Book Review / Robert Sauté
Neoliberalism and its DiscontentsNeoliberalism and its Discontents
Amsden, Alice H. 2007. Escape From Empire: The Developing World’s Journey Through Heaven and Hell. Cambridge, MA: The MIT Press. 210 pages. Cloth. $27.50
Chang, Ha-Joon. 2008. Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. New York: Bloomsbury Press. 288 pages. Cloth. $26.95
Why aren’t all countries rich? It is not a silly question. If we were to believe the economic orthodoxy of the academy and those who manage the central banks and the international institutions of finance and trade — the World Bank, the International Monetary Fund, and World Trade Organization — we would have to wonder why some countries are so poor. The theory that is taught in every reputable economics program in the United States contends that economies move toward a steady state. In the long run, if markets are allowed to operate without interference, economies ought to converge so that levels of growth and standards of living are similar. With universal access to information, increasingly lower transportation costs, and free trade, shouldn’t all countries resemble the thirty wealthy nations of the OECD? Sadly most do not, and many are extremely poor.
And poverty is a problem. In 2001, 877 million people lived on less than $1 a day. The United Nations Human Development Report for 2007 reports that “2.6 billion — 40 percent of the world’s population — live[s] on less than US $2 a day.” Of course, this poverty is not randomly distributed. The disparities between the wealth of some nations and others are quite striking. One in every six people live in countries the World Bank calls “high income” or “developed.” The purchasing power of their incomes amounted to $26 trillion in 2001. The remaining five billion people live in low or middle-income countries, and they collectively had incomes worth only $20 trillion.
The consequences of this poverty are profound. 1.5 billion people live without electricity and 1.1 billion lack adequate access to water. In 2003, 10.6 million children died before the age of five. Seventy-two million children of primary school age in 2005 were not in school. Fifty-seven percent of them were girls. In 2004, three million people with HIV/AIDS died, and one million a year die from malaria.
Those who manage the central banks of wealthy nations and the international institutions of finance and trade, the World Bank, the International Monetary Fund, and World Trade Organization, what Ha-Joon Chang calls the “Unholy Trinity,” have a solution to the problem of world poverty. If countries open their economies to foreign investment, dismantle capital controls, give up on industrial planning — in short, unfetter internal markets and expose industry and agriculture, trade and finance to the salutary effects of competition, sooner, rather than later — poverty will disappear. It is Adam Smith’s invisible hand that guides these policies, frequently referred to as neoliberalism. The idea is that the natural propensity to “truck, barter, and trade” leads to an increase in the common good because the innumerable acts of exchange result in a market that in sum expresses the desires of its participants. Buyers and sellers agree on a price that results in the ability of all to exchange their goods or services and carry out an efficient allocation of resources.
That innate call to “truck, barter, and trade” results in another important social consequence, according to mainstream economic theory: specialization and the division of labor. In The Wealth of Nations, Smith explained that the desire to gain advantage in trade would push capitalists to specialize and develop techniques to boost productivity. He used the example of a pin factory; when workers specialized in a detailed division of labor, they could radically increase productivity. With one worker straightening the wire, another cutting it, a third sharpening its point, and a fourth attaching a head, many more pins could be produced than were a single craftsman to perform each operation. Forty years later, David Ricardo extended the principle of specialization to international trade. He demonstrated through the principle of “comparative advantage” that each nation could benefit in trade by specializing in those industries in which the country was relatively more productive. Even if a country had no cost advantage over its trading partner, it could gain from trading those products that it was able to produce most cheaply. If a country could produce all commodities more efficiently than its trading partner, it would still behoove it to specialize in those products it made most cheaply. Comparative advantage provided market advocates with a powerful argument that free trade benefits all.
Anything getting in the way of trade will induce the market to get prices “wrong” and reward inefficiency. For example, tariffs — taxes on imports — will reward inefficient domestic producers and punish consumers through high prices and possibly shoddy products. Fixing the exchange rate of a national currency will distort the price charged for exports and paid for imports; again, getting prices wrong will encourage waste by underpricing some commodities and restricting demand for others by overpricing them. While trade unions and industry monopolies pose threats to the free market, government intervention in the economy is the biggest threat to prosperity because governments are rent seekers; that is, governmental actors seek to manipulate economic conditions rather than contributing to productivity, and they have the power to do so.
According to free market advocates, the best way for countries to grow their way out of poverty is to let markets be. Untrammeled competition between capitalists, between workers, between workers and capitalists, and between nations will produce efficient economies. Let the fittest survive.
Theories work well on paper, and the neo-classical economic theory that receives its sustenance from the idea that markets insure efficient economies is virtually unchallenged in the academy and among economic policy-makers. It is the reigning orthodoxy of the “Washington Consensus,” Chang’s Unholy Trinity plus the US State and Treasury Departments.
So if the theory is correct, why is there so much poverty?
It could be that there has been no political will to implement the policy. Yet, as Chang explains, since at least the third world debt crisis of 1982, the IMF and World Bank have sought to unfetter markets in indebted low- and middle-income countries. It has done so by tying debt relief to “structural adjustment programs” (SAPs). These interventions required governments to balance budgets, privatize state-owned enterprises, deregulate industries and labor markets, and end agricultural pricing policies. In the 1990s, the World Bank and the IMF went further in demanding that governance conditionalities be implemented along side the SAPs. They included debtor nation acceptance of plans for democracy, government decentralization, central bank independence, and corporate governance. The IMF and World Bank justified these various SAPs and conditionalities as necessary for fixing general problems with debtor economies, but frequently the conditions for emergency credit aided specific high-income countries. IMF loans to South Korea in 1997 contained provisions to reduce trade barriers for specific Japanese products and demanded Korea open up capital markets to foreigners so that they could achieve majority ownership of firms, something several US companies were eager to do.
Perhaps the world remains so poor, despite the best efforts of those guiding the Washington Consensus, because poorer nations have just not implemented SAPs. Privatizing state-owned enterprises was intended to raise the Third World out of poverty by exposing protected companies to market competition. In Latin America, for example, foreign direct investment climbed in the 1980s and 1990s. From 1988 to 1998, cross-border mergers and acquisitions sky-rocketed from $1.1 to $63.9 billion. Yet, when poor countries sold off nationalized companies to balance fiscal accounts, they often did so at fire-sale prices and with large tax incentives. The one-shot revenue enhancements proved expensive.
If international institutions have offered the correct policy prescriptions and developing countries have carried out the policies, to what do we attribute the failure of all to get rich? Something had to be wrong, and that something must be located in the countries themselves. One hundred years ago, Max Weber, the German economist cum sociologist, identified the role of culture in the rise of capitalism; ever since, national cultures have been the explanatory fall back position for those whose faith in market principles has not been met by economic reality. Samuel Huntington asks in The Clash of Civilizations, why South Korea succeeded when Ghana did not — they both had similar levels of economic development in the 1960s. “Undoubtedly, many factors played a role, but … culture had to be a large part of the explanation. South Koreans valued thrift, investment, hard work, education, organization, and discipline. Ghanaians had different values. In short, cultures count.” The economic historian David Landes, who has spent a lifetime asking why the industrial revolution occurred first in the West, does not hedge his bets: “culture makes all the difference.”
Explaining economic development, or the lack of it, by cultural values is tricky because defining a national culture is at best fuzzy, suppressing biases is difficult, and analysts frequently confuse cause with effect. Countries do not have stable, integrated, and mutually exclusive values. Is US culture best represented by the entrepreneurialism of Silicon Valley or a plodding General Motors, the cost plus guaranteed profits of Halliburton or the struggling immigrant street vendor? And as Alice Amsden points out, every culture has its own counter-culture. A little history illustrates the pitfalls of viewing development through the lens of culture. Beatrice Webb, the British Fabian socialist and social scientist, toured Asia in 1911-12. She reported that the Japanese held “objectionable notions of leisure and a quite intolerable personal independence.” Japan “evidently had no desire to teach people to think.” About Korea she opined, they are “12 millions of dirty, degraded, sullen, lazy and religionless savages who slouch about in dirty white garments of the most inept kind and who live in filthy mudhuts.” Fellow Europeans were hardly immune from equally devastating criticism, and to our modern ears incongruously out of character. In the early 19th century, British writers described Germans as indolent, “not distinguished by enterprise or activity.” They were dishonest, excessively emotional, and dull-witted. A French manufacturer complained they “work as and when they please.” If the Japanese, Koreans, and Germans had such “bad culture,” Chang asks, how could they could they have so admirably succeeded. If they were so different, how did they so thoroughly change their national character? The answer is twofold. We see what we want and frequently want to blame the victims of poverty. When East Asian countries were experiencing low growth rates in the 1950s, analysts blamed their lack of success on the anti-business biases of Confucianism. In the 1980s and 1990s when growth took off in Korea, Taiwan, and other East Asian countries, they attributed the economic miracles to Confucian values of hard work, thrift, and respect for education. Second, economic change is more likely to affect culture than vice versa. Poor economies often lack work, and underemployed people have lots of time on their hands. Not integrated into industrial work schedules or the hustle and bustle of the post-industrial service economy, potential workers in poor countries appear lazy, dilatory, and lacking in punctuality. When those countries catch up economically with, or their workers migrate to, wealthier nations, these same workers become industrious and ambitious.
A final argument might be that the world is indeed poor, but imagine how much poorer it would be if neoliberal policies had not been implemented. If state-owned enterprises continued to exist, if tariffs remained high, if foreign exchange controls had not been lifted, if industrial policies had not been jettisoned, wouldn’t low- and middle-income countries be that much worse off? Counterfactuals make for slippery arguments.
We could argue that neoliberal policies have not produced the desired results, that they are unpopular in the target nations — the phrase “IMF riots” comes to mind — and that nations ought to be allowed to design their own policies. Those arguments are compelling politically and ethically, but in the context of an all powerful faith in market efficiency and the inevitability of the Washington Consensus, nagging doubts remain. Perhaps, Margaret Thatcher was right, and there is no alternative.
Amsden and Chang assert there is an alternative. In fact, an alternative has been tried and found superior to neoliberalism. They argue that successful development in both high-income and developing nations historically relied on high tariffs, intellectual property theft, currency controls, and other measures that restricted trade in goods and regulated financial capital. The key to growth was rejecting the doctrine of comparative advantage and pursuing policies that protected infant industries. Recall that comparative advantage requires that countries specialize in those goods that they are most efficient in producing. If a country is most productive in labor intensive industry or agriculture, it should specialize in those products. If it is a high tech powerhouse, it should specialize in that area and trade those products in the international market. As an economist at the University of Chicago once remarked, countries can gain as much producing potato chips as computer chips.
Everything neoclassical economists and op-ed ideologues have told us about how free markets grew the world is wrong — Chang’s Bad Samaritans is subtitled “The Myth of Free Trade and the Secret History of Capitalism.” Policy makers in the leading economies may preach free trade, but only recently — and inconsistently — have their countries practiced it. Britain and the US erected high tariffs to ward off competitors and encourage the development of domestic industries. In 1721, Britain levied tariffs on imported manufactures and kept those fees high until its domestic industries were among the most productive in the world, at which point, from the 1870s to the outbreak of WWI, it became the world’s leading exponent of free trade. In the 1820s, its average tariff rate on imported manufactures ranged from 45 to 55 percent. In the United States, tariffs were high for most of the 19th century and from the Civil War to the end of WWI they ranged from 40 to 50 percent, among the highest in the world. When the restrictive treaties Western powers forced Japan to sign expired early in the 20th century, it, too, protected emerging industries from foreign competition through tariffs and foreign exchange controls, especially after WWII. Korea did much the same thing when it regained independence post-WWII. Taiwan’s emergence as an East Asian Tiger was guided by tariffs, government regulation of exports, and reliance on state-owned enterprises.
Protecting intellectual property is a prerequisite for growth, according to free trade doctrine. Patents and licenses encourage innovation by rewarding their inventors with higher than usual returns. Accordingly, the WTO has implemented a “Trade-Related Intellectual Property Rights Agreement” to widen the scope and extend the duration of patents, copyrights, and trademarks. Yet, the high income countries all relied in the past on stealing others’ ideas. In 19th century Austria, Britain, France, the Netherlands, and the US, residents could take out their own patents on foreign inventions thus claiming an exclusive right to someone else’s innovation. Some countries rejected patents, altogether. Only in 1907 did the Swiss extend patent protection to chemical processes, and it was not until 1978 that chemicals themselves could be patented in Switzerland. The Dutch recognized no patents from 1869 to 1912. Philips, the Dutch electronics company, started out in 1891 as a producer of light bulbs based on a design it “borrowed” from US inventor Thomas Edison. Having stolen ideas to get to the top of the economic heap, the US and other high-income nations — the same countries that presently hold 97 percent of all patents — now want to clamp down not only on the pirating of DVDs and software that goes on in developing nations, but they also seek to control nature’s bounty. University of Mississippi scientists successfully patented the medicinal use of turmeric only to see their claim overturned when lawyers from Indian challenged it in court.
The strength of Amsden and Chang’s argument rests not on a critique of neoliberalism but on the performance of several nations that managed to escape the trap of free trade. Those countries, South Korea, Taiwan, Mexico (to a limited extent), Brazil, India, Indonesia, China, and a few others succeeded because they were able to develop mid-level industries such as steel, auto, shipbuilding, and petrochemicals. Those industries gave them a place as manufacturers in the international division of labor, experience to acquire and adapt technology, and incentives to build institutions so that they could exploit the knowledge they had gained. Many of them managed to become leading exporters as well.
In the great wave of decolonization after World War Two, much of the third world embarked on independent economic development through a policy of Import Substitution Industrialization (ISI). Newly decolonized countries saw that they could manufacture many of the products that they were importing. Initially, they manufactured consumer items such as air conditioners, scooters, and washing machines but soon sought to expand the scope of production to capital goods. Doing so would save scarce foreign exchange, encourage subsidiary industries, increase the level of technological knowhow, provide middle-class occupations and jobs for skilled workers, and eventually create opportunities for export.
Free traders hated ISI. It involved “picking winners,” suppressing competition from imports, deemphasizing raw material exports, and sometimes encouraged corruption. Frequently, products were shabby, but the era of ISI was also the golden era of third world development. During the 1960s and 1970s per capital income in Latin America grew at a rate of 3.1 percent per year or by 81 percent for the entire period. The period up to 1980 represented for the Third World, according to Amsden, “unprecedented expansion in living standards, per capital income, wages, and poverty reduction.”
How did developing nations get away with independent economic policies? Weren’t they a challenge to the American Empire? Amsden answers that there were two empires. The First Empire ran from 1929 to 1980. It was born of the failure of free enterprise, nurtured by Keynesian heterodoxy and New Deal attempts at industrial planning, matured through wartime mobilization, decolonization and nationalist revolts, and met its decline in Vietnam. It was maniacally anticommunist, but within the bounds of capitalism, it practiced a form of laissez-faire best expressed by Richard Nixon who, commenting on the Third World, remarked, “People don’t give a damn.” The First Empire interpreted trade law liberally, allowing developing nations to industrialize behind high tariff walls, and extended favorable trade terms. Cold war competition with the Soviet Union encouraged flexibility on the part of Washington.
The US defeat in Vietnam was a metaphor for American hubris, and it represented the penultimate nail in the First American Empire’s coffin. The United States lost in Vietnam because it never took the effort to learn about the country, and the National Liberation Front out organized the American Empire. The NLF won because of its popular support, labor abundance, and precision planning. Its Tet offensive, where soldiers practiced first on life-sized models, was analogous to how South Korea built its first steel mill in 1973 — workers conducted mock production runs in a field before the facility was even finished. The NLF’s simultaneous invasion of American held cities resembled Toyota’s “just-in-time” inventory system. Their grassroots organization operated like the diversified business conglomerates of Japan, South Korea, and most other late industrializers. They made up for a shortage of managerial expertise by pushing authority down to the village (industry and shop floor) where knowledge of politics and logistics (production) was greatest.
OPEC was the final nail in the First American Empire’s coffin. With the rise in world oil prices in the 1970s there was a massive redistribution of wealth to oil-producing countries. “Petrodollars,” as the newly acquired funds were dubbed, flowed back to the financial institutions of the first world. Those same banks then peddled petrodollars as loans to a multitude of developing nations. Much of the easy money of the 1970s went into unproductive investments, but it nonetheless sustained ISI and those same banks. When the combined effects of deficit spending to finance the Vietnam War and high oil prices pushed U.S. inflation into the double digits, a Second American Empire came to the fore. The U.S. Federal Reserve cut the money supply, and interest rates soared. In 1982, Mexico declared that it would be unable to service its $82 billion debt, and a financial meltdown appeared imminent. The Federal Reserve bailed out the banks, but killed the possibility of ISI succeeding. Third World countries could stave off default — by continuing payment on the interest on their debts — but only if they accepted neoliberal policies, policies that starved infant industries of needed capital, removed protection from foreign competition, and opened up national economies to foreign direct investment.
With the end of ISI and the introduction of neoliberal policies, economic growth virtually ended. Per capita income in Latin America increased by only ten percent from 1980 to 2005. Growth rates in the Middle East dropped from eight to two percent. The IMF and World Bank practically ran most African economies in the 1980s and 1990s, and there living standards fell across the board. In Asia, where neoliberalism never took hold to the same extent, economies grew at high rates for almost the entire post-war period. The countries that survived the Second American Empire had acquired manufacturing experience before World War Two and used that expertise to enter export markets in the 1980s and 1990s. Mexico and Brazil instituted ISI policies in the 1930s; China and India, despite British colonial rule, had developed indigenous industries in the late 19th century, as did Indonesia under the Dutch; and Korea and Taiwan gained manufacturing prowess as part of Japan’s preparation for war. In addition, they all engaged in state-led industrialization.
Amsden and Chang demonstrate that poor countries can develop, even against the interests of powerful empires. To pull themselves out of poverty, they had to buck what is now called the Washington Consensus and reject free trade until they could compete with world’s most productive enterprises. They had to ignore what the powerful nations said and, instead, imitate what they did.
They have offered a powerful counter narrative to that touted by the epigones of free trade, and that, in itself, is a useful intellectual tool for those seeking global economic justice. Amsden and Chang analyze what nations do. They have little to say about what happens in those countries, though. They point out that Japan, Korea, and Taiwan had important land reform prior to taking off economically, but they drop that line of inquiry in the cases of India, China, and Brazil. Their attraction to state-led development leaves them mostly silent about the repressive policies that insured much of that growth — although Chang alludes to the stifling social control most South Koreans experienced during the long years of dictatorship following decolonization. They celebrate the entrepreneurial spirit of late industrializers but write as though no one works in the factories of the mid-tech firms.
South Korea and Brazil both had highly militant working classes. How did they affect their countries’ ascent into the ranks of middle-income nations? A question of some interest in the case of China, the factory of the world and site of 100,000 strikes a year. These are important issues that cannot be ignored, but both volumes serve a valuable purpose in showing that “yes, Margaret, there is an alternative.”
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