By Hunter Wallace
Ha-Joon Chang is a South Korean development economist and his book Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism is a stinging critique of neo-liberal economics.
Like Clyde Prestowitz, I stumbled across Ha-Joon Chang’s work many years ago via Pat Buchanan while in college. When my interest returned to trade issues because of the Trans-Pacific Partnership and Trump’s presidential campaign, I looked him up and searched for his most recent books. Bad Samaritans rehearses many of the same arguments in Chang’s earlier and more comprehensive book Kicking Away The Ladder: Development Strategy In Historical Perspective.
The core argument of this book is that rich countries – through the IMF, World Bank, and WTO – force neo-liberal economic policies on poor countries. In doing so, the rich countries are “Bad Samaritans” because they didn’t use the same economic policies to become rich and powerful themselves during their earlier stages of development. By forcing neo-liberalism on poor countries, the developed countries are “kicking away the ladder” and selectively editing their own history in order to attribute their prosperity to their present day policy preferences.
Naturally, Chang’s perspective on economic development is heavily influenced by the stupendous leap forward of his own native South Korea, a country which in 1960 was recovering from decades of Japanese colonialism, the partition of Korea, and the Korean War which was one of the most devastating wars in world history. In 1960, South Korea was one of the poorest countries in the world with a per capita income half the average of Ghana. Yet by 2010, South Korea was one of the richest and most industrialized countries in the world.
“The neo-liberal establishment would have us believe that, during its miracle years between the 1960s and 1980s, Korea pursued a neo-liberal economic development strategy. The reality, however, was very different indeed. What Korea actually did during these decades was to nurture certain new industries, selected by the government in cooperation with the private sector, through tariff protection, subsidies and other forms of government support (e.g., overseas marketing information services provided by the state export agency) until they ‘grew up’ enough to withstand international competition. The government owned all the banks, so it could direct the lifeblood of business – credit.
Some big projects were undertaken directly by state-owned enterprises – the steel maker, POSCO , being the best example – although the country had a pragmatic, rather than ideological, attitude to the issue of state ownership. If private enterprise worked well, then fine; if they did not invest in important areas, the government had no qualms about setting up state-owned enterprises (SOEs); and if some private enterprises were mismanaged, the government often took them over, restructured them, and usually (but not always) sold them off again.
The Korean government also had absolute control over scarce foreign exchange (violation of foreign exchange controls could be punished with the death penalty). When combined with a carefully designed list 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 it with open arms in certain sectors while shutting it out completely in others, according to the evolving national development plan. It also had a lax attitude toward foreign patents, encouraging ‘reverse engineering’ and overlooking ‘pirating’ of patented products.” …
The Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state direction. The Korean government did not vanquish the market as the communist states had. However, it did not have blind faith in the free market either. While it took markets seriously, the Korean strategy recognised that they often needed to be corrected through policy intervention.”
Whereas Americans believe that free-enterprise, free-labor, free-markets, free-trade and free-governments are the key to economic development, the South Korean view is that the acquisition and mastery of new technology and industrial capacity is the key to prosperity. While South Koreans are happy to make use of markets and trade, they are not ideologically opposed to state intervention and guidance and always keep their paramount national interest in mind.
According to Chang, Great Britain and the United States – the world’s two great apostles of liberal economics – became wealthy and powerful by following a similar strategy. From Henry VII to Queen Victoria, the British Empire was built by a hardier race of men who believed the national interest of England, as opposed to the individual or the consumer, was paramount. Tudor and Georgian England was a mercantilist state that systematically practiced industrial espionage, protectionism, warfare and colonialism on a massive scale to launch the Industrial Revolution and British supremacy in sea power.
The United States, which grew out of 13 of Britain’s American colonies, chaffed under the restrictions of British mercantilism. Under the Navigation Acts, American goods had to be carried in British ships and Americans were forbidden from engaging in free-trade with Britain’s European rivals. The American colonies were also forbidden from engaging in advanced manufacturing activities. Instead, the purpose of the American colonies was to export cheap raw materials to Britain while serving as a market for metropolitan industrial exports.
After the American Revolution, Alexander Hamilton articulated the blueprint of the “infant industry strategy” by which the United States would “catch up” to Great Britain through a mercantilist economic strategy of its own that would foster industrialization. Hamilton’s death and the election of Jefferson as president temporarily postponed the implementation of this strategy. Ultimately, it was the War of 1812 during which Britain burned Washington to the ground that proved decisive in bringing about the course correction.
From the Tariff of 1816 until the end of the Second World War in 1945, the United States followed a protectionist trade policy, while Great Britain became the great apostle of free-trade and classical liberal economics in 1846 before moving to a zero tariff regime recommended by liberal economists in the 1860s. This lasted until the Great Depression when Great Britain “succumbed to protectionism.”
During the 1820s, the German economist Friedrich List became impressed by America’s rapid industrial progress while living in the United States. After his return to the German states, Friedrich List became the founder of the German historical school of economics. List’s ideas, which he published in his 1841 book The National System of Political Economy, became the economic foundation of German unification and industrialization under Prussian leadership.
Success breeds imitation and Meiji Japan’s industrialization was inspired by Prussia’s example. Chang explains how France abandoned laissez-faire after its national humiliation by Germany in the Second World War. The French raised tariffs, created state-owned enterprises, nationalized key industries and channeled investment to strategic industries through state-owned banks. By the 1980s, France had modernized its economy. Finland, Norway, Italy and Austria followed the path blazed by France after the Second World War. In Sweden, the government was heavily involved in building infrastructure and used tariffs to build up key industries.
Back in East Asia, Japan’s success inspired imitators in South Korea, Taiwan, Malaysia, Singapore, China and Indonesia, although it should be stressed that different countries used many variations on the same theme of state guidance, acquiring foreign technologies, and building up industrial capacity. Chang notes that the two economists the Japanese were most influenced by were Friedrich List and Karl Marx.
The rest of the book consists of a full throttle attack on neo-liberal economics as a development strategy:
1.) Chang attacks the free-market on the grounds that foreign competition can strangle infant industries – like Japan’s 20th century automobile industry, or America’s 19th century steel industry – that in the long term can mature, develop new capacities, stimulate innovation, spinoff new industries, and lift poor nations out of poverty. By sacrificing long term development to short term profit, the free-market reinforces the status quo and perpetuates underdevelopment.
2.) Chang attacks unregulated foreign investment by criticizing the irrational herd behavior of foreign investors during the Southeast Asia financial crisis in the late 1990s. He cites Finland as an example of a country that industrialized and modernized its economy by imposing extreme restrictions on foreign investment.
3.) Chang demolishes the myth that state-owned enterprises are always hopelessly inefficient and inferior to their private sector counterparts. He points out that state-owned enterprises have been widely used by South Korea, China, France and Scandinavian countries. America’s experience with NASA illustrates how the state is capable of accomplishing technological feats which the private sector has never repeated or would have dared in the first place.
4.) Chang attacks the idea that intellectual property rights are the key to innovation. Much of this chapter deals with the West’s long history of violating patents, copyrights and trademarks. He notes most of the R&D in the United States is either government funded or conducted by public and private universities, not corporations.
5.) Chang attacks the neo-liberal doctrine of monetarism by pointing out how guilty Western countries are of inflating their own currencies and refusing to balance their budgets.
6.) Chang attacks the notion that corruption is responsible for the failure of neo-liberalism by pointing out how much corruption has thrived in developed Western countries or developing countries that have achieved respectable economic growth. As Chang’s example of Congo vs. Indonesia shows, corruption per se doesn’t necessarily hinder economic development and may even facilitate it.
7.) Chang attacks culturalist explanations of neo-liberal failure by showing how much cultural stereotypes have changed over time. No one talks anymore about dull, lazy, emotional, individualistic Germans or Japanese and Korean savages who live in Medieval mud huts. Confucianism, for example, has been invoked to explain both East Asia’s backwardness and its recent “economic miracle.”
Unfortunately, Chang never tackles the question of how free-trade and the free-market have a negative impact in rich countries. He could have easily cited our ubiquitous Wal-Marts or the fate of Alabama’s steel industry as an example of the dangers of foreign investment and free-trade dogma. Birmingham’s industrial potential was crippled by absentee ownership. Had Japan been reduced to an American state, Toyota might have ended up as a subsidiary of Ford or General Motors.
The Confederacy and the “New South” would have been excellent examples of how laissez-faire doctrine can lead to underdevelopment and crippling dependence which can prove fatal in wartime. 1 out of every 4 Southern White men died trying to win Southern independence, but failed due to the fragility of the South’s cotton based economy. Let’s not forget that it was free-market signals from the “Invisible Hand” and the short-sighted profit motive that guided Southerners to invest almost their entire national wealth in black slaves that was wiped out by the stroke of a pen with abolition.
I would love to see Professor Chang ride shotgun with Paul Theroux in a grand tour of the Ozarks in Arkansas or the poorest counties in eastern Kentucky or even better a stop at the Hyundai and KIA auto plants in Montgomery, AL and West Point, GA. In light of what I have read, I would love to hear his take on what is going on there.