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Negative Views of Free Trade

February 27, 2008


It is no secret that free trade and globalization have their critics — just listen to the presidential debates between Clinton and Obama. Among other critics of free trade is Ha-Joon Chang, author of the book Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. Paul Blustein, journalist in residence in the Global Economy and Development Program at the Brookings Institution, reviewed Chang’s book for the Washington Post [“The Case Against Globalization,” 17 February 2008].

“Bookstore shelves are loaded with offerings by economists and commentators seeking to explain, in accessible prose, why free-trade-style globalization is desirable and even indispensable for countries the world over. Now comes the best riposte from the critics that I have seen. Readers who are leery of open-market orthodoxy will rejoice at the cogency of Bad Samaritans. Ha-Joon Chang has the credentials — he’s on the economics faculty at Cambridge University — and the storytelling skill to make a well-informed, engaging case against the dogma propagated by globalization’s cheerleaders. Believers in free trade will find that the book forces them to recalibrate and maybe even backpedal a bit.”

As I noted in a recent post, there is already some backpedaling going on. Chang’s book may add stimulus to the movement, which is not necessarily a good thing. Blustein suspects, however, that Chang won’t win over many new converts.

“That’s because Chang goes way overboard in advancing his central argument, which is that poor countries can get rich only by doing pretty much the exact opposite of what they are told by the World Bank, the International Monetary Fund and the World Trade Organization — the ‘bad’ Samaritans to which the title refers.”

Blustein reports that Chang, a South Korean, draws heavily from his childhood experience with the spectacular growth of the South Korean economy, which took that country from one where indoor plumbing was a luxury to one where high tech gadgets are the norm.

“In the process of achieving this breathtakingly rapid improvement in living standards, he notes, South Korea departed dramatically from free-market principles. The country set up high barriers to protect its fledgling industries, such as steel and autos, and offered subsidies to help promising firms flourish. Other Asian countries, notably Japan and Taiwan, developed in similar ways. The dirty secret of capitalism, as Chang explains, is that much the same is true of the modern industrial economies of the West, including Britain and the United States. Although advocates of free trade typically extol the British as the pioneers of open markets, London lowered tariffs in the mid-19th century only after its industries had firmly established their lead over rivals. Likewise, U.S. tariffs remained high throughout America’s industrialization. So why, Chang asks, should today’s poor nations be required to develop differently?”

Blustein asserts that this is Chang’s strongest argument.

“Chang acknowledges that ‘the mere co-existence of protectionism and economic development does not prove that the former caused the latter.’ But, he asserts, ‘Free trade economists have to explain how free trade can be an explanation for the economic success of today’s rich countries, when it simply had not been practiced very much before they became rich.’ A fair point, and Chang scores some more when he recounts the widespread unemployment and subpar growth that occurred in countries such as Mexico and Ivory Coast after their governments, under pressure from the ‘bad Samaritans,’ lowered barriers that were sheltering their industries.”

The theory behind free markets is that they force a country to shed unproductive industries and allow it to focus on what it does best. Protectionism implies that any country can master any industry given enough time. Blustein uses Zambia as an example of bad protectionism.

“Consider Zambia, a country I visited recently, which followed World Bank advice in the 1990s to open its markets to foreign clothing. Unfortunately, the local industry was woefully uncompetitive, having survived in a protected market by selling shoddy, expensive apparel to the local population and showing no sign of success at exporting. So it quickly collapsed amid a flood of imports, resulting in 10,000 lost jobs. Sad as that was for the workers, millions of Zambians can now afford decent clothing (much of which is used and has been donated by Americans to various organizations, shipped to Africa in bulk and sold cheaply by street vendors). That’s probably a very good trade-off for the poor. Did it help put Zambia on the path to prosperity? No, and for that the World Bank should be embarrassed — for being overoptimistic Samaritans, not bad ones.”

I would venture to say that Muhammad Yunus would take a different take on whether such actions put Zambia on the path to prosperity. The street vendors and their customers are probably both better off. For them, prosperity is measured in tinier steps than the big leaps Chang is advocating. The big leaps made by developing countries were all preceded by smaller steps, such as good education systems and adequate healthcare. There is no one template that fits every situation, because every country starts at a different point and faces different challenges.

“Chang counters that short-term benefits such as cheaper clothing should be sacrificed for the sake of long-term development. That means nurturing manufacturers with long periods of protection and subsidies, like the 30 years Toyota got in Japan. He insists that this approach can work even in destitute countries. ‘A backyard motor repair shop in [Mozambique’s capital] Maputo simply cannot produce a Beetle, even if Volkswagen were to give it all the necessary drawings and instruction manuals,’ he writes. ‘But this does not mean that Mozambicans should not produce something like a Beetle — one day. … After all, a backyard auto repair shop is exactly how the famous Korean car maker, Hyundai, started in the 1940s.'”

I’m not sure Chang’s vision of an automaker in every country is either workable or desirable. Environmental concerns, which were on the back burner in the 1940s, cannot be pushed aside today simply because developed nations were poor stewards in the past. The Samaritans, developed countries, and developing countries need to find a way forward that permits development, protects the environment, and leverages technology to leap frog the mistakes of the past. The Enterra Solutions® Development-in-a-Box™ approach is based on the philosophy that it is wasteful and ineffective for every developing country to reinvent their industries. Doing it “exactly how the the famous Korean car maker, Hyundai” did it is not the answer. Blustein concludes with the point I’ve made in the past about the importance of establishing pre-conditions for development, which include, a healthy and educated work force as well as good governance.

“Lamentably, the book gives short shrift to the debacles that show the pitfalls of industrial planning. India’s experience in the 1950s and ’60s was a revealing example; its poor are still paying a dreadful price for the government’s excessive investment in steel plants, fancy hospitals and universities instead of elementary schools and small clinics. Chang also glosses over the objection that industrial planning is doomed to fail in countries lacking the strengths that Japan, Korea and Taiwan had — well-educated populations and talented, mostly incorruptible civil servants. Ironically, in an incisive chapter on privatization, he cites the poor training and low ethical standards among government officials in many developing countries as a good reason to avoid selling off state enterprises that will require effective regulation. ‘Privatization sometimes works well, but can be a recipe for disaster, especially in developing countries that lack the necessary regulatory capabilities,’ he writes. Well, if such governments can’t regulate properly, how can they successfully oversee the creation of world-class auto industries?”

Clearly, the perfect economic theory has not yet emerged. There are likely to be many paths to development, but almost all of those paths will have to share some common features — good health, good education, and good governance being among them. To fully enjoy the benefits of globalization, developing countries must eventually play by the same rules as other global players, which means they must eventually make peace with the Samaritans. For their part, the Samaritans must keep an open mind and willingness to learn. Muhammad Yunus was as frustrated with the World Bank as Chang seems to be, but the World Bank eventually saw the wisdom in Yunus’ work. Trying to create good guys and bad guys among the big players in globalization is not the best way forward for either developed or developing states.

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