateral financial institutions,

and

their aid budgets

bilateral

and regional

free-trade or investment

agreements in order to block them from doing nationalist policies (like trade protection

so.

They argue

that

and discrimination against

foreign investors) should be banned, or severely curtailed, not only

because they are supposed to be bad for the practising countries them-

but also because they lead to

selves

the

this,

playing

'unfair' competition. In

arguing

Bad Samaritans constantly invoke the notion of the

'level

field'.

The Bad Samaritans demand

that developing countries should

not be allowed to use extra policy tools for protection, subsidies

and regulation, allowed to do

developing countries would be

Bad Samaritans argue, attacking from

the

were

as these constitute unfair competition. If they

so,

like a football

team,

uphill, while the other

team

(the rich countries) are struggling to climb the un-level playing

field.

Get rid of

on an equal

all

protective barriers

footing; after

all,

and make everyone compete

the benefits of the market can only

be reaped when the underlying competition

is

fair.^

Who

can

disagree with such a reasonable-sounding notion as 'the level playing field'?

do - when it comes to competition between unequal players. And we all should - if we are to build an international system that promotes I

economic development. tion is,

when

say,

A level

playing field leads to unfair competi-

the players are unequal.

the BraziHan national team

my 11-year-old

When

one team

it is

We

is

the

team

team of ii-year-old

field is

is

made up of the girls are

tilted,

rather than a level,

to ensure fair competition.

don't see this kind of tilted playing field only because the

Brazilian national a

way

only

game

fair that

and the other team

daughter Yuna's friends,

allowed to attack downhill. In this case, a playing field

in a football

wrong

in

is

girls,

itself.

never going to be allowed to compete with

and not because the idea of a

In fact, in

most

sports,

simply allowed to compete against each other not - for the obvious reason that

it

218

tilted

playing

unequal players are not

would be

tilted

unfair.

playing field or

SAO PAULO, OCTOBER 203/ Football and most other sports have age groups and gender separation, while boxing, wrestling, weightlifting

have weight classes - the heavyweight,

and many other sports

Muhammad Ali,

was simply

not allowed to box Roberto Duran, the legendary Panamanian with four

titles in lighter

finely.

ally

classes.

And

the classes are divided really

For example, in boxing, the lighter weight classes are

How

within two-or-three-pound (1-1.5-kilo) bands.

we think of

weight

liter-

that

is it

boxing match between people with more than a couple

a

weights

kilos' difference in

US and Honduras

is

and

unfair,

yet

we

accept that the

should compete on equal terms? In

golf, to take

another example, we even have an explicit system of 'handicaps' that give players advantages in inverse proportion to their playing skills.

game of unequal players. It pits against each other countries that range from, as we development econGlobal economic competition

omists

like to say,

fair that

we

'tilt

In practice, this

a

is

Switzerland to Swaziland. Consequently,

the playing

field' in

only

it is

favour of the weaker countries.

means allowing them

producers more vigorously and to put

to protect

and subsidize

stricter regulations

their

on foreign

investment."^ These countries should also be allowed to protect intellectual property rights less stringently so that they

'borrow' ideas from

more advanced

further help by transferring their technologies this will

have the added benefit

countries

can more actively

countries. Rich countries can

on favourable terms;

of making economic growth

more compatible with

more energy

efficient.^°

The Bad Samaritan rich countries may protest that all this *

Quite a few developing countries have chosen not to use these

economists have used

this as 'evidence' that these countries

freedom - which means that the for these countries.

WTO

However, what

may

poor

the need to fight global warming, as

rich country technologies tend to be far

liberal

in

tools.

is

'special

Some neo-

do not want policy

rules are not, in fact, restricting the options

look

like a

voluntary choice

is

likely to

have

been shaped by past conditionalities attached to foreign aid and IMF-World Bank

programmes, even ignoring

as well as the fear of future this

problem,

developing countries. are so is

much

It is

it is

punishment by the

not right for rich countries to

actually quite curious

in favour of choice

how

and autonomy do not

by developing countries.

219

rich countries. But,

make

the choice for

who when it

free-market economists hesitate to

oppose

it

BAD SAMARITANS treatment' for developing countries. But to

ment

is

to say that the

person receiving

call

it is

something special treat-

also obtaining

an unfair

we wouldn't call stair-lifts for wheelchair users or Braille text for the blind 'special treatment'. In the same way, we should not call the higher tariffs and other means of protection additionally made available for the developing countries 'special treatment'. They are advantage. Yet

just differential capabilities

- and

fair

- treatment

for countries with differential

and needs.

Last but not least, tilting the playing field in favour of developing

nations

is

not just a matter of

providing the economically acquire

new

capabilities

less

by

fair

treatment now.

more easily brings

forward the day when the gap between the players

becomes no longer necessary

What Suppose

am

I

right

is

and

to

tilt

the playing

and what

right

is

is

small and thus

field.

easy

that the playing field should be tilted in

favour of the developing countries. The reader can the chance of the

about

also

sacrificing short-term gains. Indeed,

allowing the poor countries to raise their capabilities

it

It is

advanced countries with the tools to

still

ask:

what

is

Bad Samaritans accepting my proposal and changing

their ways? It

may seem

pointless to try to convert those

are acting out of self-interest. But

ened

we can

still

self-interest. Since neo-liberal policies are

countries

Bad Samaritans who

appeal to their enlight-

making developing

grow more slowly than they would otherwise

do, the

Samaritans themselves might be better off in the long run allowed alternative policies that would faster. If

per capita income grows

at

let

only

if

Bad they

developing countries grow

i%

a year, as

America over the past two decades of neo-liberaUsm,

it

it

has in Latin

will take seven

decades to double the income. But if it grows at 3%, as it did in Latin America during the period of import substitution industrialization,

income would increase by

eight times during the

same period of time,

providing the Bad Samaritan rich countries with a vastly bigger market to exploit.

So

it is

actually in the long-term interest of even the

220

most

SAO PAULO, OCTOBER 203/ selfish

Bad Samaritan countries

would generate

faster

growth

to accept those 'heretical' policies that

in developing countries.

The people who are much harder to persuade are the ideologues - those who beUeve in Bad Samaritan policies because they think those policies are 'right', not because they personally benefit from

them

more

stub-

much,

As

if at all.

I

said earlier, self-righteousness

is

often

But even here there is hope. Once accused of Maynard Keynes famously responded: *When the facts change, I change my mind - what do you do, sir?' Many, although,

born than

self-interest.

inconsistency, John

unfortunately, not

all,

of these ideologues are

change, and have changed, their minds,

new

if

like

Keynes. They can

they are confronted with

new arguments, provided that make them overcome their previous The Harvard economist Martin Feldstein is a good

turns in real world events and

these are compelling

convictions.

enough

to

He was once the brains behind Reagan's neo-liberal policies, when the Asian crisis happened, his criticism of the IMF (cited

example.

but

in chapter

was more trenchant than those by some

i)

'left-wing'

commentators.

What should give us real hope is that the majority of Bad Samaritans are neither greedy nor bigoted.

things not because

we

Most of

us, including myself,

do bad

from them or

derive great material benefit

strongly believe in them, but because they are the easiest thing to do.

Many Bad reason that

Samaritans go along with wrong policies for the simple easier to

it's

be a conformist.

'inconvenient truths'

when you can

and newspapers

Why bother

in

say?

poor countries when you can

easily

blame

suggests that creativity, It is

it

own

Why

around looking

what most

just accept

to find out

ness or the profligacy of their people?

check up on your

Why go

what it

is

for

politicians

really

going on

on corruption,

lazi-

go out of your way to

when the 'official' version home of all virtues? - free trade, you name it.

country's history

has always been the

democracy, prudence,

exactly because

hope. They are people

most Bad Samaritans

who may be

are like this that

I

have

willing to change their ways,

if

book has

they are given a

more balanced

provided. This

not just wishful thinking. There was a period, between

is

picture,

which

I

hope

this

the Marshall Plan (announced sixty years ago, in June 1947) and the

221

BAD SAMARITANS rise

of neo-liberalism in the 1970s,

when

the rich countries, led by the

US, did not behave as Bad Samaritans, as

The at least

fact that rich countries

one occasion

historical episode

discussed in chapter 2/^

did not behave as Bad Samaritans on

in the past gives us hope.

The

fact that that

produced an excellent outcome economically -

the developing world has never gives us the

I

done

moral duty to learn from that experience.

222

for

better, either before or since

-

Notes

Prologue 1

The Korean income

figure

is

from H.-C. Lee

Tongsa [Economic History of Korea]

(1999),

(Bup-Moon

Hankook Gyongje

Sa, Seoul)

[in

Korean],

Appendix Table 1. The Ghanaian figure is from C. Kindleberger Economic Development (McGraw-Hill, New York), Table 1-1. 2

(1965),

http://www.samsung.com/AboutSAMSUNG/SAMSUNGGroup/Time-

lineHistory/timelineoi.htm 3 Calculated Statistics

from A. Maddison (2003), The World Economy: Historical Paris), Table ic (UK), Table 2c (USA), and Table 5c (Korea).

(OECD,

4 Korea's per capita income in 1972 was $319 (in current dollars). $1,647 in 1979.

Its

It

was

exports totaled $1.6 biUion in 1972 and grew to $15.1 billion

in 1979. The statistics are from Lee Appendix Table 7 (exports).

(1999),

Appendix Table

1

(income) and

per capita income was $13,980. In the same year, per capita income was $14,350 in Portugal and $14,810 in Slovenia. The figures are from World Bank (2006), World Development Report 2006 - Equity and Development 5 In 2004, Korea's

(Oxford University Press,

New York),

Table

1.

6 Life expectancy at birth in Korea in i960 was 53 years. In 2003, years. In the

same

year, life

expectancy was

51.6 years in Haiti

and

it

was 77

80.5 years

Korea was 78 per 1,000 live births in i960 and 5 per 1,000 live births in 2003. In 2003, infant mortality was 76 in Haiti and 4 in Switzerland. The i960 Korean figures are from H-J. Chang (2006), The East Asian Development Experience - the Miracle, the Crisis, and the Future (Zed Press, London), Tables 4.8 (infant mortality) and 4.9 (life expectancy). All the 2003 figures are from UNDP {200^), Human Development Report 2005 (United Nations Development Program, New York), Tables 1 (Hfe expectancy) and 10 (infant mortality). in Switzerland. Infant mortality in

223

BAD SAMARITANS 7

The

Amsden

New York) and

H.-J.

- The 8

He

Korean miracle can

criticisms of the neo-Hberal interpretation of the

be found in A.

(1989), Asia's

Chang

Any

continues:

and her navigation

the Future

nation which

.

.

.

(Zed Press, London).

has raised her manufacturing power

to such a degree of

development that no other nation

can sustain free competition with her, can do nothing wiser than

away

Press,

The East Asian Development Experience

(2007),

and

Miracle, the Crisis,

Next Giant (Oxford University

to

throw

these ladders of her greatness, to preach to other nations the benefits

of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error,

and has now

for the first time succeeded in discov-

ering the truth'. Friedrich List (1841), The National System of Political Economy, translated

from the

original

German

edition published in 1841

by Sampson

Lloyd in 1885 (Longmans, Green, and Company, London), pp. 295-6. 'Kicking

away the

Chang

ladder'

is

(Anthem

Perspective

my academic book on the subject, H-J. Ladder - Development Strategy in Historical

also the title of

(2002), Kicking

Away

Press,

the

London).

Chapter 1

Friedman (2000), The Lexus and

T.

York), p.

i

the Olive Tree

(Anchor Books,

New

31.

2 Friedman (2000), p. 105. 3

Friedman (2000),

4 In

1961, Japan's

p. 105.

per capita income was $402, on a par with those of Chile

($377), Argentina ($378)

and South Africa

($396).

The data

Kindleberger (1965), Economic Development (McGraw-Hill, 5

This happened

when

the Japanese prime minister,

are

from C.

New York).

Hayao

Ikeda, visited

France in 1964. 'The Undiplomat', Time, 4 April 1969. 6

J.

Sachs

& A.

Warner

(1995),

Integration', Brookings Papers

'Economic Reform and the Process of Global

on Economic

Activity, 1995, no.

1,

and M. Wolf

(2004), Why Globalisation Works (Yale University Press, New Haven and London) are

some of

versions of

the

this.

more balanced and J.

Bhagwati

better informed, but ultimately flawed,

(1985), Protectionism

(The

MIT

Press,

Cambridge,

Massachusetts) and J. Bhagwati (1998), A Stream of Windows - Unsettling Reflections on Trade, Immigration, and Democracy (The MIT Press, Cambridge, Massachusetts) offer a less balanced but probably more representative version. 7 R. Ruggiero (1998), 'Whither the Trade System Next?' in

Hirsch

(eds.).

The Uruguay Round and Beyond - Essays

Dunkel (The University of Michigan

Press,

224

Ann

in

Arbor),

J. Bhagwati &; M. Honour of Arthur

p. 131.

NOTES 8 Britain

first

used unequal

treaties in Latin

America, starting with Brazil in

1810, as the countries in the continent acquired political

independence. Starting

with the Nanking Treaty, China was forced to sign a series of unequal

treaties

over the next couple of decades. These eventually resulted in a complete loss

of tariff autonomy, and, very symbolically, a Briton being the head of customs for 55 years

- from

1863 to 1908.

signed various unequal

treaties,

From

1824 onwards, Thailand (then Siam)

which ended with the most comprehensive

one in 1855. Persia signed unequal treaties in 1836 and 1857, and the Ottoman Empire in 1838 and 1861. Japan lost its tariff autonomy following a series of unequal

treaties

it

signed after

its

opening in

1853,

but that did not stop

it

on Korea in 1876. The larger Latin American countries were able to regain tariff autonomy from the 1880s, before Japan did in 1911. Many others regained it only after the First World War, but Turkey had to wait for tariff autonomy until 1923 and China until 1929. See H-]. Chang (2002), Kicking Away the Ladder - Development Strategy in Historical from forcing an unequal

Perspective

(Anthem

treaty

Press,

London), pp. 53-4.

9 For example, in his controversial study, In Praise of Empires, the Indianborn British-American economist Deepak Lai never mentions the role of colonialism and unequal treaties in spreading free trade. See D. Lai (2004), In Praise of Empires

-

and Order (Palgrave Macmillan,

Globalisation

New

York and Basingstoke). 10 See N. Ferguson (2003), Empire

-

How

Britain

Made

the

Modern World

(Allen Lane, London). 11

After they gained independence, growth accelerated markedly in devel-

oping Asian countries. In

all 13

Asian countries (Bangladesh, Burma, China,

India, Indonesia, Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri

Lanka, Taiwan and Thailand) for which data were available, annual per

The growth rate and the post-colonial period (1950-99) ranged between 1.1% points (Bangladesh: from -0.2% to 0.9%) to 6.4% points (Korea: from -0.4% to 6.0%). In Africa, per capita income growth rate was around 0.6% during the colonial period (1820-1950). In the 1960s and the 1970s, when most countries in the continent became independent, growth rates rose to 2% for the middle-income countries. Even capita

income growth

jump between

rates increased after de-colonization.

the colonial period (1913-1950)

the poorest countries, which usually find at

it

difficult to

grow, were growing

1%, double the rate of the colonial period. H-J. Chang, (2005),

Developing Countries Need

Deny Developing

Tariffs

-

How WTO NAMA

Why

Negotiations Could

Countries' Right to a Future (Oxfam, Oxford,

and South

Centre, Geneva), downloadable at http://www.southcentre.org/publications/

SouthPerspectiveSeries/WhyDevCountriesNeedTariffsNew.pdf )

and

7.

225

,

Tables

5

BAD SAMARITANS 12

Maddison

Table

(2003),

The World Economy: Historical Statistics (OECD,

Paris),

8.b.

17% (Mexico, 1870-1899) M. Clemens & J. Williamson and 47% (Colombia, (2002), 'Closed Jaguar, Open Dragon: Comparing Tariffs in Latin America and Asia before World War 11', NBER Working Paper, no. 9401 (National Bureau of Economic Research, Cambridge, Massachusetts). Between 1820 and 1870, when they were subject to unequal treaties, per capita income stood still in Latin America (growth rate of -0.03% per year). Annual per capita income growth rate in Latin America rose to 1.8% during 1870-1913, when most countries in the region acquired tariff autonomy, but even that was no match for the 3.1% growth rate in per capita income that the continent achieved during the 1960s and the 1970s. The Latin American income growth figures are from Maddison (2003), Table 8.b. 13

Average

tariffs in

Latin America were between 1900-1913). See Table 4 in

14 For example,

between 1875 and

tured products rose from

Germany, from 8-10%

Chang

See H-J. 15

Chang

16 Sachs

to

(2002), p.

17,

Table

(2005), p. 63, Tables 9

and Warner

1913, the

average tariff rates on manufac-

3-5% to 20% in Sweden, from 4-6% 18% in Italy and from 10-12% to 20%

13%

in

2.1.

and

(1995), p. 17.

to

in France.

10.

The

full

quote of the relevant passages:

'Export pessimism combined with the idea of the big push to produce the highly influential view that open trade

would condemn developing

countries to long-term subservience in the international system as raw materials exporters tage,

it

and manufactured goods importers. Comparative advan[sic] Latin America

was argued by the Economic Commission of

(ECLA) and

others,

was driven by short-term considerations that would

prevent raw materials exporting nations from ever building up an industrial base.

The protection of infant

industries

was therefore

vital if the

developing

countries were to escape from their overdependence on raw materials production.

These views spread within the United Nations system

(to regional offices

of the United Nations Economic Commission), and were adopted largely by

on Trade and Development (UNCTAD). In new part IV of the General Agreement on Tariffs and Trade (GATT), which estabhshed that developing countries should enjoy the right to asymmetric trade policies. While the developed countries should open their markets, the developing countries could continue to protect their own markets. Of course, this "right" was the proverbial rope on which to hang one's own economy!' the United Nations Conference

1964 they found international legal sanction in a

17

According to an interview in the magazine

Ve/'a, 15

November

1996, as

and cited by G. Palma (2003), 'The Latin American Economies During the Second Half of the Twentieth Century - from the Age of ISI to

translated

226

NOTES the Age of

The End of History'

18

Chang

Chang

in H-J.

Economics (Anthem Press, London),

p.

(ed.),

Rethinking Development

149, endnotes

15

16.

(2002), p. 132, Table 4.2.

19 A. Singh (1990), 'The State of Industry in the Third

Analytical

and

and Policy

Issues',

Working

Institute for International Studies,

World

in the 1980s:

Paper, no. 137, April 1990, Kellogg

Notre

Dame

University.

20 The 1980 and 2000 figures are calculated respectively from the 1997 issue (Table 12) and the 2002 issue (Table 1) of World Bank's World Development Report (Oxford University Press, 21

M. Weisbrot,

New York).

D. Baker and D. Rosnick (2005), 'The Scorecard on

Diminished

September 2005, Center for DC, downloadable from

Development:

25 Years of

Economic and

Policy Research (CEPR), Washington,

Progress',

http://www.cepr.net/publications/development_2005_09.pdf 22

Some commentators argue that

the world it

more

equal. This result

is

has happened because, to put

it

richer,

highly disputed, but, even

if it

made

were

true,

become

crudely, a lot of Chinese have

not because income distribution has become more equal within coun-

Whatever happened

tries.

recent advance in globalization has

to 'global' inequality, there

income inequality has increased over the past 20-25 years.

in

most

is little

countries, including

On this debate, see A. Cornia

dispute that

China

itself,

(2003), 'Globalisation

and the Distribution of Income between and within Countries' in H-J. Chang (ed.), Rethinking Development Economics (Anthem Press, London) and B. Milanovic (2005), Worlds Apart - Measuring International and Global Inequality (Princeton University Press, Princeton and Oxford). and A. Subramaniam (2004), 'From "Hindu Growth" to Growth Acceleration: The Mystery of Indian Growth Transition', mimeo., Kennedy School of Government, Harvard University, March 2004. 23 For example, see D. Rodrik

Downloadable from http://ksghome.harvard.edu/~drodrik/Indiapaperdraft March2.pdf

GDP growth rate between 1975 and 2003 was 4% in 4.9% in Singapore and 6.1% in Korea. See UNDP (2005), Human Development Report 2005 (United Nations Development Program, New York). 24 Annual per capita Chile,

25 Chile's per capita

was $5,293

in 1970,

income

when

(in 1990 dollars, as all the following figures are)

Salvador Allende, the left-wing president

who was

subsequently deposed by Pinochet, came to power. Despite the bad press

Allende has been getting in the

official history

of capitalism, per capita income

in Chile rose quite a lot during his presidency

$5,492 in 1972. After the coup, Chile's per capita at $4,323 in 1975. 1981,

From

1976,

it

-

it

was $5,663

income

started rising again

fell,

and peaked

and bottom

in 1971

hitting the

at $5,956 in

mainly thanks to the financial bubble. Following the financial crash,

227

it

BAD SAMARITANS back to $4,898 in 1983 and recovered the pre-coup $5,590. The data are from Maddison (2003), Table 4c.

fell

level

only in 1987,

at

26 Public Citizen's Global Trade Watch (2006), 'The Uses of Chile: Hov^ Politics

Trumped Truth

in the Neo-liberal Revision of Chile's Development',

Discussion Paper, September 2006. Downloadable

at http://www.citizen.org/

documents/chilealternatives.pdf.

The output

27 the

WTO

is from World Bank (2006). The trade figure is from World Trade 2004, 'Prospects for 2005: Developing

figure

(2005),

countries' goods trade share surges to 50-year peak' (Press Release), released

on

14 April, 2005.

The FDI

from various

figures are

issues of

UNCTAD,

World Investment Report.

M.

28

Feldstein (1998), 'Refocusing the IMF', Foreign Affairs, March/April

1998, vo. y/y no.

2.

29 The decisions The US happens

most important areas at the IMF need a 85% majority.

in 18

own

to

veto any proposal that

it

17.35% of

does not

share. Therefore,

its

like.

At

least three

it

can unilaterally

of the next four biggest

shareholders are needed in order to block a proposal (Japan with 6.22%;

Germany with 6.08%; 21 issues that require a

Britain or France each with 5.02%). There are also

70% majority. This means that any proposal regarding

these issues can be defeated

if

holders band together against the

IMF

in a

the above-mentioned five biggest share-

it.

See A. Buira (2004), 'The Governance of

Global Economy', G24 Research Paper, downloadable

at

http://g24.org/buiragva.pdf

30 Luddites are the early-i9th-century English reverse the Industrial Revolution

Economic Forum

textile

in Davos, Switzerland, in 2003,

the chairman of the International

safe for stagnation

.

.

.

whose

who

tried to

Richard McCormick,

who want

hostility to business

BBC

Mr

Chamber of Commerce,

globalization protesters 'modern-day Luddites

the poor'. As reported by the

workers

by destroying machines. At the World called the anti-

make the world makes them the enemy of to

website on 12 February, 2003.

Chapter 2 1

Richard West (1998), Daniel Defoe - The Life and Strange, Surprising

Adventures (Carroll

&

Graf Publishers,

scheider (1990), Daniel Defoe

- His

Inc.,

New

Life (Johns

York) and Paula BackHopkins University Press,

Baltimore). 2 However, he was not the III

and Edward

I,

first

to try

it.

Earlier English kings, such as

Henry

tried to recruit Flemish weavers. In addition to recruiting

228

NOTES Flemish weavers, Edward

III centralized trade in raw wool and imposed strict on wool exports. He banned the import of woollen cloth, thus opening up space for English producers who could not compete with the then dominant Flemish producers. He was also a very good political propagandist who understood the power of symbols. He and his courtiers wore only English cloth to set an example for his 'Buy English' (like Gandhi's Swadeshi) policy. He ordered the lord chancellor (who presides over the House of Lords) to sit on, of all things, a woolsack - a tradition that has survived until today - to emphasize the importance of wool trade for the

control

country. 3

Henry VII

'set

the Manufacture of

Wool on Foot

in several Parts of his

Country, as particularly as Wakefield, Leeds, and Hallifax, in the West Riding of Yorkshire, a Country pitch'd upon for the Work, being

fill'd

its

particular Situation, adapted to

with innumerable Springs of Water, Pits of Coal, and

other Things proper for carrying on such a Business

(A Plan,

.' .

.

p. 95, italics

original)

4 Henry VII skill'd in

'secretly

procured a great

the Manufacture, to

many

Foreigners,

come over and

who were perfectly own People here

instruct his

in their Beginnings' (A Plan, p. 96).

G. Ramsay (1982), The English Woollen London and Basingstoke), p. 61.

5

Industry, 1500-1750 (Macmillan,

Henry VII realized 'that the Flemings were old in the business, long exand turn'd their Hands this Way and that Way, to new Sorts and Kinds of Goods, which the English could not presently know, and when known, had not Skill presently to imitate: And that therefore he must proceed 6

perience'd,

gradually'.

So he 'knew

.

.

.

that

it

was an Attempt of such a Magnitude, as and Caution, that it was not to be

well deserv'd the utmost Prudence

attempted rashly; so

it

was not

to be push'd with too

much Warmth' (A

Plan,

p. 96, italics original).

7

Henry VII

'did not

immediately prohibit the exporting the Wool to the

Flemings, neither did he,

till

some Years

after,

load the Exportation of

any more Duties than he had before' {The Plan,

raw wool exports, Defoe

says

Henry VII was

p. 96).

'so far

.

.

compleat his Design, that he could never come to a exporting the

Wool

in this Reign'

(The Plan,

p. 96).

As

for the

it

with

ban on

from being able

to

total Prohibition

of

.

Thus, although Henry

VII 'did once pretend to stop the Exportation of the Wool, he conniv'd

at

the Breach of his Order, and afterwards took off the Prohibition entirely' (A Plan, p. 97).

8

A

Plan, pp. 97-8.

9 Cloth exports (mostly woollen) accounted for around

229

70%

of English

BAD SAMARITANS exports in 1700 and was

Musson

still

over

50%

of total exports until the 1770s. A.

The Growth of British Industry

(1978),

(B.T. Batsford Ltd.,

London),

p. 85.

10 In substance, however, Walpole deserves the

government head enjoyed such wide-ranging was

also the first to take

famous 11

official

up residence

because no previous

title

political

power

(in 1735) at 10

as his.

Downing

Walpole

Street, the

residence of the British prime minster.

Walpole also attracted vehement

criticism,

mainly for

his corruption,

from

Dr Samuel Johnson

other important literary personages of his time, such as

(A Dictionary of the English Language), Henry Fielding {Tom Jones) and John Beggar's Opera). It seems as if you did not count in the Georgian

Gay {The literary

world unless you had something to say against Walpole. His

literary

connection does not stop there. His fourth son, Horace Walpole, sometime politician,

was

a novelist, considered to

Horace Walpole

genre.

after the Persian story Sri

12

be a founder of the Gothic novel

also credited with coining the

term

'serendipity',

of the mysterious island of Serendip (believed to be

Lanka).

As

lated

cited in

F.

from the

in 1885 13

is

For

List (1841),

original

The National System of Political Economy, transedition published in 1841 by Sampson Lloyd

German

(Longmans, Green, and Company, London), details, see:

p. 40.

N. Brisco (1907), The Economic Policy of Robert Walpole

(The Columbia University

Press,

New York), pp. 131-3, pp. 148-55, pp. 169-71;

R. Davis (1966), 'The Rise of Protection in England, 1689-1786',

Economic

McCusker (1996), 'British Mercantilist Policies and the American Colonies' in S. Engerman & R, Gallman

History Review, vol.

(eds.),

19,

no.

2,

pp. 313-4;

J.,

The Cambridge Economic History of the United

Colonial Era (Cambridge University Press, Cambridge), (1984), England's Apprenticeship, 1603-1763,

New York),

2nd

ed.

Vol.

States, p. 358;

1:

The

C. Wilson

(Longman, London and

p. 267.

14 Export subsidies (then called 'bounties') were extended to

new

export

and gunpowder (1731), while the existing and refined sugar were increased in 1731 and

items, like silk products (1722)

export subsidies to sailcloth 1733 respectively. 15 In Brisco's

words, 'Walpole understood that, in order successfully to

a strongly competitive market, a high standard of goods

sell

in

was necessary. The

rival, would lower the quality on other English-made goods. high standard, and that was to

manufacturer, being too eager to undersell his

of his wares which, in the end, would

reflect

There was only one way to secure goods of a regulate their manufacture

by governmental supervision'

16 Brisco (1907) points out that the

first

230

(Brisco, 1907, p. 185).

duty drawback was granted under

NOTES William and Mary to the exportation of beer,

ale,

mum,

cider

and perry

(p. 153)-

The figures for Germany, Switzerland and the Low Countries (Belgium and the Netherlands were united during 1815-30) are from P. Bairoch (1993), Economics and World History - Myths and Paradoxes (Wheatheaf, Brighton), 17

p. 40, table 3.3.

difficulties

Bairoch did not provide the French figure, because of the

involved in the calculation, but John Nye's estimate of the French

overall (not just

manufacturing)

based on customs receipts puts

tariff rate

the figure at 20.3% for the 1821-5 period. Given that the corresponding British figure

was 53.1%, which

is

in line with Bairoch's

45-55%,

sonable to say that the average French manufacturing

it

may not be

unrea-

was around

tariff rate

20%. See J. Nye (1991), 'The Myth of Free-Trade Britain and Fortress France: and Trade in the Nineteenth Century', Journal of Economic History^

Tariffs

vol. 51. no.

1.

18 Brisco (1907) neatly cial

and

sums up

of Walpole's policy: 'By commer-

this aspect

made

industrial regulations attempts were

to restrict the colonies

to work up, to way compete with the mother

raw materials which England was

to the production of

discourage any manufactures that would any

country, and to confine their markets to the English trader and manufacturer' (p. 165).

19 Willy de Clercq, the

European commissioner

for external

economic

rela-

tions during the late 1980s, intones that '[o]nly as a result of the theoretical

legitimacy of free trade

when measured

against widespread mercantilism

Hume, Adam Smith

provided by David Ricardo, John Stuart Mill and David

and others from the relative stability

Scottish Enlightenment,

provided by the

UK

and

as the only

as a

and

consequence of the benevolent

relatively

superpower or hegemon during the second half of the nineteenth century,

was

free trade able to flourish for the first time'.

W de Clercq

(1996), 'The

End of History for Free Trade?' in J. Bhagwati & M. Hirsch (eds.), The Uruguay Round and Beyond - Essays in Honour of Arthur Dunkel (The University of Michigan 20

J.

Press,

Ann

Bhagwati

Massachusetts),

(1985), p. 18.

of today, attaches so cover of the

Arbor),

book

p. 196.

(The

Protectionism

MIT

Press,

Cambridge,

Bhagwati, together with other free-trade economists

much importance

a 1845 cartoon

to this episode that

from the

political satire

he uses

as the

magazine. Punch,

depicting the prime minister, Robert Peel, as a befuddled boy being firmly led to the righteous path of free trade

by the

stern, upright figure

of Richard

Cobden, the leading anti-Corn-Law campaigner. 21 C. Kindleberger (1978),

'Germany's Overtaking of England, 1806 to 1914'

(chapter 7) in Economic Response: Comparative Studies in Trade, Finance,

Growth (Harvard University

Press,

Cambridge, Massachusetts),

231

p. 196.

and

BAD SAMARITANS 22 The passage

is

from The Political Writings of Richard Cobden, 1868, William vol. 1, p. 150; as cited in E. Reinert (1998), 'Raw Materials

Ridgeway, London,

- Or why List (the protectionist) and Cobden (the free trader) both agreed on free trade in corn in G. Cook (ed.), The Economics and Politics of International Trade - Freedom and Trade, Volume 2 (Routledge, London), p. 292. in the History of

Economic

Policy

23 See D. Landes (1998), The Wealth

&

Company, New York),

24 Bairoch

and Poverty of Nations (W.W. Norton

p. 521.

One French Commission

(1993), p. 46.

of Inquiry in the early

19th century also argued that 'England has only arrived at the

summit of

prosperity by persisting for centuries in the system of protection and prohi-

Cited in W. Ashworth (2003), Customs and Excise - Trade, Production, and Consumption in England, 1640-1843 (Oxford University Press, Oxford)

bition'.

p. 379.

25

As

cited in List (1841), p. 95. Pitt

he was 26 The

is

cited as the Earl of

Chatham, which

at the time. full

quotation

is:

'Were the Americans, either by combination or by

any other sort of violence,

to stop the

importation of European manufac-

by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital

tures, and,

into this

employment, they would retard instead of accelerating the further

increase in the value of their annual produce,

and would obstruct instead

of promoting the progress of their country towards real wealth and greatness.'

Adam

Smith

(1776),

edition, pp. 347-8. Smith's

The Wealth of Nations, the 1937

French economist Jean-Baptise Say, Poland', the

Reported in

US

Random House

view was later echoed by the respected 19th-century

who

is

reported to have said that,

'like

should rely on agriculture and forget about manufacturing.

List (1841), p. 99.

They are: (i) modern terminology); (ii) 'prohi-

27 Hamilton divided these measures into eleven groups. 'protecting duties' (tariffs,

if

translated into

bition of rival articles or duties equivalent to prohibitions' (import bans or

prohibitive tariffs);

(iii)

'prohibition of the exportation of the materials of

manufactures' (export bans on industrial inputs); (subsidies); (v)

(iv)

'pecuniary bounties'

'premiums' (special subsidies for key innovation);

exemption of the materials of manufactures from duty' (import

(vi) 'the

liberaliza-

which are imposed on the on imported industrial inputs); (viii) encouragement of new inventions and discoveries, at home, and of the

tion of inputs); (vii) 'drawbacks of the duties

materials of manufactures' (tariff rebate 'the

introduction into the United States of such as countries; particularly those,

which

relate to

232

may

have been

made

in other

machinery' (prizes and patents

NOTES for inventions); (ix) 'judicious regulations for the inspection of

manufac-

tured commodities' (regulation of product standards); (x) 'the facilitating of

pecuniary remittances from place to place' (financial development); and 'the facilitating

(xi)

of the transportation of commodities' (transport develop-

ment). Alexander Hamilton (1789), Report on the Subject of Manufactures as reprinted in Hamilton - Writings (The Library of the America, New York, y

2001), pp. 679-708.

28 Burr and Hamilton were friends in their younger days. However, in 1789,

Burr shifted his allegiance and accepted the state

office of attorney general of the

of New York from Governor George Clinton, despite having campaigned

for Hamilton's candidate. In 1791,

become

Burr defeated Philip Schuyler, Hamilton's

and then used the office to oppose Hamilton's policies. Hamilton, in turn, opposed Burr's candidacy for the vice presidency in 1792 and his nomination as the minister (ambassador) to France in 1794. To top it all, Hamilton snatched the presidency away from Burr's father-in-law, to

hands and forced him

to

a senator,

become

the vice president in the 1800 election. In

- John Adams and Charles Pinckney from the Federalist Party and Thomas Jefferson and Aaron Burr from the opposing Democratic Republican Party. In the electoral-college vote, the two Democratic Republican candidates came out ahead, with Burr unexpectedly tying with Jefferson. When the House of Representatives had to choose between the two candidates, Hamilton swung the Federalists towards Jefferson. This was done despite the fact that Hamilton opposed Jefferson almost as much, because he thought Burr was an unprincipled opportunist, whereas Jefferson was at least principled, albeit guided by wrong principles. As a result. Burr had to satisf}^ himself with the job of vice president. And then, in 1804, when Burr was running for the New York state governorship, Hamilton waged a verbal campaign against Burr, again preventing him from getting the job he wanted. The above details are from J. Ellis (2000), Founding Brothers - The Revolutionary Generation (Vintage Books, New York), pp. 40-1 that election, four candidates ran

and

J.

Garraty

& M.

Carnes (2000), The American Nation

United States, loth edition (Addison Wesley Longman,

-A

History of the

New York), pp. 169-70.

29 Similarly, Latin American industrial development was given an important

impetus by an unexpected disruption in international trade caused by the Great Depression during the 1930s.

30 Hamilton proposed to issue government bonds to finance public infrastructural investments.

people

at the time,

The

idea of 'borrowing to invest'

including

Thomas

Jefferson.

It

was suspect

to

many

did not help Hamilton's

cause that government borrowing in Europe at the time was usually used to finance wars or extravagant in persuading Congress,

life style

buying

of rulers. Eventually Hamilton succeeded

Jefferson's

233

consent by agreeing to

move

the

BAD SAMARITANS capital to the

wanted

to set

owned by

South - to the newly built Washington, DC. Hamilton also

up

a 'national bank'.

the government (20%)

The idea was that a bank that was partly and acting as the government's banker

could develop and provide stability to the financial system.

It

could give

by issuing bank notes, using its special a government-backed institution. It was also expected that the

extra liquidity to the financial system

position as

bank could finance nationally important industrial projects. This idea, too, was considered dangerous by Jefferson and his supporters, who considered banks to be essentially vehicles of speculation and exploitation. For them, a semi-public bank was even worse, as it is based on an artificially created monopoly. To diffuse such potential resistance, Hamilton asked for a bank with a finite 20-year charter, which was granted, and the Bank of the USA was set up in 1791. When its charter expired in 1811, it was not renewed by Congress. In 1816, another Bank of the USA (the so-called the Second Bank of the USA) was set up under another 20-year charter. When it came up for renewal in 1836, its charter was not renewed (more on this in chapter 4). After that, the US did without even a semi-public bank for nearly 80 years, until the Federal Reserve Board (its central bank) was set up in 1913.

The exhibition was called 'Alexander Hamilton: The Man Who Made Modern America' and was held between September 10 2004 and February 28 2005. See the web page at:http//www.alexanderhamiltonexhibition.org. 31

32

The Whig Party was the main

rival to the

then dominant Democratic

Party (formed in 1828) between the mid-i830s and the early 1850s, and

produced two presidents

in five elections

between 1836 and 1856 - William

Harrison (1841-4) and Zachary Taylor (1849-51). 33 Cited in Garraty

34 The quote

&

from

is

Carnes (2000),

The American Historical Review, 35

One

leading tionist

p. 405.

R. Luthin (1944),

'Abraham Lincoln and the

Tariff,

vol. 49, no. 4, p. 616.

of Lincoln's key economic advisors was Henry Carey, the then

US

who was the son of a leading early American protecMathew Carey, and himself a prominent protectionist

economist,

economist,

economist. Few people have heard of Carey today, but he was regarded as

one of the leading American economists of his time. Karl Marx and Friedrich Engels even described in their letter to

him

only American economist of importance' March 1852, in K. Marx & F. Engels (1953),

as 'the

Weydemeyer,

Letters to Americans, 1848-93:

5

A

Selection (International Publishers,

New

and Labour, translated by S. Neely from the original French edition published in 1988 by Paris, Publications de la Sorbonne (University of Illinois Press, Urbana and York), as cited in O. Fraysse (1994), Lincoln, Land,

Chicago),

p. 224,

note 46.

234

NOTES 36 The consolidation of a protectionist trade policy regime was not the only

economic legacy of Lincoln's presidency. In 1862, in addition to the Homestead one of the largest land reform programmes in human history, Lincoln

Act,

oversaw the passage of the Morill Act. This act established the 'land grant' colleges,

which helped boost the country's research and development (R&D) which subsequently became the country's most important

capabilities,

competitive weapon. Although the tural research

from the

US government had

1830s, the Morrill

of government support for

R&D

in the

supported agricul-

Act was a watershed in the history

USA.

37 Bairoch (i993)> PP- 37-8. 38 Bhagwati (1985),

p. 22, f.n. 10.

39 Bairoch (i993)» PP- 51-2.

40 In reviewing my own book. Kicking Away the Ladder, the Dartmouth economist Doug Irwin argues that 'the United States started out as a very wealthy country with a high literacy ship, stable

rate,

government and competitive

widely distributed land owner-

political institutions that largely

guaranteed the security of private property,

a large internal

with free trade in goods and free labor mobility across regions,

market Given

etc.

these overwhelmingly favorable conditions, even very inefficient trade

economic advances from taking place'. Away the Ladder Development Strategy in Historical Perspective (Anthem Press, London, 2002), policies could not have prevented

D. Irwin (2002), review of H-J. Chang, Kicking

http://eh.net/bookreviews/library/0777.shtml. 41 These included: 'voluntary' export restraints against successful foreign

exporters

(e.g.,

Japanese car companies); quotas on

imports

(through

(compare

this

the

Multi-Fibre Agreement);

textile

subsidies

with the repeal of the Corn Laws in Britain); and anti-dumping

duties (where 'dumping'

is

defined by the

US government

biased against foreign companies, as repeated

WTO

(2002), chapter

2,

pp. 32-51

and H-J.

Chang

in a

way

that

is

rulings have shown).

42 For further details on the other countries dealt with in

Chang

and clothing

agricultural

(2005),

this chapter, see

Why

Developing

Countries Need Tariffs - How WTO NAMA Negotiations Could Deny Developing Countries' Right to a Future,

Oxfam, Oxford, and South Centre, Geneva

(http://www.southcentre.org/publications/SouthPerspectiveSeries/WhyDev CountriesNeedTariffsNew.pdf) 43 See the evidence presented in

Nye

(1991).

44 The average industrial tariff rates were 14% in Belgium (1959), 18% in Japan (1962) and Italy (1959), around 20% in Austria and Finland (1962) and

30%

in France (1959). See

Chang

(2005), Table

235

5.

BAD SAMARITANS Chang (2005), Table 5. In 1973, the EEC countries included Belgium, Denmark, France, Italy, Luxemburg, the Netherlands, UK and West Germany.

45

46 R. Kuisel

and

(1981), Capitalism

Univesity Press, Cambridge),

47 Irwin (2002)

is

the State in

p. 14.

an example.

48 In their celebrated article cited in chapter

Warner to

discusses

adopt 'wrong'

how 'wrong' theories policies.

and the Process of Global 1995, no.

1,

Modern France (Cambridge

J.

&

Sachs

1,

Jeffrey Sachs

and Andrew

have influenced developing countries

A.

Warner

(1995),

Integration', Brookings Papers

'Economic Reform

on Economic Activity^

pp. 11-21.

WTO

collapsed, Willem Buiter, the distin49 When the Cancun talk of the guished Dutch economist who was then the chief economist of the EBRD

(European Bank for Reconstruction and Development) argued: 'Although the leaders of the developing nations rule countries that are,

poor or very poor,

it

on

average,

does not follow that these leaders necessarily speak on

behalf of the poor and poorest in their countries.

corrupt and repressive

elites that

Some

do; others represent

feed off the rents created by imposing

and other distortions, at the expense of their poorest and most defenceless citizens'. See Willem Buiter, 'If anything is rescued from Cancun, politics must take precedence over economies', letter to the editor, Financial Times, September 16 2003. barriers to trade

50 The growth rates in this paragraph are from A. Maddison (2003), The

World Economy: Historical

(OECD,

Statistics

Paris), Table S.b.

Chapter 3 1

Willem Buiter (2003),

'If

anything

is

rescued from Cancun, politics must

take precedence over economies', letter to the editor, Financial Times,

September 2

16 2003.

Most of the Mexican diaspora

are the descendants of the

are recent

former Mexicans

immigrants but some of them

who became Americans due

the annexation of large swathes of the Mexican territory

- including

all

to

or

modern California, New Mexico, Arizona, Nevada, Utah, Colorado and Wyoming - after the US-Mexico War (1846-48) under the Treaty of Guadalupe Hidalgo (1848). parts of

The numbers are from M. Weisbrot et al. (2005), 'The Scorecard on Development: 25 Years of Diminished Progress', Center for Economic and Policy Research (CEPR), Washington, DC, September, 2005

3

(http://www.cepr.net/publications/development 2005 09.pdf), Figure

236

1.

NOTES 4 Mexican per capita income experienced a

fall

in 2001 (-1.8%),

2002 (-0.8%),

and 2003 (-0.1%) and grew only by 2.9% in 2004, which was barely enough to bring the income back to the 2001 level. In 2005, it grew at an estimated rate of 1.6%. This means that Mexico's per capita income at the end of 2005 was 1.7% higher than it was in 2001, which translates into an annual growth rate of around 0.3% over the 2001-5 period. The 2001-2004 figures are from

World Bank annual

the relevant issues of the

report,

World Development

Report (World Bank, Washington, DC). The 2005 income growth figure (3%) is from J. C. Moreno-Brid & I. Paunovic (2006), 'Old Wine in New Bottles?

- Economic Policymaking in Left- of- center Governments in Latin America', Revista - Harvard Review of Latin America^ Spring/Summer, 2006, p. 47, Table. The 2005 population growth rate (1.4%) is extrapolated from World Bank (2006), data for 2000-4, found in World Development Report 2006 (World Bank, Washington, DC), p. 292, Table 1. 5 J.

Mexico's per capita income during 1955-82 grew at over 6%, according to C.

Moreno-Brid

Back on

NAFTA and 'The Mexican Economy: A Look

et al. (2005),

North Carolina International

a Ten-Year Relationship',

Commerce

Register, vol. 30.

As Mexico's population growth

rate

Law and

during

this

period was 2.9% per annum, this gives us per capita income growth rate of

around 3.1%. The population growth rate is calculated from A. Maddison (2001), The World Economy - A Millennial Perspective (OECD, Paris), p. 280, Table C2-a.

Chang

6 For further details, see H-J.

Need

Tariffs

- LIow

WTO NAMA

Countries' Right to a Future,

(2005),

Why

Developing Countries

Negotiations Could

Deny Developing

Oxfam, Oxford, and South Centre, Geneva

(http://www.southcentre.org/publications/SouthPerspectiveSeries/WhyDev

CountriesNeedTariffsNew.pdf), pp. 78-81. 7 Tariffs account for 54.7% of

government revenue

for Swaziland, 53.5% for

Madagascar, 50.3% for Uganda and 49.8% for Sierra Leone. See Chang (2005), pp, 16-7.

& M.

Keen (2005), 'Trade Revenue and (or?) Trade Liberalisation', IMF Working Paper WP/05/112 (The International Monetary Fund, Washington, DC). 8 T.

Baunsgaard

9 In this sense, the

-

it

HOS

theory

is

highly unrealistic in one crucial respect

assumes that the developing countries can use the same technology

as

more productive (and naturally more difficult) technologies is exactly what makes those countries poor. Indeed, infant industry protection is exactly aimed at those used by developed countries, but the lack of the capability to use

raising such capability,

known

as 'technological capability'

mists.

237

among econo-

BAD SAMARITANS Remarks at a White House Briefing on Free and Fair Trade, 17 July 1986.

for Trade Association Representatives

10

11

Oxfam

Sand -

(2003), 'Running into the

Talks Threatens the World's Poorest People',

Why

Failure at

Oxfam

Cancun Trade

Briefing Paper, August

2003, p. 24.

The tariff figures are from Oxfam (2003), pp. 25-7. The income figures from the World Bank data set. In 2002, France and Bangladesh respectively paid around $320 million and $300 million in tariffs to the US. Total income of Bangladesh in the same year was $47 billion, whereas that of France was $1,457 billion. In the same year, the UK paid around $420 million in US tariffs, while India paid about $440 million. UK and Indian incomes in that year were $1,565 billion and $506 billion respectively. 12

are

13

According to an estimate by Oxfam in 2002, European citizens are

supporting the dairy industry to the tune of £16 billion a year through subsidies

and

tariffs.

This

is

the world's people live

equivalent to

on

less

than

more than $2 per cow per day - half amount. Oxfam (2002), 'Milking the

this

CAP', Oxfam Briefing no. 34 (Oxfam, Oxford). Downloadable at: http://www.oxfam.org.uk/what_ we_ do/issues/trade/downloads/bp34_ cap.pdf 14 T. Fritz (2005), 'Special

and

Differential

Treatment for Developing

Countries', Global Issues Paper no. 18, Heinrich Boll Foundation, Berlin. 15

In 1998, a multilateral investment agreement (MIA), which proposed to

put severe restrictions on governments'

abilities to regulate foreign invest-

OECD, the club of rich countries. Ostensibly, among the rich countries, but the ultimate goal

ment, was proposed in the

it was an agreement only was to make it include the developing countries. By proposing

to allow

developing countries voluntarily sign up to the agreement, the rich coun-

hoped that all developing countries would eventually feel obliged to up to it for fear of being blackballed in the international investors' community. Some developing countries, such as Argentina (a faithful disciple of the IMF and the World Bank at the time), enthusiastically volunteered to sign up to it, putting pressure on other developing countries to do likewise. When the proposal was thwarted in 1998 due to disagreements

tries

sign

among

the rich countries themselves, the rich countries tried to put the

proposal back on the international agenda by bringing

However,

WTO

in the

2003 Cancun

ministerial meeting,

it

it

agenda due to resistance from developing countries.

tion of these events, see H-J. Chang

&

to the

WTO.

was dropped from the

On

the evolu-

D. Green (2003), The Northern

WTO

Agenda on Investment: Do as we Say, Not as we Did (CAFOD [Catholic Agency for Overseas Development], London, and South Centre, Geneva), pp. 1-4.

238

NOTES 16 See

J.

& A.

Stiglitz

Charlton (2005), Fair Trade for All -

How

Trade

Can

Promote Development (Oxford University Press, Oxford), pp. 121-2 and Appendix 1. For various numerical estimates of the gains from agricultural liberalization in the rich countries, see

Shrinking Gains from Trade: Projections', Global

A

R Ackerman

(2005), 'The

Assessment of Doha Round

Critical

Development and Environment

Institute

Working

Two World Bank

Paper, No. 05-01, October 2005, Tufts University.

mates cited by Ackerman put the share of the developed countries

esti-

in the

world gain from trade liberalization in agriculture by high-income

total

countries at

75%

($41.6 billion out of $55.7 billion)

and 70% ($126

billion

out of $182 billion).

Chapter 4 1

Between

capital

1971

and

1985,

FDI accounted

for only

about 0.6% of

total fixed

formation (physical investment) of Finland. Outside the communist

bloc, only Japan, at 0.1%,

had

a lower ratio.

The data

are

UNCTAD

from

on

(various years). World Investment Report (United Nations Conference

Trade and Development, Geneva). 2

M.

Feldstein (2000), 'Aspects of Global

the Future',

NBER Working

Economic

Integration:

Outlook

Paper, no. 7899, National Bureau of

for

Economic

Research, Cambridge, Massachusetts. 3 A. Kose, E. Prasad, K. Rogeff 8c S-J.

Wei

(2006), 'Financial GlobaHsation:

A Reappraisal', IMF Working Paper, WP/06/189, International Monetary Fund (IMF), Washington, DC.

4 Bank loans used to be the dominant element of debts until recently, but

now bonds

account for the

accounted for only about

5%

lion's share.

oping countries. The share rose to about to nearly

70% between

Between 1975 and

1999 and 2005.

30% between

The data

Development Finance, the 1999 and the 2005 5

The

tice,

a

distinction

10%

stake in a

are

is

bonds

1990 and 1998, and

from World Bank, Global

issues.

between portfolio equity investment and FDI

ambiguous. FDI

involved in the

1982,

of total net private debts contracted by devel-

usually defined as an investor buying

is,

in prac-

up more than

company in a foreign country, with the intention of getting management of the company. But there is no economic

theory that says that the threshold should be 10%. Moreover, there

is

a

hybrid form emerging that blurs the boundary even more. Traditionally, foreign direct investment has been

(TNCs), which are defined

made by

transnational corporations

as productive corporations

239

with operations in

BAD SAMARITANS more than one country. But recently what the UN calls 'collective investment funds' (such as private equity funds, mutual funds or hedge funds) have become active in foreign direct investment. FDI by these funds differs from traditional FDI by TNCs because it does not have the potentially infinite commitments of TNCs. These funds typically buy up firms with a view to selling them off after 5-10 years, or even earlier - without improving their productive capabilities,

UNCTAD

see

if

they can get away with

it.

On

phenomenon,

this

(2006), World Investment Report, 2006 (United Nations

Conference on Trade and Development, Geneva). S. Reddy & C. Minoiu (2006), 'Development Aid and Economic Growth: A Positive LongRun Relation', DESA Working Paper, no. 29, September 2006, Department of Economic and Social Affairs (DESA), United Nations, New York.

6 For an up-to-date literature review on the aid issue, see

7

The data on

capital flows in this

paragraph are from World Bank (2006),

Global Development Finance 2006, (World Bank, Washington,

DC),

Table

A.i.

8 Foreigners bought $38 billion worth of developing country but, during 1998-2002, the

sum

fell

amount went up to $44 billion per year. 1997, bond purchases during 1998-2002 was 40%

the

purchase was double that of the

'dry'

billion per year. This folio equity

of what times 10

it

lower, while the 2003-5

was

The Asian

that,

from it

ters in H-J.

it

was 30% higher than

crises are well Its

and

In 2005, the

US

billion,

than

30%

and

4.5

documented and analysed by

J.

Stiglitz (2002),

Discontents (Allen Lane, London). Also see the chap(eds.)

the Asian Crisis, (Palgrave, Basingstoke

stock market was worth $15,517 billion.

(2001), Financial

and

New York).

The Indian market

http://www.diehardindian.com/overview/stockmkt.htm.

12 In 1999, the Nigerian stock

that of Ghana

less

in 1997

in the 'dry' period of 1998-2002.

Chang, G. Palma and H. Whittaker

Liberalisation

$31 billion

averaged $41

during 1998-2002, the average annual port-

in 1997. In 2003-5,

and

Globalization

11

fell

during 1998-2002. In 2003-5,

investment inflow into developing countries was

more than

was $506

means

in 1997,

period and 15% higher than in 1997.

9 Portfolio equity investment into developing countries in 1997 to $9 billion per year

bonds

During 2003-2005, This means that, compared to

to $23 billion per year.

market was worth a mere $2.94 billion, whereas

was a mere $0.91 billion, http://www.un.org/ecosocdev/geninfo/

afrec/subjindx/i43stock.htm

Eichengreen & M. Bordo (2002), 'Crises Now and Then: What Lessons from the Last Era of Financial Globalisation', NBER Working Paper, no. 8716, 13 B.

National Bureau of Economic Research (NBER), Cambridge, Massachusetts.

240

NOTES 14 This

is

the

title

of chapter

of

13

Globalization (Oxford University Press, 15

Bhagwati (2004), In Defense of

J.

New York).

The new, more nuanced view of the IMF

is

set

out in detail in two papers

written by Kenneth Rogoff, a former chief economist of the

IMF

(2001-2003),

and three IMF economists.

& A.

Kose (2003),

'Effects

E. Prasad, K. Rogoff, S-J.

Wei

Some

of Financial Globalisation on Developing Countries:

IMF

Evidence',

(IMF), Washington, DC, and Kose 16 Kose et

al.

et al. (2006).

The

(2006), pp. 34-5.

capital account

Empirical

Occasional Paper, no. 220, International Monetary Fund

full

quote

is:

'premature opening of the

without having in place well- developed and well-supervised

good

financial sectors,

institutions,

and sound macroeconomic

policies can

hurt a country by making the structure of the inflows unfavourable and by

making the country vulnerable 17

World Bank

Washington, DC), Table 18

to

(2003), Global

sudden stops or

reversals of flows'.

Development Finance, 2003 (World Bank,

1.1.

World Bank (2006), Table

A.i.

19 L. Brittan (1995), 'Investment Liberalisation:

World Economy', Transnational Corporations, 20 For example, one study by a group of

The Next Great Boost

vol. 4, no.

1.

to the

p. 2.

IMF economists shows

that, for a

sample of 30 poorer developing countries during 1985-2004, FDI inflows turned out to be more

volatile

than equity flows or debt flows. See Kose

et

3. The 30 countries are Algeria, Bangladesh, Bolivia, Cameroon, Costa Rica, the Dominican Republic, Ecuador, EI Salvador, Fiji, al.

(2006), Table

Ghana, Guatemala, Honduras, Iran, Jamaica, Kenya, Malawi, Mauritius, Nepal, Niger,

Papua

New

Guinea, Paraguay, Senegal, Sri Lanka, Tanzania, Togo,

Trinidad and Tobago, Tunisia, Uruguay, Zambia and Zimbabwe. FDI inflows

were

less volatile

than equity or debt flows for the sample of 'emerging

market' economies, which include Argentina, Brazil, Chile, China, Colombia, Egypt, India, Indonesia,

Israel,

Korea, Malaysia, Mexico, Pakistan, Peru, the

Philippines, Singapore, South Africa, Thailand, Turkey 21

Loungani

P.

ment

for

& A.

Razin (2001),

'How

Beneficial

is

and Venezuela.

Foreign Direct Invest-

Developing Countries?', Finance and Development,

vol.. 28,

no.

2.

22 In addition, with the increasing importance of collective investment funds that

I

discussed previously (note

5),

there

is

also shortening of time hori-

zons for FDI, which makes such 'liquidizing' of FDI more 23 These include local content requirements (where

likely.

TNCs

are required to

buy more than a certain share of inputs from local producers), export requirements (where they are forced to export more than a certain proportion of their output) and foreign exchange balancing requirements (where they are required to export at least as

much

as they import).

241

BAD SAMARITANS 24 Christian Aid (2005), 'The Shirts off Their Backs -

How

Tax PoHcies

Fleece the Poor', September 2005.

25 Kose et

al.

(2006), pp. 29.

26 Moreover, brownfield investment can magnify the negative impact of transfer pricing. If a

TNC that has bought up, rather than newly created, a company is now become a TNC subsidiary

practising transfer pricing, the firm that has

could be paying

The data

27

less tax

are

from

than

it

used to when

UNCTAD

it

was a domestic

firm.

(United Nations Conference on Trade and

Development). 28 Especially 5

and

22), this

specific

buy

when it comes to FDI by collective investment funds (see notes may be the sensible strategy, as they do not have the industry-

knowhow

to

improve the productive

capabilities of the firms they

up.

29 R. Kozul-Wright

&

Rayment

P.

(2007), The Resistible Rise of

Fundamentalism: Rethinking Development Policy Books, London), chapter

4.

Also, see Kose et

al.

Market

an Unbalanced World (Zed

in

(2006), pp. 27-30.

30 The measures include: requirements for joint ventures, which increases the chance of technology transfer to the local partner; explicit conditions

concerning technology transfer; local contents requirements, which forces

TNC

the

to transfer

some technology

ments, which force the

TNC

to the supplier;

and export require-

to use up-to-date technology in order to be

competitive in the world market. 31 Sanjaya Lall, the late

Oxford economist and one of the leading scholars

on TNCs, once put

point well: 'while having

may is

usually

(if

this

between different

a question of choosing

FDI

more FDI, on

the margin,

not always) bring net benefits to the host country, there

still

strategies regarding the role of

in long-term development'. See S. Lall (1993), Introduction, in S. Lall

(ed.),

Transnational Corporations and Economic Development (Routledge,

London). 32

The quote

is

from Bankers' Magazine, no.

38,

January 1884, as cited in

Wilkins (1989), The History of Foreign Investment in the United States to 1914 (Harvard University Press, Cambridge, Mass), p. 566. The full quote is: 'It will

be a happy day for us when not a single good American security

owned abroad and when

is

the United States shall cease to be an exploiting

European bankers and money lenders. The tribute paid to odious We have outgrown the necessity of submitting to the humiliation of going to London, Paris or Frankfort [5/c] for capital has become amply abundant for all home demands.'

ground

for

foreigners

is

.

.

.

.

.

.

33 Foreign lenders were also badly treated. In 1842, the

242

US became

a pariah

NOTES market when ii state governments defaulted on foreign (mainly British) loans. Later that year, when the US federal government tried to raise a loan in the City of London, The Times hit in the international capital

may be fully persuaded which no abundance of money,

back, saying: '[t]he people of the United States that there

however

is

a certain class of securities to

great,

can give value; and that in

stand pre-eminent'. As cited in

Cochran

T.

this class their

& W.

Enterprise: A Social History of Industrial America

New

York),

own

securities

Miller (1942), The Age of

(The Macmillan Company,

p. 48.

34 The second Bank of USA, set up in 1816 under a 20-year charter, was 20% owned by the government and federal tax revenue was deposited there,

but

it

did not have note issue monopoly, so

it

could not be considered a

proper central bank. 35

As

cited in Wilkins (1989), p. 84.

36 Even until as

was one of the

late as 1914,

when

it

had become

authoritative estimate by the

US

historian

Mira Wilkins puts the

foreign debt at that time at $7.1 billion, with Russia ($3.8 billion) ($3.7 billion) trailing far

the US, with

its

the

US

behind

(p. 145, Table, 5.3).

Of course,

level

of

US

and Canada

at that point,

estimated lending at $3.5 billion, was also the fourth largest

UK

lending country, after the ($7.3 billion).

UK,

as rich as the

borrowers in the international capital market. The

largest net

However, even

and Germany US still had a the same as the

($18 billion), France ($9 billion)

after subtracting its lending, the

net borrowing position of $3.6 billion, which was basically

Russian and the Canadian figures. See Wilkins (1989). 37 Wilkins (1989),

p.

563

38 Cited in Wilkins (1989),

39 Wilkins (1989),

p. 583.

40 Wilkins (1989),

p. 83,

p. 85.

and

p. 583

41 At the time, the territories were

Montana,

North Dakota, South Dakota, Idaho,

New Mexico, Utah, Washington, Wyoming, Oklahoma and Alaska.

The Dakotas, Montana and Washington in 1889, Idaho and Wyoming in 1890, and Utah in 1896 became states, and thus were no longer subject to this Act. See Wilkins (1989),

p. 241.

42 Wilkins (1989),

p. 579.

43 Wilkins (1989),

p. 580.

44 Wilkins (1989),

p. 456.

45 For further details, see M. Yoshino (1970), 'Japan as Host to the International Corporation' in C. Kindleberger (ed.). The International

Corporation

-A

Symposium (The

MIT 243

Press,

Cambridge, MA).

BAD SAMARITANS 46 Between 1971 and 1990, FDI accounted for less than 0.1% of total fixed capital formation (physical investment) of Japan, as opposed to 3.4% average for the developed countries as a

UNCTAD,

whole

(for 1981-1990).

World Investment Report (various

The data

are

from

years).

47 Government of Japan (2002), 'Communication to the Working Group on Trade and Investment', 27 June 2002, WT/WGTI/W/125. 48 Between 1971-95, FDI accounted for less than 1% of total fixed capital formation in Korea, while the developing country average for the 1981-95 period (pre-1980 figures are not available) was 4.3%. Data from

UNCTAD

(various years).

49 In Taiwan, between 1971-95, FDI accounted around 2.5% of total fixed capital formation, as against the developing country average of 4.3% (for 1981-95). Data

50

S.

UNCTAD

Young, N. Hood, and

British 51

from

J.

Economy - Impact and

Young

(various years).

Hamill (1988), Foreign Multinationals and the Policy (Groom Helm, London), p. 223.

et al. (1988), p. 225

52 According to the

US Department

of

Commerce

1981 survey.

The Use of

Investment Incentives and Performance Requirements by Foreign Governments,

20%

of

US TNG

affiliates

operating in Ireland reported the imposition of

performance requirements, in contrast to the 2-7% in other advanced countries - 8% in Australia and Japan, 7% in Belgium, Canada, France and Switzerland,

6%

Netherlands. See

in Italy,

Young

3%

UK

in the

et al. (1988), pp.

and

2%

in

Germany and

the

199-200. For further discussions

on the Irish FDI strategy, see H-J. Chang & D. Green (2003), The Northern WTO Agenda on Investment: Do as we Say, Not as we Did (CAFOD [Catholic Agency for Overseas Development], London, and South Centre, Geneva), pp. 19-23. 53 Particularly notorious in this regard

is

the so-called Chapter

(North American Free Trade Agreement), which the include in

all its

Australia).

Chapter

bilateral free trade 11

US

has

11

in

NAFTA

managed

to

agreements (except in the one with

gives foreign investors the right to take the host

country government to special international arbitration bodies of the World

Bank and the United Nations

if

they think the value of their investment

has been reduced due to government action, ranging from nationalization to environmental regulation. Despite involving the

government, these arbi-

tration procedures are closed to public participation, observation

54 Kozul- Wright 55

P.

Hirst

&

(Polity Press,

G.

&

Rayment

Thompson

and input.

(2007), ch. 4. (1999), Globalization in Question,

Cambridge), chapter

3,

2nd edition

provides detailed information on

244

this.

NOTES 56 World Press,

Bank

World Development Report, 1985 (Oxford University

(1985),

New York),

p. 130.

57 Nokia was founded as a logging

company in 1865. The shape of the modern

Nokia group started emerging when Finnish Rubber Works Ltd (founded in 1898) bought the majority shares in Nokia in 1918 and in Finnish Cable Works (founded in 1912) in 1922.

Finally, in 1967, the three companies were merged form Nokia Corporation. Some Finnish observers summarize the nature of the merger by saying that the name of the merged company (Oy Nokia Ab) came from wood processing, the management from the cable factory and the money from the rubber industry. Nokia's electronic business, whose mobile phone business forms the core of the company's business today, was set up in i960. Even until 1967, when the merger between Nokia, FRW and

to

FCW The

happened, electronics generated only

electronics

arm

only in 1977. The world's

NMT,

money

lost

first

3%

of Nokia group's net

for the first 17 years,

making

its first

sales.

profit

international cellular mobile telephone network,

in Scandinavia in 1981 and Nokia made the first car Nokia produced the original hand-portable phone in 1987. wave, Nokia rapidly expanded during the 1980s by acquiring

was introduced

phones

for

it.

Riding on this

a series of electronics

and telecommunications companies

in Finland,

Germany, Sweden and France. Since the 1990s, Nokia's leading business has been mobile phones. By the 1990s, Nokia became the leader in mobile details, see H-J. Chang (2006), Management, National Development Strategy Policy Guidance Note, United Nations DESA (Department of Economic and Social Affairs) and UNDP (United Nations Development Program), Box 15.

telecommunications revolution. For further

Public Investment

Chapter 1

5

Property rights need not be private property rights, as

by many people who emphasize the

communal property over the world have

of

common

rights that

work

well.

Many

communal property rights

resources

A more modern

(e.g., forest, fishery)

example

is

where users are encouraged

is

impHcitly assumed

role of property rights.

rural

There are

many

communities from

all

that effectively regulate the use

to prevent their over-exploitation.

open-source computer software, such as Linux, to

improve the product but are banned from

using the improved product for their personal benefit. 2 Strictly speaking, the soft budget constraint

is

not a problem due to owner-

it is to punish lax management, which can be done even under state ownership. Moreover, soft budget constraints alone do not make the managers of the enterprises lazy. Why?

ship per

se.

All that

is

needed to 'harden'

245

BAD SAMARITANS If

professional managers (whether they are running an

know

enterprise)

SOE

or a private

management

they will be severely punished for poor

have their salaries cut or even lose their jobs), they will not have the

(say,

mismanage

incentive to

their firms (allowing for, of course, the usual

principal-agent problem). If they are punished for poor management, the fact that their

company

survives thanks to

government bail-out

is

neither

here nor there for them. Therefore, even though soft budget constraints are

more

likely for

problem

SOEs due

the incentives for the

is

constraints. If that

is

ownership

to their

SOE

status, the

key cause of the

managers, rather than

the case, privatization

is

soft

budget

unlikely to change the perform-

Chang

ances of the enterprises involved. For further discussion, see H-J. (2000), 'The Hazard of

Development, 3

Moral Hazard - Untangling the Asian

J.

Loizides (1987), 'Public Enterprises

Annals of Public and Cooperative Economics,

4 The Wall Street Journal,

Dance of

World

vol. 28, no. 4.

T Georgakopolous, K. Prodromidis, &

in Greece',

Crisis',

May

the Millions: Latin

24 1985, as quoted in

America and the Debt

J.

vol. 58, no. 4.

Roddick

(1988),

Crisis (Latin

The

America

Bureau, London), P109. 5

Temasek Holdings owns majority shares

in the following enterprises:

of Singapore Power (electricity and gas) and of

67%

of Neptune Orient Lines (shipping),

60%

PSA

100%

International (ports),

of Chartered Semiconductor

Manufacturing (semiconductor), 56% of SingTel (telecommunications), 55% of SMRT (rail, bus and taxi services), 55% of Singapore Technologies

SembCorp Industries (engineering). owns a controlling stake in the following enterprises: 32% of SembCorp Marine (shipbuilding) and 28% of DBS (the largest bank in Singapore). See H-J. Chang (2006), Public Investment Management, National Development Engineering (engineering) and 51% of It

also

Strategy Policy Guidance Note, United Nations

Economic and Program), Box

Social Affairs)

UNDP

and

SOE

of

1.

Bank report on SOEs,

6 According to a well-known World

of the

DESA (Department

(United Nations Development

sector in

GDP

the average share

in the 40 developing countries

it

studied was

10.7% during 1978-91. The corresponding figure for Korea was 9.9%. See

World Bank

(1995), Bureaucrats in Business

(Oxford University

Press,

New

World Bank report did not provide the data on Singapore. However, the Singapore Government's Department of

York), Table A.i. Unfortunately, the

Statistics

estimated that

non-GLC

GLCs accounted

for 12.9% of

GDP in

1998, with the

public sector (such as Statutory Boards) accounting for another

8.9%, giving a total of 21.8%. The Department of Statistics defined

GLC

as

those companies in which the government has an effective ownership of 20% or more. For the sources, see

Chang

(2006),

246

Box

1.

NOTES World Bank

7 According to

GDP

on POSCO,

8 For further details

9

(1995), Table A.i, the share of the

SOE

sector in

during 1978-91 were 4.7% in Argentina and 1.9% in the Philippines.

Chang

(2006),

Box

see

Chang, (2006), Box

2.

3.

10 The three principles are those of minzu (nationalism) minquan power or democracy) and minsheng (people's livelihood). 11

12

www.economywatch.com/world_economy/china/structure-ofeconomy.html. J.

Willner (2003), 'Privatisation and State Onwership in Finland', CESifo

Working Paper, Munich. 13

(people's

M. Berne

Sc

no. 1012, August 2003, Ifo Institute for

G Pogorel

Economic Research,

(2003), 'Privatisation Experiences in France', paper

presented at the CESifo Conference on Privatisation Experiences in the EU,

Cadenabbia, 14

The

November

Italy,

2003.

story of Renault's privatization

tion process. Renault was It

was nationalized

-

its

first

is

typical of the French privatiza-

established as a private

in 1945 for having

company

in 1898.

been 'an instrument of the enemy'

owner, Louis Renault, was a Nazi collaborator. In 1994, the French but kept a 53% share. In 1996, it relin-

state started selling the shares,

quished

its

majority share, reducing

holdings to 46%. However, 11% of

its

company website calls 'a stable core of many of them financial institutions partly controlled

the shares was sold to what the

major shareholders',

by the French state. Since then, the French government has gradually reduced its share to 15.3% (as of 2005), but still remains the largest single shareholder. Moreover, an important part of this reduction in the French

government's share

is

explained by the acquisition in 2002 of 15% of

Renault shares by Nissan, which had formed an alliance with Renault in 1999. Since Renault has

44%)

owned

in Nissan since 1999, the

making

Renault's shares,

(2006),

Box

it

the

the controlling stake

French

(first

dominant

now 30% of

35%,

state effectively controls

Chang

force in Renault. See

2.

15

Chang

16

W Henderson

(2006),

Box

2.

(1963), Studies in the

Economic Policy of Frederick

the Great

(Frank Cass, London), pp. 136-152. 17 See T.

Smith

Government

(1955), Political

Change and Industrial Development

G. C. Allen (1981),

A

Short Economic History of

Modern Japan, 4th

(Macmillan, London and Basingstoke), for further 18 See H-J.

in

Japan:

Enterprise, 1868-1880 (Stanford University Press, Stanford)

Chang

(2002), Kicking

in Historical Perspective

(Anthem

Away

Press,

247

the

and

edition

details.

Ladder - Development Strategy

London),

p. 101.

BAD SAMARITANS 19 T. Kessler

&

N. Alexander (2003), 'Assessing the Risks in the Private

Provision of Essential Services', Discussion Paper for G-24 Technical Group,

Geneva, Switzerland, September 15-6, 2003, available

at

the website,

http://www.unctad.org/en/docs/gdsmdpbg2420047_en,pdf, 20 Indeed, there

is

evidence that gains in productivity in privatized enter-

prises usually occur before privatization

suggesting that restructuring

is

through anticipatory restructuring,

more important than privatization. See Chang

(2006). 21 D.

Green (2003) Silent Revolution - The Rise and Crisis ofMarket Economics America (Monthly Review Press, New York, and Latin American ,

in Latin

Bureau, London), 22

Miami

23

P.

p. 109.

Herald, 3

March

Selling

U.K., Vol.

1:

Mexico, Background,

Department, June 7 1992, 24 Kessler

& Alexander

Many academic

25

As

1991.

cited in

Green (2003),

TELMEX, World Bank Country Economics

p. 6.

(2003).

studies have

shown

that competition

important than ownership status in determining review of these studies, see H-J. in

p. 107.

(1992), World Bank Conference on the Welfare Consequences of Public Enterprises: Case Studies from Chile, Malaysia, Mexico and the

Tandon

Chang

& A.

Developing Countries and Economic

no.

4.

26

Some economists argue

artificially

is

usually

more

performance. For a

Singh (1993), 'Pubhc Enterprise

Efficiency',

that competition

natural-monopoly industry by

SOE

UNCTAD

may

dividing

it

Review, 1993,

be 'simulated' in a

up into smaller

(say,

and rewarding/punishing them according to their relative performances. Unfortunately, this method, known as 'yardstick competition', is difficult to manage even for well-resourced developed country regulators, as it involves administering complicated performance-measurement regional) units

formulas.

It is

highly unlikely that the regulators in developing countries

can cope with them. Moreover, in the case of network industries

(e.g.,

from simulated competition among regional units should be set against the increased costs of co-ordination failure due to the fragmentation of a network. The British railway privatization of 1993 created dozens of regional operators that compete with each other very little (due to geographically-based franchising) while providing poor connections with trains run by other operators. railways), the potential benefit

27 For example, during the 1980s, the state-owned railway of Britain faced quite intense (partial) competition

from privately-owned bus companies

some market segments.

248

in

NOTES

Chapter 6 1

It is

estimated that, in 2005, 6.1% of the adult population (15-49 years) in

sub-Saharan African carry the

HIV

virus, as

opposed

to

1%

for the

world

as

The epidemic has taken on apocalyptic proportions in Botswana, Lesotho and South Africa, but is also very serious in Uganda, Tanzania and Cameroon. It is estimated by the United Nations that Botswana has the most a whole.

HIV

serious epidemic, with 24.1% of the adult population having

virus in

and South Africa (18.8%) follow closely. The problem is also very serious in Uganda (6.7%), Tanzania (6.5%) and Cameroon (5.4%). All the statistics are from UNAIDS (United Nations Program on HIV/AIDS) (2006), 2006 Report on the Global AIDS Epidemic, downloadable at 2005. Lesotho (23.2%)

http://data.unaids.org/pub/GlobalReport/2006/2006_GR_CH02_en.pdf.

income in 2004 was $4,340 in Botswana, $3,630 in South Africa, Cameroon, $740 in Lesotho, $330 in Tanzania and $270 in Uganda. The figures are from World Bank (2006), World Development Report 2006, Tables 1 and 5. 2 Per capita

$800

3

in

When

the

US government announced

its

intention to stockpile the anti-

anthrax drug, Cipro, Bayer volunteered to give a substantial discount to the

US government

(it

offered $1.89 per tablet instead of the drugstore price of

$4.50 per tablet). But the

US government

considered even this insufficient,

given the fact that a copy drug produced in India cost less than

ct20.

The US

government got another 50% discount from Bayer by threatening to impose compulsory licensing. For further details, see A. Jaffe & J. Lerner (2004), Innovation and Its Discontents - How Innovation and Progress, and Princeton), p.

Our Broken Patent System Is Endangering What to do about It (Princeton University Press,

17.

4 H. Bale, 'Access to Essential Drugs in Poor Countries - Key

Issues',

down-

loadable from http://www.ifpma.org/News/SpeechDetail.aspx?nID=4 5

'Strong global patent rules increase the cost of medicines'. The Financial

Times, February 14 2001.

6 See

the

of the

website

US

pharmaceutical

industry

association,

http://www.phrma.0rg/publications/profileoo/chap2.phtm#growth. 7 For example, a major survey conducted in the mid-1980s asked the chief

R&D executives of US firms what proportion of the inventions they developed would not have been developed without patent protection. Among the 12 industry groups surveyed, there were only three industries where the answer was 'high' (60% for pharmaceutical and 38% for other chemicals and 25% for petroleum).

'none'

(0%

And

for office

there were six others where the answer

was

basically

equipment, motor vehicles, rubber products and

249

textiles.

BAD SAMARITANS 1%

for

primary metals and instruments). In the remaining

the answer was 'low' (17% for machinery,

and 11%

An

and

Management Science, vol. 32, February. The confirmed by a number of other studies conducted in

Empirical Study',

of this study

is

F. Scherer & D. Ross (1990), Industrial Market and Economic Performance (Houghton Mifflin Company, Boston),

UK and Germany, cited in

the

Structure p. 629,

8

tliree industries,

for fabricated metal products

for electrical equipment). See E. Mansfield (1986), 'Patents

Innovation: result

12%

footnote 46.

A study based on

panies in the

US

a survey of 650 high-level

R&D managers of listed commuch

found that patents are considered

less

important in

preserving an innovator's advantage than these 'natural advantages'. See R. S. & Winter (1987), 'Appropriating the Returns and Development', Brookings Papers on Economic

Levin, A., Klevorick, R., Nelson,

form

Industrial Research

Activity, 1987, no.

9

F.

Machlup

3.

& E. Penrose

(1950) 'The Patent Controversy in the Nineteenth

Century', Journal of Economic History, vol. 10, no.

1,

p. 18.

J. Schumpeter (1987), Capitalism, Socialism and Democracy, 6th edition (Unwin Paperbacks, London). According to the authoritative British historian of economic thought, Mark Blaug, Schumpeter mentions patents only

10 See

a few times in the thousands of the pages he wrote. 11

For further details on the anti-patent movement, see Machlup

&

Penrose

(1950).

12

J.

arly

Gleeson (2000), The Moneymaker (Bantam, London).

A more

schol-

biography and a systematic discussion of Law's economic theories

Murphy

(1997),

John

Law - Economic

Theorist

is

A.

and Policy-maker (Clarendon

Press, Oxford). 13

According to the eminent economic historian, Charles Kindleberger, Law

argued that

'if

the

money

supply were increased by bank notes issued for

productive loans, employment and output would the value of

money would remain

stable'.

Financial History of Western Europe (George Allen further details, see

Murphy

rise proportionately,

and

See C. Kindleberger (1984),

&

A

Unwin, London). For

(1997).

contemporary account, around 900 British workers watchmakers, weavers, metal-workers and others - were recruited by Law's 14 According to a

brother William and settled in Versailles (Gleeson, 2000,

p. 121).

The

his-

torian John Harris gives a samller estimate: 'About 70 watchmakers were

recruited

and established

in Versailles

and

over 30 metal workers emigrated. The

Paris, at least 14 glass

last

makers and

group included lock- and

file-

makers, hinge-makers, girders, and an important group of foundry workers

who were established at Chaillot in

Paris.

250

Most of the other workers

in metals

NOTES Normandy, at Harfleur and Honfleur. A substantial colony set up at Charlaval and on Law's recently acquired Norman estate, Tancarville. The main groups listed certainly do not include The total number of workers who all the skilled workers involved emigrated through the Law scheme was probably over 150 J. Harris (1991), 'Movement of Technology between Britain and Europe in the Eighteenth Century' in D. Jeremy (ed.), International Technology Transfer - Europe, Japan, and

glass

were

in

of woollen workers was

.

.

.

.'

.

and 15

the

USA, 1700-1914 (Edward

.

Elgar, Aldershot).

For further details on the British ban on the emigration of skilled workers,

Jeremy (1977), 'Damming the Flood: British Government Efforts to Check the Outflow of Technicians and Machinery, 1780-1843', Business History Review, vol. LI, no. 1, and J. Harris (1998), Industrial Espionage and Technology Transfer - Britain and France in the Eighteenth Century (Ashgate, Aldershot), see D.

ch. 18.

16 For further details, see Jeremy (1977) 17 Technologies

were

relatively

simple

background could learn

right skills

and Harris

at the

a lot

(1998)

time so that a person with the

about

its

technology from a tour

of a factory. 18 For further details, see Harris (1998), D. Landes (1969), The Unbound Prometheus - Technological Change and Industrial Development in Western

Europe from 1750

to the

and K. Bruland

(ed.)

Industrialisation, (Berg,

19

The

Present (Cambridge University Press, Cambridge)

Technology

(1991),

British patent law

came

reform in

its

and Scandinavian

into being in 1623 with the Statute of

Monopolies, although some argue that a 'patent law' until

Transfer

New York).

1852,

it

name of McLeod (1988),

did not really deserve the

For example, see C.

Inventing the Industrial Revolution: the English Patent System, 1660-1800

(Cambridge University 20 Russia

Press,

Cambridge).

(1812), Prussia (1815),

Belgium and the Netherlands

(1820), Bavaria (1825), Sardinia (1826), the Vatican state (1833),

Wiirttemberg

and Saxony

(1836), Portugal (1837)

(1843). See E.

(1817),

(1834),

Penrose

(1951),

The Economics of the International Patent System (The Johns Hopkins Baltimore), p. 21

The

Switzerland. less

Press,

13.

original signatories were

Guatemala,

Spain

Sweden

Italy,

11

countries: Belgium, Brazil, France,

the Netherlands, Portugal, El Salvador, Serbia, Spain and

The inclusion of trademarks

in the

agreement enabled patent-

Switzerland and Netherlands to sign up to the Convention. Before the

Convention went into up, bringing the

effect in July 1884, Britain,

number of

original

member

Ecuador and Tunisia signed

countries to

14.

Subsequently,

Ecuador, El Salvador and Guatemala denounced the Convention, and did

251

BAD SAMARITANS not re-join

until the 1990s.

it

The information

from the

is

WIPO

(World

Intellectual Property Organization) website: http://www.wipo.int/about-

ip/en/iprm/pdf/ch5.pdf#paris.

They were on

22

Brownian motion, the photoelectric

the

most

effect and,

importantly, special relativity. 23

It

was only

in 1911, six years after

he finished his Ph.D., that he was made

a professor of physics in the University of Zurich.

24 For further

on the

details

history of Swiss patent system, see Schiff (1971),

-

Industrialisation without National Patents

the Netherlands, 1869-1912

and

Switzerland, 1850-1907 (Princeton University Press, Princeton).

Dutch patent law was rather

25 Moreover, the 1817

dards of the time.

It

deficient even

by the stan-

did not require a disclosure of the details of patents,

allowed the patenting of imported inventions,

it

it

nullified national patents

of inventions that acquired foreign patents and there was no penalty on others using patented products without permission as far as

own

it

was

for their

business. See Schiff (1971), pp. 19-20.

26 Although Edison

made some

critical

contributions to the development

of the filament-based light bulb, he did not single-handedly invent

commonly

believed.

as

is

Miller (1942), The Age of Enterprise:

A

However, he owned

27 According to T. Cochran Social History of Industrial

& W.

against 145 for Great Britain (p. 14).

US produced

was mainly due

535 patents per year

to the difference in 'scruples'

& Z. Khan

Contrast this to the argument by K. Sokoloff

was thanks

it,

the relevant patents.

America (New York, The Macmillan Company),

the fact that, between 1820 and 1830, the

it

all

to a good' patent system that the

US

far

(2000) that

exceeded Britain in

patenting per capita by 1810, expressed in their paper, 'Intellectual Property

Development and Comparative Perspective', prepared for World Bank Summer Research Workshop on Market Institutions, July 17-19, 2000, Washington, DC, (p. 5). The truth probably lies somewhere in between. Institutions in the United States: Early

28

Durand made

the

same statement regarding his

1811

patent of an

Shephard (2000), Pickled, Potted & Canned - How Food Changed Civilization (Headline, London), p. 228. See

S.

29 According to this Act,

abroad which has upon that

it is

made

place of origin'

it

'it

[was] a penal offence to

cited in E. Williams (1896),

Henemann, London),

sell

an

article

made

p. 137.

The

details, see

edition consulted

Williams (1896),

252

words denoting the

'Made

an introduction by Austen Albu (The Harvester 30 For further

lamp.

any word or mark leading the purchaser to believe

in England, in the absence of other

As

oil

the Preservation of

is

in

the 1973 edition with

Press, Brighton).

p. 138.

real

Germany (William

NOTES 31

Williams (1896),

p. 138.

32 The prominent business economist John Kay makes this point brilliantly in a satire featuring Virginia Woolf and her time-travelling literary agent. See

J.

Kay

The Financial Times,

(2002), 'Copyright law's duty to creativity',

October 23 2002.

The average was not quite 20 years at some poor countries were yet to fully comply with

33 Jaffe 8c Lerner (2004), p.94. that time because

TRIPS. 34 Chemical (including pharmaceutical) substances remained unpatentable until 1967 in West Germany, 1968 in the Nordic countries, 1976 in Japan, 1978 in

Switzerland and 1992 in Spain. Pharmaceutical products remained

unpatentable until 1959 in France, 1979 in Italy and 1992 in Spain. The infor-

mation

is

from

Round - A

Patel (1989), 'Intellectual Property Rights in the

S.

Disaster for the South?', Economic

1989, p. 980,

and G. Dutfield

&

and

15

May

U. Suthersanen (2004), 'Harmonisation or

Differentiation in Intellectual Property Protection?

Occasional Paper

Uruguay

Political Weekfyy 6

(Quaker United Nations

- The Lessons of History',

Office, Geneva), pp. 5-6.

35 With TRIPS, developing countries have been compelled to introduce pharmaceutical product patents, at the latest by 2013 in the case of the poorest countries. When the TRIPS agreement came into effect in 1995, developing countries were to comply to it by 2001. The poorest countries (the Least Developed Countries, or LDCs) were given until 2006, but, at the end of 2005, this was extended to 2013.

36 Dutfield 37 Jaffe

&

&

Suthersanen (2004),

Lerner (2004), pp. 25-6,

p. 6.

p. 34, pp. 74-5.

38 Both cases were eventually settled outside the court.

& Lerner & Lerner

39

Jaffe

40

Jaffe

41

The two

in the

(2004), pp. 34-5.

(2004), p.

professors also

US were around

2,500 per year (Jaffe

12.

show

that the

& Lerner,

2004,

p. 14, figure 1.2).

are notoriously expensive to fight, this

generating

42 In a

new

number of

patent suits initiated

now

over

Given that patent

suits

1,000 per year until the mid-1980s, but are

means

that resource

is

diverted from

ideas to defending existing ones.

letter to

Robert Hooke, dated February

5 1676.

we can and cannot own was the exact we have today - he may have thought nothing of owning

43 Thus, Jefferson's view of what

opposite of what

other people, but he found

it

absurd that people should be allowed to

and have their rights protected through an by the government called patents. ideas

253

artificial

monopoly

own

created

BAD SAMARITANS rice 2', developed in 2005 by Syngenta, which now owns the technology, the benefits could be even greater. Golden rice 2 produces 23 times more beta carotene than the original golden rice.

44 Especially with 'golden

45 See http://en.wikipedia.org/wiki/Golden_ rice. Xerophthalmia (Greek for dry eyes) is an inflammation of the conjunctiva of the eye with abnormal

dryness and corrugation {Oxford English Dictionary).

46

On the golden rice controversy, see RAFI (Rural Advancement Foundation RAFI Communique, September/October 2000, Issue own account in 'The "Golden Rice" Tale' at http://

International) (2000),

#66. Also see Portykus's

www.biotech-info.net/GR_tale.html+golden+rice&hl=ko&gl=kr&ct=clnk&cd=4.

47 The IPR expenditure

is

cited in

M. Wolf (2004), Why Globalisation Works 217. The foreign aid figure is from the

New Haven), p.

(Yale University Press,

OECD. 48 Wolf (2004),

49 As Joseph

p. 217.

Stiglitz

proposes, a public fund could also be set up to guar-

antee purchase of valuable inventions, such as life-saving drugs. (2006),

Making

Lane, London),

Globalization

Work - The Next

J.

Stiglitz

Steps to Global Justice (Allen

p. 124.

50 Allowing easier parallel imports

may

result in

some

reverse inflow of

cheap copies from developing countries before the end of IPR

life

in

developed countries, but there are ways to control them; copy drugs can

be manufactured in different shapes and while special identification microchips

sizes

from the

may be implanted

originals,

in the packag-

them from copies. For further discusmaking IPRs weaker in poor countries, see H-J. Chang (2001), 'Intellectual Property Rights and Economic Development - Historical Lessons and Emerging Issues', Journal of Jiuman Development, 2001, vol. 2, no. 2. The article is reprinted in H-J. Chang (2003), Globalization, Economic Development and The Role of the State ing for the originals to distinguish

sion of issues related to

(Zed Press, London).

Chapter 7 1

Of

always cial

boundary between macroeconomic policy and microecoeconomy) is not

course, the

nomic policy clear.

firms

(policy that affects particular agents in the

For example, regulation regarding the kinds of assets that finan-

(e.g.,

microeconomic

amount of

banks, pension funds) can hold policy,

assets

but

concerned

this is

is

typically classified as a

can have macroeconomic impacts,

large.

254

if

the

NOTES 2

Domingo

3

The Los Angeles Times, October 20

4

S.

Cavallo, 'Argentina

must grow

Financial Times, 27

Stability',

Finance and Development,

1996.

5 Interview

with Playboy, February 1973.

6 For further discussion, see H-J. Chang

Development - An Alternative Economic pp. 181-2 and 185-6. 7 Fischer (1996), p.

&

Policy

I.

Grabel (2004), Reclaiming

Manual (Zed

Press,

efficient

London),

35.

8 Moreover, neo-liberals believe that government spending less

July, 2001.

1978.

Fischer (1996), 'Maintaining Price

December

up',

is,

by nature,

than private spending. Martin Feldstein, the economic

advisor to Ronald Reagan, once put

it:

can provide a temporary stimulus to

'Increased government spending

demand and output but

in the

longer run higher levels of government spending crowd out private

investment or require higher taxes that weaken growth by reducing incentives to save, invest, innovate, and work.'

The quote

is

from:

http://www.brainyquote.eom/quotes/quotes/m/martinfeld333347.html

'How

9 A. Singh (1995),

did East Asia grow so

an Analytical Consensus', other 10

statistics in

UNCTAD

the paragraph are from the

The average annual

inflation

fast?

- Slow Progress towards 8. The

Discussion Paper, no. 97, Table

rates

IMF

database.

(defined as the average annual

percentage growth of consumer price index) for the 1960s were 1.3% in Venezuela, 3.5% in Bolivia, 3.6% in Mexico, 10.4% in Peru and 11.9% in

Colombia. The

rate in

Argentina was 21.7%. The information

is

from Singh

(1995), Table 8.

The average inflation rates were 12.1% in Venezuela, 14.4% in Ecuador and 19.3% in Mexico. The rates were 22% in Colombia and 22.3% in Bolivia. The data are from Singh (1995), Table 8. 11

12

The

details are

Argentina:

from

F.

Alvarez

&

S.

Zeldes (2001), 'Reducing Inflation in

Mission Impossible?' http://www2.gsb.c0lumbia.edu/faculty/

szeldes/Cases/ Argentina/ 13

Moreover, in the neo-liberal argument, economic

equated with price stabiHty. Price of overall economic

stability,

stability

but the

is,

stability

is

wrongly

of course, an important part

stabilities in

output and employment

more broadly, we cannot macroeconomic policy has succeeded even in its selfproclaimed goal of achieving economic stability over the past two and a half decades, as output and employment instabilities have actually increased are also important. If

we

define economic stability

say that neo-liberal

during

this period.

For a

full

discussion of this issue, see

255

J.

A.

Ocampo

(2005),

BAD SAMARITANS Broad View of Macroeconomic

'A

DESA (Department

October, 2005, Nations,

A

14

DESA Working

Stability',

study by Robert Barro, a leading neo-liberal economist, concludes that inflation (inflation rate of

10-20%) has low negative

growth, and that, below 10%, inflation has no effect 'Inflation 3.

i,

New York.

moderate

no.

Paper, no.

of Economic and Social Affairs), United

at

all.

effects

on

See R. Barro (1996),

and Growth', Review of Federal Reserve Bank of

St Louisy vol. 78,

A study by Michael Sarel, an IMF economist, concurs. It estimates that,

below 8%,

inflation has

the relationship

little

positive

is

impact on growth -

below that

level

-

anything, he points out,

if

that

is,

inflation helps rather

than hinders growth. See M. Sarel (1996), 'Non-linear Effects of Inflation on

Economic Growth', IMF

M. Bruno

15

(1995),

Staff Papers, Vol., 43,

March.

'Does Inflation Really Lower Growth?', Finance and

Development pp. 35-38; M. Bruno & W. Easterly (1995), 'Inflation Crises and Long-run Economic Growth', National Bureau of Economic Research (NBER)

NBER, Cambridge,

Massachusetts.; M. Bruno, and and Growth: In Search of a Stable Relationship' Review of Federal Reserve Bank of St Louis, vol. 78, no. 3.

Working Paper,

no. 5209,

W

Easterly (1996), 'Inflation

16

PBS

(Public Broadcasting System) interview: http://www.pbs.org/fmc/

interviews/volcker.htm. 17 Calculated 18

On

from the IMF

dataset.

the profit rate data, see

S.

Claessens,

S.

Djankov

&

L.

Lang

(1998),

'Corporate Growth, Financing, and Risks in the Decades before East Asia's Financial

Crisis',

Policy Research

Washington, DC, figure 19 T. Harjes

Nowak &

&

L. Ricci (2005),

concept here 1,

is

the returns

diff^erent

returns

on

'What Drives Saving

in

South

Africa?' In

M.

p. 49, figure 4.1.

many

20 There are

World Bank,

2017,

Post-Apartheid South Africa: The First Ten Years (IMF,

L. Ricci,

Washington, DC),

Working Paper, no.

1.

on

assets in

ways

assets.

to calculate profit rates, but the relevant

According to Claessens

et al. (1998), figure

46 developed and developing countries during

1988-96 ranged between 3.3% (Austria) and 9.8% (Thailand). The ratio

4% and 7% in 40 of the 46 countries; it was below 4% in and above 7% in three countries. Another World Bank study

ranged between three countries

puts the average profit rate for non-financial firms in 'emerging market'

economies (middle-income countries) during the 1990s (1992-2001)

at a

lower level of 3.1% (net income/assets). See

&

Suttle (2003), 'Corporate Financing Patterns

Markets', mimeo., March, 2003, 21

OECD

Historical Statistics

S.

Mohapatra, D. Ratha

and Performance

World Bank, Washington, DC.

(OECD,

Paris), Table 10.10.

256

in

P.

Emerging

NOTES 22 There

is

no evidence that

greater central

bank independence has any assoemployment, better budget

ciation with lower inflation, higher growth, higher

balance or even greater financial stability in developing countries. See the

evidence presented in

S.

Eijffinger

&

de Haan (1996), 'The PoHtical

J.

of Central-bank Independence', Special Papers

No.

19,

Princeton University and B. Sikken

&

J.

de Haan (1998), Budget

and 'Central-bank Independence Oxford Economic Papers, vol. 50, no. 3.

Deficits, Monetization,

Countries',

Economy

Economics,

in International

Developing

in

23 http://en.wikipedia.org/wiki/Federal_Reserve_Board

On

24 S-J.

&

H-J.

Chang

London), chapter 25

J.

policy in Korea following the 1997

see

3.

and

Its

Discontents (Allen Lane, London),

3.

26 H-J. Chang It is

crisis,

(2003), Restructuring Korea Inc. (Routledge Curzon,

Stiglitz (2001), Globalization

chapter

27

IMF

the evolution of

Shin

&

I.

Grabel (2004),

for this reason that

p. 194.

Ocampo

(2005) argues that

'fiscal policies

cannot

be expected to serve by themselves as the major instrument of countercyclical

management'

(p. 11).

The remark was made

28

Who

Said No,

made when

Vidal:

Man

The

Brown. The

we

lag

behind

the industrialized nations of the West, preferring that the public

money

seat against Jerry all

documentary movie, Gore

in the

Vidal campaigned in 1982 for a California senator full

quote

is:

'In public services,

go not to the people but to big business. The

which we have

free enterprise for the

result

a unique society in

is

poor and socialism

for the rich.'

29 John Burton, the Financial Times correspondent in Seoul in the early days of Korean financial

crisis in 1997,

wrote: 'The public has reacted as

has done in previous economic downturns by obeying belts in the belief that

debt

crisis'.

spending

less will

somehow

calls to

it

tighten their

save the nation

from

Unfortunately, in his view, 'no economist has warned that

its

some

by housewives to serve smaller meals home, could deepen the country's plunge into recession since it would

austerity measures, such as promises at

further reduce the resist

are

demand needed

the economic facts

blamed

for national

- With

ills',

to bolster growth'.

J.

Burton, 'Koreans

a presidential election near, foreign plots

Financial Times,

December

12 1997.

Chapter 8 1

Press Conference, October 15 2006.

2 As of April 2006, these included Chad, Kenya

and Congo

in Africa, India,

Bangladesh and Uzbekistan in Asia, Yemen in the Middle East, and Argentina

257

BAD SAMARITANS in Latin America. See the website of the

cated to monitoring the

IMF and

the

NGO,

Brettonwoods Project, dedi-

World Bank. http://www.bretton-

woodsproject.org/article.shtml?cmd%5Bi26%5D=xi26-53i789. 3 This point

development

was eloquently made by Hilary Benn, the British international secretary, at the 2006 annual meeting of the World Bank, as

he was refusing to give unconditional support to

Mr

Wolfowitz's anti-

corruption drive.

4 G. Hodgson

&

S.

Corruption of Economics: An at

Institutionalist Perspective', a

the Annual Meeting of the European Association

Economy, November 3-4 2006, 5

Economics of Corruption and the

Jiang (2006), 'The

See C. Kindleberger (1984),

paper presented

for Evolutionary Political

Istanbul.

A Financial History of Western Europe (Oxford

University Press, Oxford), pp. 160-1, for England and pp. 168-9 for France.

Also see R. Nield (2002), Public Corruption - The Dark Side of Social Evolution (Anthem Press, London), chapter 4 for France, and chapter 6 for Britain.

Even in Prussia, arguably the

least

corrupt European country in

the 18th century, offices were not openly for sale but effectively sold to the

highest bidder, as the government very often gave jobs to those willing to

pay the highest amount for the tax that was customarily imposed on the first year's salary.

See R. Dorwart (1953), The Administrative Reforms of

Frederick William I of Prussia (Harvard University Press, Cambridge,

Massachusetts),

p. 192.

6 Nield (2002),

p. 62.

7

He was supposed

to induce the

government by offering them the

members of

gifts

support the

his party to

of offices in the

civil service.

See Nield

(2002), p. 72.

8 to

The Pendleton Act required the most important jobs (about 10% of total) be competitively filled. This ratio rose to 50% only by 1897. G. Benson

(1978),

Political

Corruption

in

America (Lexington Books, Lexington,

Massachusetts), pp. 80-5.

9 As cited in T. Cochran

& W.

Miller (1942), The Age of Enterprise:

History of Industrial America (The Macmillan 10

As

cited in

J.

Garraty

472.

1870S.

sales

A

Social

York), p. 159.

& M. Carnes (2000), The American Nation -A History

of the United States, loth edition

Open

Company, New

(Addison Wesley Longman,

New

York), p.

of votes by them were especially widespread in the 1860s and

The group of corrupt assemblymen from both

parties, called 'Black

Horse Cavalry', demanded $1,000 per vote on railroad bills and vigorous bidding drove prices up to $5,000 per vote. The group also introduced which,

if

passed,

would

greatly hinder

some wealthy

258

'strike bills',

interests or corporation,

NOTES and would then demand payment

to

drop the

bill.

As

a result,

some com-

panies created lobbying organizations that bought legislation, sparing themselves from blackmail. See Benson (1978), pp. 59-60. 11

The information

2005 -

A

Box

DC),

p. 101,

12 S.

Huntington

New

Press, 13

One

from World Bank (2005), World Development Report (World Bank, Washington,

is

Better Investment Climate for Everyone 5.4.

(1968), Political

Haven),

making

is

political advertising

in today's

elections cheaper

by both the candidates and the

only one category, spending will simply

ban on

Changing Societies

in

(Yale University

p. 386.

crucial action to take

toral expenditure

Order

is

also

shift

by limiting

political parties; if

from one part of the

elec-

you ban other.

A

important in making elections cheaper

media-heavy world. Strengthening of the welfare

state (which,

of

improvement in government revenue) will also help reduce electoral corruption by making the poor less vulnerable to votebuying. Higher taxes will also enable the government to improve the salaries of its officials, making them less tempted by venality. Of course, there is a course, requires an

bit of a

whom

chicken-and-egg problem; without

you have

to

pay good

Thus the

tax collection capacity. collection services.

The

salaries,

first

example

best

it

is

first

may

good people,

recruiting

to

not be possible to increase the

place to clean

up

is

the revenue-

the British excise service in the 17th

century (collecting indirect taxes). Meritocracy, unheralded inspections and clear rules

were introduced

to great effect in the excise service before other

parts of the British government.

but also

later served as a

other departments.

It

not only increased government revenue

template for improving the customs service and

On the issue of government tax capability in

general, see

John (2007), 'The Political Economy of Taxation and Tax Reform in Developing Countries' in H-J. Chang {ed.). Institutional Change and Economic J.

di

Development (United Nations University London). For further

details

Press, Tokyo,

on the reform of the

and Anthem

Press,

British excise service, see

Nield (2002), pp. 61-2. 14 See chapter 3 for the effect of trade liberalization

on government finance

in developing countries. 15

16

This point J.

is

made very

Stiglitz (2003),

London) provides

well

Corruption' in IDS Bulletin^ vol. Studies, University of Sussex).

and

Collusion:

(St Martin's Press,

Jiang (2006).

W Norton, New York and

detailed discussions of these cases.

17 See the articles in the special issue

Collision

& (W

by Hodgson

The Roaring Nineties

on

27, no. 2, April

On

'Liberalisation

the Russian case, see

The Strange Case of Western Aid

New York). 259

and the

New

1996 (Institute of Development J.

to

Wedel

(1998),

Eastern Europe

BAD SAMARITANS 18 http://www.usaid.gov/our_

workydemocracy_ and_ governance/.

19 http://www.brainyquote.eom/quotes/authors/f/franklin_ d_ roosevelt.html.

20 M. Wolf (2004),

Haven and London), As

21

Press,

cited in

J.

New York,

Why

Globalisation Works (Yale University Press,

New

p. 30.

Bhagwati, In Defense of Globalisation (Oxford University 2004), p. 94.

22 N. Bobbio (1990), Liberalism and Democracy, translated by Martin Ryle

and Kate Soper

(Verso, London).

M. Daunton

23

(1998), Progress

and Poverty (Oxford University

Press,

Oxford), pp. 477-8. S.

Kent

(1939), Electoral Procedure

Press,

New

Haven).

24

25

M. Clark

New York), 26

On

27

More

(1996),

Modern

Italy,

under Louis Philippe (Yale University

1871-1995,

2nd

(Longman, London and

p. 64.

the record of

ARA

in

Uganda and

Peru, see Di John (2007).

recent examples include the right to a clean environment, the right

to equal treatments across sexes or ethnicities,

more

ed.

recent, the debates

and consumer

rights.

Being

surrounding these rights are more controversial and,

becoming more widely accepted, they look increasingly less political - especially witness the way in which environmental rights, which were only supported by the radical fringe a few decades ago, have become so widely accepted in the last decade or so that they do not look like a political issue any more.

therefore, their 'political' nature easier to see. But, as these rights are

28 For example,

when

a law regulating child labour

British Parliament in 1819,

some members of

the

was proposed

in the

House of Lords objected

on the grounds that 'labour ought to be free', despite the fact that was an extremely mild law by the standards of our time - the proposed

to the law it

law was supposed to apply only to cotton factories that were considered most hazardous, while banning only the employment of children under the age

of nine. See

A

M. Blaug

(1958),

'The Classical Economists and the Factory Acts:

Re- examination', Quarterly Journal of Economics, 1958, vol. 72, no.

the 'economic'

argument against ownership of

29 Daron Acemoglu, the political scientist,

MIT

2.

For

ideas, see chapter 6.

economist, and James Robinson, the Harvard

put the same point in more academic language. They predict

democracy will become more widespread with globalization, as it will make democracy more innocuous. In their view, globalization is likely to make 'the elites and conservative parties to become more powerful and democracy to become less redistributive in the future, especially if new forms of representation for the majority - in both the political sphere and the

that

260

NOTES workplace - do not emerge. Thus, democracy dated: however, for those

same way

who

will

become more

consoli-

expect democracy to transform society in the

democracy did in the first half of the twentieth century, form of democracy'. J. Robinson & D. Acemoglu (2006), Economic Origins of Dictatorship and Democracy (Cambridge

it

as British

may be

a disappointing

University Press, Cambridge), p. 360.

30

A

telling

in this regard is an opinion poll before the 2000 US which revealed that the most important reason cited by

example

presidential election

the respondents against either of the candidates was that he was 'too political'.

So many people rejecting someone

office in the

who

world on the ground that he

is

is

seeking the biggest political

'too political'

is

a testimony to

the extent which the neo-liberals have succeeded in demonizing politics. 31

However, extension of franchise to poor people in European countries in

the late 19th and the early 20th centuries did not lead to an increase in income transfer, contrary to

what the old

had

liberals

feared, although

it

led to

and internal security). Income transfer expanded only after the Second World War. For further information, see T. Aidt, J. Dutta, and E. Loukoianova (2004), 'Democracy Comes to Europe: Franchise Extension and Fiscal Outcomes, 1830-1938', European Economic Review, vol. 50, pp. 249-283. reallocation of spending (especially towards infrastructure

32 See the literature reviews in A. Przeworski

8c F.

Limongi

(1993), 'Political

Regimes and Economic Growth', Journal of Economic Perspectives, 3 and Robinson & Acemoglu (2006), chapter 3.

Democracy

33 A. Sen, no.

3,

as a Universal Value, Journal of

vol. 7, no.

Democracy,

vol. 10,

1999.

34 One important dimension

that

we need

to bear in

mind when under-

standing the struggle for democracy in today's developing countries universal suffrage

the Second

now enjoys an

World War,

selective franchising

simply unacceptable. Rulers

now

is

that

unprecedented legitimacy. Since the end of

- once

so 'natural'

only have a binary choice -

- has become democracy

full

An army general who has come to power through a military coup d'etat may easily suspend elections, but he cannot declare that only rich people or only men can vote. Such heightened legitimacy has made it possible for today's developing countries to introduce and sustain democracy at much or no election.

lower levels of development than was the case with today's rich countries in the past. 35 Technically speaking, the blacks in the southern states were disenfran-

chised not

on the

basis of their race, but

qualifications. This "was because the Fifth

introduced after the Civil

War banned

on the

basis of property arid literacy

Amendment to the US Constitution

racial restrictions

261

on

voting. But they

BAD SAMARITANS were

effectively racial restrictions, as, for

example, the literacy

was

test

conducted extremely leniently for the whites. See H-J. Chang (2002), Kicking Ladder - Development Strategy

Away

the

Press,

London),

in Historical Perspective

(Anthem

p. 74.

Chapter 9 1

The quote

2

S.

is

from Japan Times,

18

August

1915.

Gulick (1903), Evolution of the Japanese (Fleming H. Revell,

New York),

p. 117.

3 Gulick (1903), p. 82.

4 D. Etounga-Manguelle (2000), 'Does Africa Need a Cultural Adjustment Program?' in Values Shape 5

B.

Webb

Harrison

L.

Human

(1984),

vol. 3, edited

&

S.

Huntington

Progress (Basic Books,

(eds.).

Culture Matters

New York),

The Diary of Beatrice Webb: The Power

by N. MacKenzie and

J.

How

-

p. 69. to Alter Things,

MacKenzie (Virago/LSE, London),

p. 160.

6

Webb

7

S.

(1984), p. 166.

Webb &

B.

Webb

by N. MacKenzie and

(1978),

The

Letters of Sidney

and

Beatrice Webb, edited

MacKenzie (Cambridge University Press, Cambridge),

J.

p. 375.

8

Webb & Webb

(1978), p. 375.

annexed by Japan

When Webb

visited Korea,

it

had been

just

in 1910.

9 T. Hodgskin (1820), Travels in the North of Germany: describing the present state of the social

and

political institutions,

commerce, education, arts and manners

kingdom of Hannover, 10 For example,

vol,

Hodgskin

I

the agriculture, manufactures,

in that country, particularly in the

(Archbald, Edinburgh), p.50, n.

2.

(1820) has a section entitled 'the causes of German

indolence' in p.59. 11

M.

Shelly (1843), Rambles in

London), 12 D.

Germany and

Italy, vol.

1

(Edward Monkton,

p. 276.

Landes

(1998),

The Wealth and Poverty of Nations (Abacus, London),

p. 281.

13

John Russell

Co, Edinburgh),

(1828),

A

Tour

in

Germany,

vol.

1

(Archibald Constable

&

p. 394.

Buckingham (1841), Belgium, the Rhine, Switzerland and Holland: The Autumnal Tour, vol. I (Peter Jackson, London), p. 290.

14 John

262

NOTES Whitman

15 S.

(1898), Teuton Studies

(Chapman, London),

p. 39, no. 20,

quoting John McPherson.

Etounga-Manguelle (2000),

16

p. 75.

17 Sir

Arthur Brooke Faulkner

vol. 2

(Richard Bentley, London),

(1833), Visit to

Germany and the Low Countries,

p. 57.

18 Faulkner (1833), p. 155.

19

Huntington (2000), 'Foreword: Cultures Count' in L. Harrison & S. (eds.). Culture Matters - How Values Shape Human Progress

S.

Huntington

(Basic Books,

New York),

1960s was

than half that of Ghana, as

less

p. xi.

In fact, Korea's per capita I

income

in the early

point out in the Prologue to this

book.

20 Representative works include the following.

The Social Virtues and Landes

How

-

(1998); L.

Harrison

Values Shape

in the 'Symposium

Spring 2006, 21

Landes

the Creation of Prosperity

&

Human

S.

Huntington

F.

Fukuyama

(1995), Trust:

(Hamish Hamilton, London);

(eds.) (2000), Culture

Progress (Basic Books,

New

Matters

York); the articles

on "Cultural Economics" Journal of Economic Perspectives, ',

vol. 20, no. 2.

(1998), p. 516.

(1982), Why Has Japan Succeeded? - Western Technology and the Japanese Ethos (Cambridge University Press, Cambridge). This argument has been popularized by Fukuyama (1995).

22

M. Morishima

on their analysis of the World Value Survey data, Rachel McCleary and Robert Barro argue that Muslims (together with 'other Christians', that is, Christians that do not belong to the Catholic, the Orthodox or the mainstream Protestant churches) have exceptionally strong beliefs in hell and after 23 Based

See their

life.

Spring 2006,

24

It is

thank

I

25

article, 'Religion

and Economy', Journal of Economic Perspectives,

vol. 20, no. 2.

said that, of the nine

names of

Allah,

Elias Khalil for relaying this point to

Guhck

two mean the

me.

(1903), p. 117.

26 Landes (2000), 'Culture Makes Almost All the Difference' in

& 27

S.

Huntington (2000),

Fukuyama

28 This

is

Harrison

(1995), p. 183.

the position taken by a

29 This term refers to the

number of authors in Harrison & Huntington

to have

and Harrison.

fact that the

Indian economic growth rate was

1%

in per capita terms) during 1950-80.

stuck at a relatively low 3.5% (around

supposed

L.

p. 8.

(2000), especially the concluding chapters by Fairbanks, Lindsay

It is

'just one'.

been coined by the Indian economist. Raj Krishna,

263

BAD SAMARITANS and was popularized by Robert McNamara, the former president of the World Bank.

30 S.

L.

Harrison, 'Promoting Progressive Cultural Change' in

Huntington

L.

Harrison

&

(eds.) (2000), p. 303.

on Japan,

31 Authorities

like the

American

political scientist

Chalmers

Johnson and the British sociologist Ronald Dore, also provide evidence showing that the Japanese were much more individualistic and 'independent-

minded' than they are today. See C. Johnson

(1982),

The MITI and the Japanese

Miracle (Stanford University Press, Stanford) and R. Dore (1987), Taking

Japan Seriously (Athlone Press, London). 32 K. Koike (1987),

Tasuba

(eds.).

The

'Human Resource Development' Political

Economy of Japan,

vol.

in K. 1

Yamamura &

Y.

(Stanford University

Press, Stanford).

33

J.

You

&

H-J.

Contributions

Chang

(1993),

to Political

'The Myth of Free Labour Market in Korea',

Economy,

vol. 12.

Epilogue The 2002 US proposal argued for a radical reduction in industrial tariffs 5-7% by 2010 and their total abolition by 2015. Since it did not envisage any exception, it is more potent than what happens in my Tallinn Round. The current EU proposal is slightly milder than my Tallinn proposal in that 1

to

it

calls for a

reduction to 5-15%. But even that

going to bring

is

tariffs in

developing countries to the lowest level since the days of colonialism and

unequal

treaties

- and, more importantly,

a level that

was not seen

in

most

of today's developed countries before the 1970s. For further details on the

US and EU proposals, see H-J. Chang (2005), Why Developing Countries Need Tariffs - How WTO NAMA Negotiations Could Deny Developing Countries' Right to a Future (Oxfam, Oxford, and South Centre, Geneva) http://www.southcentre.org/publications/SouthPerspectiveSeries/WhyDevCo

untriesNeedTariffsNew.pdf 2 Welles says these lines, which he wrote himself, as Harry Lime, the villain

of the movie. This script for The Third British novelist,

name, except

Graham

Greene,

who

Man was

later

turned

it

written by the famous into a novel of the

same

for these lines.

3 In 2002, manufacturing value-added per capita in 1995 $12,191 in Switzerland. $9,851 in Japan, $5,567 in the

$78 in India. See

UNIDO

(2005), Industrial

US

USA, $359

dollars

in

Development Report 2003 (United

Nations Industrial Development Organisation, Vienna), Table A2.1.

264

was

China and

NOTES 4 The figure for Korea in 2002 was $4,589 and that for Singapore was $6,583. UNIDO (2005), Table A2.1. Thus the Singapore figure is 18 times that of

China and 84 times that of India 5

World Bank

(1993),

The East Asian Miracle - Economic Growth and Public

Policy (Oxford University Press, Oxford), p. 102.

6 A. Winters (2003), 'Trade Policy as Development Policy' in

Toye

J.

(ed.).

Trade and Development - Directions for the Twenty-first Century, (Edward Elgar,

for All

Cheltenham). As cited in

-

How

J.

Stiglitz

and A. Charlton

(2005), Fair Trade

Can Promote Development (Oxford, Oxford

Trade

University

Press), p. 37.

7 For further details on Taiwan, see R. Wade (1990), Governing the Market - Economic Theory and the Role of Government in East Asian Industrialisation

(Princeton

University

influenced, through

Communist Party. There

Ching-Kuo,

in

219-220.

Moreover, the

was heavily Comintern membership in the 1920s, by the Soviet party constitution was apparently a copy of the latter's.

Its

members of

'miracle' years,

who

the Nationalist Party Politburo that

much

in the 1980s. Taiwan's

succeeded his

father,

amused

the

second president, Chiang

Chiang Kai-Shek,

as the leader of the

young man and Moscow with future leaders of the Chinese Communist Party, Deng Xiao-ping. He met his Russian wife when he was studying

party and the head of the

including

pp.

its

of the world so

studied in

Princeton),

the explanation for the sight of the professional hand-raisers for

lies

the geriatric rest

Press,

which ruled Taiwan during the

Nationalist Party,

state,

was a communist

as a

Moscow.

8 Korea also

had

its

who masterminded young

share of Marxist influence. General Park Chung-Hee,

the Korean

economic miracle, was

a

communist in his who was an

days, not least because of the influence of his brother,

influential local

communist

leader in their native province. In 1949, he was

sentenced to death for his involvement in a communist mutiny in the South

Korean army, but earned an amnesty by publicly denouncing communism.

Many 9

of his lieutenants were also communist in their young days.

Some

left-wing development campaigners have unwittingly contributed

to legitimizing the notion of the 'level playing field'

ment back is

at the

tilted the

other

by throwing the argu-

developed countries. They point out that the playing

way when

it

comes

are often (although not always) stronger (e.g., agriculture, textiles). If

going to have free competition, they argue,

and not 10

The

emit

just

we have

where the more powerful countries find

plain fact

is

that

much more carbon

field

to areas where developing countries

to have it

poor countries have low energy for each unit of output than

265

do

more

it

we

are

everywhere,

convenient.

efficiency

and thus

rich countries. For

BAD SAMARITANS example, in 2003, China produced $1,471 billion worth of output while emitting 1,131 million tonnes of CO^. This it

produced

means

that, for

every tonne of CO^,

Japan produced $4,390 billion, while emitting 336 million

$1,253.

tonnes of CO^, which translates into $13,065 per tonne of CO^. This means that Japan

produced more than 10 times the Chinese output per each tonne

of CO^. Admittedly, Japan

is

one of the most energy

efficient

economies, but

US produced CO^ - it produced

even the notoriously energy- inefficient (for a rich country)

more than

five

times the Chinese output per tonne of

$6,928 for every tonne of

CO^

worth of output and emitted data are from the

that

it

emitted

1,580 tonnes of

US government

(it

produced $10,946

billion

CO^). The carbon emission

source. G. Marland, T. Boden,

and R.

Andres (2006) Global, Regional and National CO^ Emissions. In Trends: A Compendium of Data on Global Change, Carbon Dioxide Information Analysis Center, able

Oak Ridge

National Laboratory, U.S. Department of Energy (avail-

online at http://cdiac.esd.ornl.gov/trends/emis/tre_tp20.htm).

The

output figures are from World Bank (2005), World Development Report 200s (World Bank, Washington, DC). 11

Some people

argue that this

the Cold War, which to

poor countries

lest

Good Samaritanism was

demanded

partly motivated

by

that rich capitalist countries behave nicely

the latter should 'go over to the other

side'.

But inter-

national competition has always been there. If the international competition for influence

was the only thing

that

made

the rich countries 'do the right

thing' in the third quarter of the 20th century,

not do the same in the 19th century

when

competition with each other?

266

why did the European empires they were in even

more

fierce

Index

Acemoglu, Daron 260-1 Adams, John 233

Arthur Andersen (accountancy firm) 170 Asian financial crisis (1997) causes 207, 209

Africa

cultural stereotyping

growth

and corruption 168 and foreign investment 86-7 and privatization 117

development 25

colonial

27-8

rates

HIV/AIDS

183, 184

South Korea

123

post-colonial development

asset stripping

225

see also individual countries by

name

Australia

agency cost 105

aircraft industry

ALBA

policies

108

55, 57,

256

religion as success factor

SOEs

60

131, 133

profit rates

27, 111 91,

(Alternativa Bolivariana para las Americas:

193

110

automotive industry

see car industry

Alcatel

111

autonomous revenue

authorities see

Algeria

241

Aventis

Bolivarian Alternatives for the Americas)

Alien Property Act (1887) Allende, Salvador allocative

207

Backscheider, Paula loss

Bairoch, Paul

114

Alternativa Bolivariana para las Americas see

ALBA

137

America, colonial Britain's restrictive

see also

ARAs

111

93

227

deadweight

Amazon.com

economic

policies

45,

48-9

Bale,

40

48, 55

Harvey 124

Bangladesh

75, 225, 241, 257

Bank of the

USA

51,

52-3

banks

USA

accountability of central

American System 52 Animal Farm (Orwell) 104

154

BIS capital adequacy ratio 149, 157-8 Chile 108

anthrax 123

France 128

Appert, Nicolas 133

loans to developing countries 86

ARAs (autonomous Arcelor

revenue authorities) 175

roles

of central

USA

111

Argentina

148, 154

51.92-3.94.154

see also financial institutions, multilateral;

1961 per capita

2002 financial agriculture

income crisis

21,

World Bank

224

86-7, 180

and dairy 79

Barro, Robert

147

Bechtel

corruption

257

Belgium

early 20th-century wealth

foreign investment inflation

256, 263

Bayer 123

Cavallo on

SOEs

208-9

244

79, 178, 179,

economic IPR laws

problem

68, 77, 78-80, 83

airline industry

90, 156, 158-9,

Austria

see also principal-agent

agriculture

12, 34, 87,

91

118

19th-century manufacturing 46, 48

213

development and democracy 178 economic policies 45, 57

238, 241

148, 150

foreign investment

109, 118-19

267

244

BAD SAMARITANS Burma (Myanmar)

Belgium (cont'd) IPR laws 251

Low

see also

Burr,

225

51

Burton, John 257

Countries

BWIs

Benn, Hilary 258 Berne Convention on copyright (1886) Beyer, Peter

Aaron

Woods

(Bretton

Dom

Camara,

BIS capital adequacy ratio 149, 157-8 Bismarck, Otto von 155

Cambodia 75 Cameroon 241, 249 Canada 79, 136, 178,

Mark

250

Bolivarian Alternatives for the Americas see Bolivia

IMF;

139-40

Bhagwati, Jagdish 47, 54, 87

Blaug,

Institutions) see

World Bank

131

capital

market

Britain

244

113

96, 107

France 97, 107,

249

168,

179, 205, 243,

failure

car industry

241

118, 150, 207,

bonds 51, 86 Botswana 123,

ALBA

Helder 188

111, 112,

120

Bowring, John 48

Germany

90, 97-8, 107, 112, 210

Brazil

greenfield

and brownfield investment

agriculture

corruption 180

Japan 19-21, 96, 97, 99, 212 Korea 90, 211

development under dictatorship 178 foreign investment

SOEs

241

IPR laws 136, 251 and neo-liberal economics possible future scenario

SOEs

203-7, 209

Carey,

Henry 234

Carey,

Mathew

234

Catholicism 188

with Britain 225

treaties

WTO governance Woods

Bretton

107, 108, 111, 112, 120-1

97-8,108

carbon emissions 265-6 27, 28

111

unequal

and

USA

and growth 149

inflation

Cavallo,

Chad

36

Institutions see

IMF; World

Domingo

147

257

Chang, Ha-Joon: family and background 4-12,

Bank

65-6

bribes see corruption

Chaplin, Charlie 129

Brisco, N.

Chiang Ching-Kuo 265 Chicago Boys 30

230-1

Britain

car industry 96, 107

child labour

chUd labour 260

ChUe

colonial policies

democracy 173 economic policies

PM

steel

115,

bureaucratic competence 217

carbon emissions 266

107

Confucianism 188-9

British Leyland

corruption 162

131

counterfeit goods

248 71, 107,

61

cultural stereotyping

129

technological development

British Steel

171

205

China

251

under Thatcher 209 US import tax rates see also England British Aerospace 107

30-1

possible future scenario

104, 115

industry

224

241

Pinochet regime 30, 108,

156

protection of technology 129-30, railways

21,

neo-liberal experiments

95-6, 243

IMF, control of 228

privatization

foreign investment

43-8, 155

Robert Walpole

government spending

nationalization

income

corruption 168

foreign investment

131, 133,

260

banks 108

16, 17, 21-2, 25,

43; see also

IPR laws

9,

1961 per capita

48-9, 24-5, 225

45,

corruption 162-3, 170

first

90, 96,

97-8

79

186

development under dictatorship 178 economic policies 29-30, 69

128

export success 14

75

foreign investment

growth

rates

and Hong Kong

107

94, 99, 241

27 24, 29

inequality 145, 227

107

Leon 88 Brown, Gordon 155

manufacturing output

215

Opium War

24

brownfield investment 90-2

possible future scenario

Bruno, Michael 150-1

post-colonial development

budget

deficits

155-8

Shanghai 145

Buiter,

Willem

67, 70, 236

SOEs

Brittan, Sir

268

110

(1839-42)

204-5, 207-9 225

INDEX Cuba 207

sweatshops 9

TNCs

culture

99

unequal

treaties

WTO

and

with Britain

changing 198-200

24, 225

Christian Aid

187-9

definition

172

and economic development 182-202

89

Chrysler 97-8, 108

Chun Doo-Hwan, General

Dacom

10

121

Cicero 61

Daewoo 90

civil service

Daimler-Benz 97-8

bureaucratic competence and development 216-17

De

Henry 52-3

Clercq, Willy de

Clinton,

debts 86

233

democracy

Cobden, Richard

alternatives

48, 231

Colbert, Jean-Baptiste

collective

266

63, 109,

first in

and

CoUor, Fernando 180

and corruption

private property 103-4

comparative advantage, theory of 46-7, 70-4 competition 120-1, 126

Confucianism: and economic development 188-9,

effects

115

see also

SOEs

of Congo)

Zaire;

now Democratic

Republic

Dominican Republic 241 Durand, Peter

169

133

duty drawbacks 44, 232

108

controlling stakes

135

Dore, Ronald 264

160-1, 164, 178, 257

contracting out

170, 180

and economic development

dictatorship:

Disney

189-92, 199

Congo (formerly

121

deregulation

24-5, 45

communism: and

world 179 market 18

free

Deng Xiao-ping

150, 205, 225, 241

colonialism

261

developed countries' undermining of 174-7 and economic development 171-4, 177-81

58

investment funds 240, 241

Colombia

21

Defoe, Daniel 40-3, 65, 229

Clinton, George

Cold War

Gaulle, Charles

231

172

Bill

238

Davos summit (2003) 228

169-70

corruption Clay,

Daimler-Chrysler 97-8 dairy industry

copyrights and copyright law

William 150-1

academic books 144

Easterly,

balancing interests 126

economic rights 175-6 Ecuador 10, 150, 205-6,

expense of protecting 141-2 first

laws

who

industries

South Korea

USA

Edison,

131

protect aggressively

11,

122

Thomas

education effects of copyright

61

see also IPR Corn Laws 46-8

Edward Edward

corruption

Egypt 241 166-7

III,

El Salvador

and economic development 160-6, 180-1 and neo-liberal policies 168-71 and privatization 118

king of England

electoral corruption

163, 259

electricity industry

113-14, 115, 120

electronics industry

France

Netherlands 132

10, 241

Nokia

cotton manufacturing industry see textile and

garment industries

harm

Tom

1, 3,

South Korea ElfAquitaine

(or otherwise) of 144

see also

Cruise,

210, 212

1-3

210

Singapore 96 249

developed countries 131-4

trademark laws

3, 85, 101,

Samsung

61, 122

123,

111

possible future scenario

counterfeit goods 11,

229

131-2

Costa Rica

copy drugs

144

241, 251-2

Corruption Perception Index 168

Asia

141,

king of England 228

I,

Einstein, Albert

avoiding 259 18,

law on

Korea 6

134-5, 208, 212

causes

241, 251-2

132

Elizabeth

IPR 145

Crusoe, Robinson (fictional character)

I,

EMBRAER

131, 133

43

1-3, 7, 9, 14, 210

111

queen of England 111,112

employment and inflation 151-2 and the welfare state

269

177

40, 41

178

BAD SAMARITANS energy efFicienq^ 219

industry

steel

energy industries ii3-i4>

ii5>

TNCs 97 US import

120

England

tax rates

17th-century excise service 259

Franco, Gustavo

Tudor economic

free

40-3

policies

111

75

27

market economics academic theories supporting 46-7, 70-4

see also Britain

and corruption 168-71 and democracy 171-4, 177-81 and developing countries 17, 67-74-8 effect of trade liberalization on government

Enron 170 espionage see spies essential services

and competition and privatization

248

121,

revenue 69

113-14> ii5> ii8-i9> 120

Etounga-Manguelle, Daniel 183

and growth

EU

history of 15-17, 21-31, 40-64

(European Union)

264

77,

Korea's use

export product quality standards 44

25,

27-31

14-15

neo-liberal view 12-14

Faulkner, Sir Arthur Brooke

FDI

see also foreign

Feldstein,

Martin

Ferguson, Niall Fielding, Fiji

possible future scenario

184

(foreign direct investment)

86,

investment

problem 106-7,

free-rider

financial institutions, multilateral

technology 1-2

fuel cell

37

IMF; World Bank

Fujimori, Alberto

180

Fukuyama, Francis 186-7, The Full Monty (film) 71

Finland cultural stereotyping

116

Friedman, Milton 147 Friedman, Thomas 20-1

241

regional

14-16, 24-30, 36-7, 40-63, 65-83, 211,

217-20

25

Henry 230

see also

economics

see also neo-liberal

free trade

34, 221, 255

203-9

winners and losers 70-4

88-92

184

197

development and democracy 178

EU

subsidies

economic

Galbraith, John Kenneth

77

policies

84-5, 100-1

foreign investment

SOEs

Fischer, Stanley

Gates, Bill

GATS

60, 110-11 147, 148

122

(General Agreement on Trade in Services)

97

GATT

86

foreign aid

foreign direct investment see foreign exchange controls

FDI

14, 89,

(General Agreement on Tariffs and Trade)

22, 23, 27, 63,

Gay, John 230

attempts to liberalize controls 78, 96-100

General Motors

Chile

Germany

31

developed countries

59, 60,

developing countries

14, 17,

types

20, 90,

19th-century manufacturing 48 car industry 90, 97-8, 107, 112, 210

corruption 258

76,

counterfeit goods

96-7

133-4

cultural stereotyping

86

democracy 173, 178 economic policies 22,

Henry 36

foreign investment

France

183-5, 194-8

45, 50, 56, 57,

95, 243,

18th-century financial system 128

government spending

18th-century manufacturing 129, 130

IMF, control of 228

19th-century manufacturing 48

infant industry protection

car industry 97, 107,

111, 112,

120

interest rates

IPR laws

corruption 162 cultural stereotyping

electronics industry

foreign investment

SOEs 48, 56, 58-9, 226

steel

95, 243,

244

Ghana

58

153

131, 136,

251 113

112

industry

TNCs

111

57, 58, 113

97-8

2, 3, 87,

185-6, 241

IMF, control of 228

Ghosn, Carlos 97

interest rates

GLCs (government-linked companies)

153

IPR laws 131, 136, 251 SOEs 110, 111, 120-1

Gleeson, Janet 128

economy

270

226

244

156

Prussian model factories

186

democracy 173, 178 economic policies 45,

96

29-30, 31

Ford 20, 96 Ford,

(GM)

92-6

pros and cons 84-102

agreement

226

Uruguay Round 74-8

95

foreign investment

TRIMS

103

gas industry 113-14

60

57,

109, 246

NDEX import substitution industrialization

control 31-7 rich countries' share

warming

global

British rule

219

45

bureaucratic competence 216-17

globalization

and democracy 260-1

copy drugs

123,

history of 21-31

corruption

257

TINA argument

GM see General Golden

Good Samaritan

foreign investment

16

government appointments: corrupt 162-3 government bonds 51 government corruption see corruption government-linked companies see GLCs government spending 146, 155-8

manufacturing output

SOEs

Graham 264

US import

90

and

87

WTO

rates

1997 crisis

87,

156-7

corruption 160-1, 164

development under dictatorship 178

Gulliver's Travels (Swift)

foreign investment

43

subsidies

unequal

162, 178, 223

Hamilton, Alexander 49-51, 214

in agriculture

40, 43

80

developed countries 58-60

Germany

58

Harrison, William 53

Japan

59-60

HCI (Heavy and Chemical 7,

Industrialization)

Heckscher-Ohlin-Samuelson theory

see

HSO

USA king of England

III,

VII, king of

with foreign investment regulation

92,94 pros and cons 65-7, 73-4, 82-3, 126-7, South Korea 82-3

theory

Henry Henry Henry

58,

parallel

217

70

Eli

225

treaties

Harrison, Lawrence 198

Heckscher,

241

27

infant industry protection

250

programme

75

governance 36

Indonesia

Gulick, Sidney 183, 196

Harris, John

215

and Uruguay Round 76

rates

Harley, Robert

69

106

stock market

and free trade 25, 27-31 and inflation 148, 149-51, 152 Guatemala 205, 213, 241, 251-2

Haiti

30,

and manufacturing vs services 214 post-colonial development 225

Greece 107

growth

241

and free market policies growth rates 27, 263-4 IPR laws 136

20-1

greenfield investment

249

development and democracy 179

37-9

Motors

Straitjacket

Greene,

see ISI

India

31

England 41-2

inflation

12, 18,

12,

223

20, 147-55, 157> 171. 175> 255-7

VIII, king of England 42 Hinduism: and economic development 198

innovation, Schumpeter's theory of 125

HIV/AIDS

interest rates

152-8, 203, 212

International

Monetary Fund

Hoechst

111

Holker, John

developing countries

53

timescales

29, 87, 96, 122, 193

IPR

211-12

(intellectual property rights)

costs of system establishment

5-6, 10

Singapore 109

Hungary

153

see also foreign investment

housing 4,

IMF

and monetarism 153-4

(Heckscher-Ohlin-Samuelson) theory 70-4

Korea

see

investment, industrial

130

Homestead Act (1862) Honduras 241 Hong Kong 10-11, 24,

HOS

IPR

intellectual property rights see

123-4

effect

and Korea 11, 14 laws and conventions 131-4

Hyundai

length of protection

168

211

134-6

originality of protected objects

IMF

136-8

pros and cons of protecting 122-44

91

(International

TRIPS agreement

Monetary Fund)

on foreign investment liberahzation 87-8 and neo-liberal economics 13, 15 origins

Iran (formerly Persia) Ireland Irwin,

32

and

policies

76, 122-3, 135. 141. 253

see also counterfeit goods; patents

control of 35

roles

141

on developing countries 140-2

Huntington, Samuel 165-6, 185-6

Iberia

226

50-2, 55

infant mortality

228

214,

23,

32-6, 145-9, 156-7

ISI

271

45,

225, 241

96

Doug

235

(import substitution industrialization)

22-3

BAD SAMARITANS Islam

Deepak

Lai,

cultural changes

196

and economic development

188,

192-3

cultural stereotyping

democracy 173, 178 economic policies 57, foreign investment

IPR laws

186

inflation

148, 150

see also individual countries by

60, 226

and economic development

law, rule of:

251, 253

68

legislative

Andrew

Adam

52,

corruption 163 137

Lesotho 249

92-3

74-8, 217-20

level playing field

137

Lexus cars 20

184, 241

Japan

life

1961 per capita

income 224

expectancy

223

12,

Abraham

Lincoln,

52-4, 124

Linux 245

208

1990s stagnation

Friedrich

agriculture 79 bureaucratic competence 216, 217

List,

car industry

loans

19-21, 96, 97, 99, 212

16, 48, 50, 217

Ken

Livingstone,

176

carbon emissions 266

conditionalities

Confucianism as success factor 188-9,

ways of regulating

192-3

182-3, 184-5, 194-8, 199,

Low

201

Countries 40-2

see also

development and democracy 178 economic policies 20-2, 29-30, 44, 55-60, 212

loyalty:

export success 14

Luddites

rates

92, 94-5, 239,

5, 8,

59-60

34, 80-1, 109, 183

215

McPherson, John 184 macroeconomic policies 146-59 Madagascar 237 Malawi 241 Malaysia

industry

developed countries 40-52,

173

treaties

Thomas

113, 129,

177

importance 213-15

96, 97

unequal

87, 99, 188, 225, 241

manufacturing industries

58, 113

and South Africa

Jefferson,

58,

113

TNCs

228

McNamara, Robert 264

manufacturing output steel

188, 192,

199

McCleary, Rachel 263

63

infant industry protection

SOEs

Belgium; Netherlands

and economic development

244

IMF, control of 228

IPR laws 136 and Korea 3,

149, 157

London City and Midland Bank 94

cultural stereotyping

foreign investment

33-4

banks

see also

corruption 162, 168

growth

191

laziness 18, 182-4, 194-7, 245

Lerner, Josh

Jamaica

name

Law, John 128-9

244

110

Ivory Coast

Jaffe,

53, 93, 235

development 25, 233 growth rates 27-8

corruption 162, 168

Jackson,

USA

America

Latin

Italy

SOEs

242

land ownership and reform: Landes, David 187, 197

241

Israel

225

Sanjaya

Lall,

technological development and flow 127-44

225

49,

51,

see also individual industries

136-7, 138, 233

Johnson, Chalmers 264

by name; infant

industry protection

Johnson, Dr Samuel 230

Marshall Plan 62-3, 221-2

Mauritius 241 Kay, John

Maynilad Water Services 115-16

253

Merchandise Mark Act Mexico economic policies

Keegan, William 155

Kenya 241 Keynes, John Maynard Kim, Alfredo (fictitious Kindleberger, Charles

Korea

146, 221

politician)

inflation

and

183, 190, 225

NAFTA

68-9, 205

Microsoft

Kornai, Janos 106

mining 93

Krishna, Raj

Mission Impossible

263

241

150

North Korea; South Korea Korea Telecom 121 Korean War (1950-3) 3, 5 see also

possible future scenario

microeconomic

policies

205, 207, 208

254

122, 126

Mississippi Bubble

272

133

68, 119, 225

foreign investment

203

250

Kwangju Massacre (1980) 10

(1862)

III (film)

128

145

NDEX mobile phone industry

Mobutu

Sese Seko

Modern Times

2, 3,

Nokia

245

Samsung

see also Nokia;

210, 212

NAMA

non-governmental organizations see NGOs North American Free Trade Agreement see NAFTA

160-2, 178

(film)

3, 85, 101,

non-agricultural market access see

129

monetarism 146-59

North Korea 80-1

money

Norway 60, 79, 110, 179 NPM (New Public Management) 169-70

liberating aspect 173

money supply

152-4

origins of paper

Nullification Crisis (1832)

money

129,

ODA

monopoly and

costs

126

benefits

OECD 121,

Monty Python

Ohlin, Bertil

113-14,

see also

193

and Mexico 68-9, 205 (non-agricultural market

Pakistan

225

Turkey

216, 225, 241

New Guinea

Papua access)

241

Paraguay 241

78-80,

Convention on patents and trademarks

264 Nanking, Treaty of (1842) 24 nano-technology industry 203-6

Paris

Nath, Kamal 78

patents

(1883)

131

Park Chung-Hee, General 6-7,

SOEs

on imported inventions

213

economics

133

possible future scenario

Friedman's take 20-1

public interest clashes 123

Korea

history 12-13

influence

on development 13-14

and timescales 75,

Patten, Christopher Peel,

policies

foreign investment

15, 45, 57,

Low

NGOs

Isaac

Philippines

see

Philips

NPM

121

132

pirate

goods

see counterfeit industry

Pitt the Elder,

William 49 208

Plaza Accord (1985) (fictitious

company

Pohang Iron and Steel Company politics see democracy

Nicaragua 75 Nield, Robert 170

portfolio equity investment

Niger 241

POSCO

Portugal

Nigeria 87

247

(Pohang Iron and 112, 113, 121

postal services

273

see

POSCO

86

12, 223, 251

109-10, 97,

208

Pinckney, Charles 233

(non-governmental organizations): and the

Nissan 96,

i35. 136, 174,

109, 115-16, 178, 216, 225, 241

Pinochet, General Augusto 30, 108, 171

138

chairman) 1-2

241

111

Peugeot-Citroen

79, 148, 179

World Bank 35 Nhumaio, Armando

75, 150, 175, 180,

Petrobras

pharmaceuticals industry 122-5,

156

Countries

Management

Zealand

60

244

government spending IPR laws 15, 132, 251

Newton,

163

Persia see Iran

Peru

economic

Public

24

perfect factor mobility 71

97 Netherlands

see also

206, 207, 208

Robert 231

Pendleton Act (1883)

212

241

Nestle

New New

14

see also

monetarist policies 146-59

Nepal

11,

TRIPS agreement 76 IPR

27-31

rates

265

interlocking 138-40

and corruption avoidance 168-71 on democracy 171-7, 179-81 and growth

10, 217,

developed countries 60, 232-3

natural resources: and standards of living neo-liberal

128

Palma, Gabriel 88

NAMA

nationalization see

24

overseas aid see foreign aid

244

11

(1841-2)

Ottoman Empire

1-2, 3, 198, 210

(North American Free Trade Agreement)

Chapter

78

Orwell, George 104

235

Muhammad, the Prophet Myanmar see Burma

NAFTA

12,

70

Opus Dei 188 Orleans, Due d'

13

85

Morill Act (1862)

assistance) see foreign

(Organisation for Economic Co-operation

Opium War vievs^

development

and Development)

248

118-19

Mozambique

(official

aid

and innovation 125 natural monopolies and competition natural monopolies and privatization neo-liberal

52

204

114

Steel

Company)

14,

BAD SAMARITANS Potrykus, Ingo pricing

and

139-40

prices

251

service

economy: vs manufacturing 214

Shanghai 145

of patents 126

effect

Serbia

Mary

and natural monopolies 113-14

Shelley,

price stability see inflation

shipbuilding 108

and privatization

Sierra

117

principal-agent problem

development under dictatorship 178 economic policies 29

105, 107

privatization as loan conditionality

foreign investment

34

SOEs

see also

growth

pro-cyclical investment behaviour

productivity:

Leone 237

Singapore

89-90, 242

transfer pricing

SOEs

87

109

Singer

Prussia

Singh, Ajit

258

138-9

Slovenia

funding

developed countries 55-6,

WTO

regulations

54-5

SOEs (state-owned

120-1

monitoring 120

14

116-19

privatization pitfalls

pros and cons

70, 231

103-21

Robinson, James 260-1

software industry 122, 126

Robinson, Joan 100

Somoza, Anastasio 260 South Africa 123-4, 152-3, South Korea

Rolls-Royce 107

260

Roosevelt, Franklin

Theodore

Ruggiero, Renato

163

budget constraint problem 106

1997

crisis

12, 34, 87,

John 184

corruption

Gobain

Samsung

3,

90, 156, 158-9, 208-9

162, 168

counterfeit goods

84, 129, 243, 251

117-18, 170-1

culture

11,

61

183, 185-7, 189, 196,

economic

236

27,

politics

policies

199-201

178, 179

14-15, 29, 44, 55-6, 61, 81-2,

265

111 1,

249

car industry 90, 211

development and St

173, 224, 241,

bureaucratic competence 216-17

23

Russia

post-Soviet

106-8

state vs private enterprise

soft

Sachs, Jeffrey

203-6

improving performance 120-1 11,

golden 139-40

imperial

electronics industry 1-3,

210

Samuelson, Paul 70 Sanofi-Aventis

foreign investment

111

SAPs

(structural adjustment

Sarel,

Michael 256

Say, Jean-Baptiste

Schindler, Oscar

programmes)

32, 35

7, 9, 14,

growth

rates

and development 2-12

IMF

210

95-6, 101, 241, 244

history

232

225, 227

loan conditionalities 34, 148, 156, 158-9,

257

162

Schindler's List (film)

inflation

162

life

and growth 149-50

expectancy and infant mortality

12,

Schumpeter, Joseph 125

manufacturing output

Schuyler, Philip

per capita income 3-4, 10-11, 223, 263

SDT

233

sense of time

196

SOEs

112, 113, 120, 121

Senegal

see also

steel

241

109-10,

industry

7, 9, 14,

Korea

South Sea Bubble 43

274

223

29, 215, 265

and differential treatment) 77 semiconductor industry 3 Sen, Amartya 178 (special

Seoul 4-5, 10

206

203-5, 206

enterprises)

road building and maintenance 118-19

Russell,

203,

examples of successful 108-12

105

Rhone-Poulenc 111 Ricardo, David 46-7,

Roosevelt,

businessman) 203

(fictitious

developed countries 58-60

111, 112,

reverse engineering: Korea

rice,

Antonio

Soares Tecnologia (fictitious company)

189-92, 199 residual claim

45-7, 49-50, 214, 217

tariff

Soares, Paulo (fictitious businessman)

248

and economic development 188-9,

Renault 97,

12,

Soares, Luiz (fictitious businessman)

Reagan, Ronald 74-5, 108, 147 religion:

Adam

Soares, Jose

174

77

58, 113-14, 115,

53-4 223

12,

Smoot-Hawley

slimming drugs vs malaria cures railways

Smith,

58, 60, 235

of patents on 124-6

effect

27

USA

slavery:

R&D

215

Singapore Airlines 108, 112

153

protection see free trade 113, 251,

96, 241

225, 227

rates

sources of wealth

and privatization 248

profit rates, average

183

109-10,

112, 113, 211

INDEX Spain

56, 91, 136, 251

special

and

spies: industrial

130

spill-over effects

91

'Spring of Seoul'

Lanka

SDT

growth

SOEs

10

France

independent tax

109-10,

53

telephones landline

87

programmes

see

SAPs

mobile

Telmex

developed countries

17,

essential services

58-60

Thales

41-2, 45, 81

9,

87, 99, 225, 241, 256

111

Thatcher, Margaret 37-8, 104, 209

The Third

106, 107

Man

Thomson

white elephant projects 27

(film)

214-15

111

timber industry 93

regulations 76-7

Mohamed

mobile phone industry

and garment industries

textile

107-8

113-14, 119, 121

see

119

Thailand

114-15

14

private firm bail-outs

and SOEs

ARAs

development and flow 127-44 importance of acquiring 81-2, 127

112, 113, 211

254

5,

Korea's use

175; see also

115

historical

25, 57, 129 7, 9, 14,

subsidies

time, sense of 196

160-1, 178

TINA TNCs

Sun Yat-Sen, Dr no Swaziland 237

Sweden

(There

Is

No

Alternative)

37-9

(transnational corporations)

89-102,

239-40

Togo

corruption 162

economic policies 57, government spending industrial relations

IPRlaws

58, 153, 157-8, 201,

241

Tools Act (1785)

226

156, 158

199

industry automation interest rates

130

township and

village enterprises see

Toyota 19-21,

92, 212

Trade-related Intellectual Property Rights agree-

ment

251

see

TRIPS

Trade-related Investment Measures agreement see

58

TRIMS

SOEs 58,108

trademark laws

training 72

Jonathan 43

131, 133

see also counterfeit goods;

Switzerland

transnational corporations see

79

19th-century manufacturing 46, 48

treaties,

development and democracy economic policies 15, 45, 60

Tres Estrelas (fictitious

foreign investment interest rates

IPR laws

15,

178, 179

TRIMS

TRIPS

131-2, 136, 251

76,

12,

1-2, 3

97-7

(Trade-related Intellectual Property Rights)

agreement

223

76, 122-3, i35> 141. 253

manufacturing output 214-15

trust:

sources of wealth

Tunisia 241, 251

214-15

and economic development

Turkey

97

TVEs (township and

Taiwan

Uganda 123, 175, unemployment

bureaucratic competence 216-17

corruption 162

disguised

culture

see also

193 politics

Uruguay

178, 179

275

186-7, 197

225, 241

Syngenta 139-40

development and

company)

(Trade-related Investment Measures)

Trinidad and Tobago 241

153

expectancy and infant mortality

TNCs

TNCs

unequal 24-5

agreement

244

IPR

89-90, 242

transfer pricing

agriculture

TVEs

trade liberalization see free market economics

177

153

public-private cooperation

life

203

technologies

structural adjustment

Swift,

Zachary

Taylor,

57, 58, 113

58, 113

Joseph

WTO

offices

system establishment

111

stock markets: relative size

Suharto,

to reduce

and corruption avoidance 259

ban of American 45

South Korea

and

249

taxation

protectionism

Stiglitz,

123, 241,

protection see free market economics

71, 107, 129

Germany Japan

95

225

ongoing pressure

industry

British

rates

tariffs

225, 241

Britain

29, 44, 55

110

Tanzania

state-owned enterprises see SOEs steel

policies

foreign investment

218-19

sporting analogies

Sri

economic treatment see

differential

village enterprises)

178, 237,

152

employment

168, 241

249

no

BAD SAMARITANS USA

wages: and inflation

151-2

1800 presidential election

233

Walpole, Horace 230

i860 presidential election

54

Walpole, Robert 40, 43-6, 162, 213-14

2000 presidential election 261

Wang Xing-Guo

agriculture

Warner, Andrew

77,

79

(fictitious central

anthrax scare 123

water industry 113-14, 115-16,

banks

The Wealth of Nations (Smith) Webb, Beatrice 183, 199

51,

92-3, 94, 154

and BWI control

35

Californian electricity deregulation car imports

Weber,

115

Max

118

46, 49

182

Orson 214-15

Welles,

corruption

West, Richard 40

163, 168, 170

development and democracy drugs research funding 125 policies

Wilkins, Mira

178, 179

Winters, Alan 216, 217 Wolf, Martin

92-4, 243

government spending 157 import tax rate variations

75,

infant industry protection

50-2, 55

76

133, 134-5,

215

142, 172

Woolf, Virginia 253 woollen manufacturing industry see

World Bank and agricultural

liberalization

control of 35

Mexican diaspora

and corruption 161 on costs of TRIPS agreement

68, 236

per capita income 25

205-8

East Asian Miracle report

Republican Party, origins 53

and neo-liberal economics

slavery

origins 32, 75

53-4

soldiers in

TNCs Whig

87

77, 108

subsidies

WorldCom

97-8

America

see also

Usinor

and China

3

172

governance structure 36-7

111

and neo-liberal economics

Uzbekistan 257

origins

23, 36, 75

75-8

policies

(Vitamin

Venezuela Venice

deficiency)

61, 165, 188,

205

deficiency see

Volcker, Paul

Volkswagen

257

158

81

A

possible future policies

139

Yemen

131

Gore Vietnam 5, Vitamin

A

150, 206-7, 241

Vidal,

Vinalon

13, 15

170

utilities see essential services

VAD

141

216

Wright Brothers 139 WTO (World Trade Organisation)

Party 234

USAID: on Korea

78

and privatization 119 roles and policies 23, 32-6, 75-8 World Economic Forum, Davos (2003) 228

Korea 8-9

stock market

151 112,

VAD

and

Woolsack: origins 229 136-9, 208, 212

Marshall Plan 62-3

possible future scenario

textile

garment industries

152-4, 156-8, 203

IPR laws and suits 131, manufacturing output

243

Williams, Ernest 133-4

48-56, 57, 62-4, 74-5

17, 22,

foreign investment

interest rates

204

welfare state 72, 167, 177, 199, 259

19

carbon emissions 266

economic

banker)

236

27,

Zaire see

Congo

Zambia

241

Zhou Enlai Zimbabwe

210

276

212

68-9, 241

203

13, 15

common

Both justice and

demand

that

we

sense,

reevaluate the policies

weaker nations. Bad Samaritans return to like the

its

abandoned

in

role,

calls

we

argues, force

on

on America

embodied

in

to

programs

Marshall Plan, to offer a helping hand, in-

stead of a closed

low

Chang

fist,

to countries struggling to fol-

our footsteps.

Ha-Joon Chang has taught

in the Faculty of

Economics, University of Cambridge, since 1990.

He

has consulted for numerous international

organizations, including the United Nations, the

World Bank, and

He

the Asian

Development Bank.

has published eleven books, including Kicking

Away

the Ladder^

In 2005,

winner of the 2003 Myrdal

Chang was awarded

Prize.

the Leontief Prize for

Advancing the Frontiers of Economic Thought,

whose previous recipients include Amartya Sen and

John Kenneth

Galbraith.

Jacket design: mjcdesign.com Jacket photograph: Gary S.

Chapman

Author photo: Valor Economico

© Getty Images

Praise for BAD

"A smart,

lively,

##

SAMARITANS

and provocative book

that offers us compelling

new ways

of looking at

globalization."

—Joseph

Nobel laureate

Stiglitz,

"Lucid, deeply informed,

and enlivened with

could be entitled 'Economics

in

in

economics, 2001

striking illustrations, this penetrating

the Real World.'

Chang

reveals the yawning

study

gap between

standard doctrines concerning economic development and what really has taken place

from the origins of the industrial revolution

today. His incisive analysis

until

shows how,

and why, prescriptions based on reigning doctrines have caused severe harm, to the

most vulnerable and defenseless, and are

likely to

continue to do

particularly

so."

— Noam Chomsky "Every orthodoxy needs effective effective critic of globalization.

integration into the world

critics.

He does

Ha-Joon Chang

not deny the benefits to developing countries of

own

is

and

globalization.

— Larry "I

recommend

I

is

scope, and beautifully

writ-

Elliott,

economics

book

to

it."

editor.

Guardian

people who have any interest

everyone."

—Bob

in its

Works

the perfect riposte to devotees of a one-size-fits-all model of growth

strongly urge you to read

this

argue that

of Wtiy Globalization

a marvelous book. Well researched, panoramic

Bad Samaritans

of history to

terms."

— Martin Wolf, Financial Times, author "This

probably the world's most

economy. But he draws on the lessons

they must be allowed to integrate on their

ten.

is

Geldof

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