Review: Ha-Joon Chang’s Bad Samaritans

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.

How did this “economic miracle” happen?

“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.

9 Comments

  1. although I am a capitalist, I have never embraced the total free market philosophy. however national mercantile policies can back fire. At the turn of the 20th century, Argentina was at European first world standard of development. (like Australia or Canada). By 1970 it was a third world basket case as a result of failed mercantilism.

  2. I’m glad Asians are learning form our stupid, disastrous mistakes. Whitey’s spectacularly deranged Do Gooderism is destroying us. It’s NOT all about money; it’s about taking care of One’s Own Kind.

  3. I would love to study Argentina in greater detail. I know Chile was a famous experiment in neo-liberalism under Pinochet. Last year, I studied the economic history of the Caribbean and wrote a book review:

    http://www.occidentaldissent.com/2014/01/29/caribbean-project-review-the-economic-history-of-the-caribbean-since-the-napoleonic-wars/

    Victor Bulmer-Thomas has another book on the economic history of Latin America, but I haven’t got the chance to read it yet.

    http://www.amazon.com/Economic-History-Independence-Cambridge-American/dp/1107608554

    Right now, I am interested in East Asia.

  4. When an economy is extremely small or poor the government may be the only source of deep pockets for investment.

    This doesn’t apply in the current U.S.economy in which Google, Microsoft, Apple, etc., were started up and nurtured completely with private money unlike the Solyndra debacle which cost the taxpayers about 500 million dollars.

    The closest to laissez-fare style economics I see in America today are the litigation industry and public government.

    “Laissez-fare” government is particularly damaging.
    Massive overcompensation of public employees by dumping a horrific tax burden on the future taxpayers, tragic wars such as Vietnam and Iraq, the subprime mortgage disaster. The list could go on endlessly.
    The government is like a gigantic extremely expensive conglomerate monopoly with very little constitutional restraint.

    Also, I don’t think NASA is a good example of smart government.
    A humongous expense to have few scientific camping trips to the Moon followed by a ludicrously dangerous and expensive shuttle program.

    The lessons of developing an economy from scratch don’t apply well to a mature economy in my opinion.

  5. Anyone over fifty years old knows that things were far different pre-1980s in which the wealth was taken out of the hands of the common White people and cooncentrated into the hands of jews and thieving whiggers. I myself grew up within a social order in which there were family farmers, and tradesmen and manufacturing jobs as opposed to tattooed whiggers and anglo-mestizos living off of disability and welfare.

    Today the whiggers theysselfs are all messed up and so no “economic policy” is possible with degenerates and nigger and beaner and gook savages. The Empire has destroyed its own Founding Stock — like Mighty Evil Empires tend to do always.

    Having some gook who never was raised in a Gook Empire which destroys gook stock tell you that having no hard and fast economic dogma leading to the enrichment of the jews and whiggers running the Empire is the way to go is foolishness. The understanding used to be that corporations were “good citizens” used to be taught in business school. No longer.

    Secondly, Brad seems to have forgotten that the “Jeffersonian ideal” was what was simply good sense and the natural way of life for Southern Whites — as opposed to the Hamiltonian half-jew mischling ravings of a Rothschild agent. If the South would have had Nathan Bedford Forrest or a Quantrill engaged in guerrilla warfare the North would have had to eventually quit because the South would have become ungovernable. Instead, Robert E. Lee and Stonewall Jackson engaged in attritional warfare against an enemy three times or more their size. George Washington, while not as good of a tactical general was Lee’s strategic superior as after losing on Long Island never ever fought the British without having an escape route and routinely gave up cities and camped a days march or greater away.

    You are becoming a Yankee mercantilist and disparaging your roots, Brad. Gonna end up like the Yankees of West Enfield Connecticut in which Mobile paper is trucked up to a direct mailing factory — run by Puerto Ricans with nary a Yankee whigger in sight.

    You have become quite the tard, Moan Cunthair. If you learn anything from this gook author learn that the Tribe cums first and that if the People don’t do well, then the Empire, like all empires, is doomed. When the Empire falls, the only hope for the People is enlightened ruthless Warlordism in which the traitors are purged and the non-Tribe is expelled with extreme prejudice. But you prefer your own “morality” of death.

    Hail Victory!!!

  6. “…Chang… notes most of the R&D in the United States is either government funded or conducted by public and private universities, not corporations…”

    If we just demanded that any research we paid for publicly be used for the benefit of the US it would be a great leap. They wouldn’t be making the wings for the 787 in Japan for example.

    I would be interested in why Argentina failed. I read that it was due to socialism not mercantilism. I think most of the stuff I’ve read about Argentina was from Libertarian or Mises Institute. So their emphasis would be on lack of free trade causing the problems. I think it was more along the lines of trade unions taking control of all the industry. They did go from being wealthy to poor quickly. A path we are following right now.

  7. Thanks for pointing out Ha-Joon Chang. I’ve been looking at his books and he has a new one.

    “23 Things They Don’t Tell You About Capitalism” by Ha-Joon Chang

    Review in Huffington post. Has the twenty three points. Interesting.

    http://www.huffingtonpost.com/ian-fletcher/a-review-of-ha-joon-chang_b_840417.html

    Thing 1: There is no such thing as a free market. Pace the glorification of the free market in recent years, this is largely a mythical animal. This is not just because of government interference, it is often because the private sector doesn’t want to be free, regardless of what it says. Even when we could hypothetically free up markets, we frequently wouldn’t be better off it we did.

    Thing 2: Companies should not be run in the interest of their owners. Not entirely,…Long-term success requires taking seriously everyone who contributes to a business: not just equity investors but also employees, suppliers, customers, and plant communities…

    Thing 3: Most people in rich countries are paid more than they should be…This doesn’t mean we should feel guilty; it does mean we should remember we succeed in large part because of what society we belong to, not just due to our own efforts…

    Thing 4: The washing machine has changed the world more than the Internet. The washing machine and other labor-saving devices made feasible the radical change in women’s roles we know as feminism. Similarly, without the humble air conditioner, America would have no Sunbelt. Twitter doesn’t come close…

    Thing 5: Assume the worst about people and you will get the worst…

    Thing 6: Greater macroeconomic stability has not made the world economy more stable. Brutal anti-inflationary policies can easily do more damage than the inflation they combat. Protecting the value of a nation’s money is less important that protecting its economy as a whole…

    Thing 7: Free-market policies rarely make poor countries rich…

    Thing 8: Capital has a nationality…Money always belongs to somebody, and those somebodies have passports and home addresses…

    Thing 9: We do not live in a post-industrial age…You can’t download a ride to work or the supermarket…

    Thing 10: The U.S. does not have the highest standard of living in the world. Much bad policy, both here and abroad, has been based on the idea that the American version of capitalism is observably superior. But our per-hour average income ranks about 8th in the world on a purchasing-power parity (read the book to find out what that is) basis…

    Thing 11: Africa is not destined for underdevelopment…They’re poor for the same reasons other nations were once poor–which means that their poverty can be fixed if the apply the same solutions other nations have…

    Thing 12: Governments can pick winners…In the U.S., government was responsible for (in order) the Erie Canal, the Transcontinental Railroad, the Interstate Highway System, and the Internet. Not to mention the aircraft and semiconductor industries. In East Asia, governments did even more…

    Thing 13: Making rich people richer doesn’t make the rest of us richer…

    Thing 14: U.S. managers are overpriced. America has the highest-paid corporate managers in the world…

    Thing 15: People in poor countries are more entrepreneurial than people in rich countries…

    Thing 16: We are not smart enough to leave things to the market… fantasy.

    Thing 17: More education in itself is not going to make a country richer…

    Thing 18: What is good for General Motors is not necessarily good for the United States…That time is long gone. Multinationals will treat nations as hotels if we let them…

    Thing 19: Despite the fall of communism, we are still living in planned economies…

    Thing 20: Equality of opportunity may be not be fair… some minimums for what even the losers get.

    Thing 21: Big government makes people more open to change…If big government is always a loser, why is America borrowing money from Sweden?…

    Thing 22: Financial markets need to become less, not more, efficient…

    Thing 23: Good economic policy does not require good economists…

  8. On Ha-Joon Chang’s
    “23 Things They Don’t Tell You About Capitalism”

    Thing 2: Companies should not be run in the interest of their owners. Not entirely…

    Corporations are licensed by the State. They were considered a great evil on the past. The Supreme court ruling on them being people have caused us great harm. There are ways to counter act this stupidity.

    1. If corporations are people shouldn’t everyone in the corporation go to jail if they disobey the law?

    2. How can they give money to all districts? They should only be able to give money to one district where they are located.

    3. Why should they get a special corporate income tax? They should pay the individual rate. Much higher, if they want to be a person. Would allow an opt out.

    4. When they make money overseas they are allowed to defer taxes until they bring the money back. People can’t do that. Why should they be able to?

  9. This is an excellent review and it’s a shame that I’m the first commenter. WN don’t seem to be interested in this sort of thing.

    I particularity like how you’ve shown the long chain of trade policy all the way back to the Mercantilism of England and how Americans helped add to this tradition. So much that it was once called The American System. I can understand the long line of reading that went into this as I read some of the same things. You’ve summed it up very tidily.

    I’ve read a lot books like this about the rise of Japan and how they, as you mentioned, moved up the chain of manufacturing profitability. A good book to read, although it didn’t come true is, “Blindside: Why Japan Is Still on Track to Overtake the U.S. By the Year 2000” by Eamonn Fingleton. Now maybe he wasn’t exactly correct but he in great detail covers EXACTLY what the Japanese gov. was and is doing to foster economic growth. It is worth reading as it has a great deal of policy in it. One thing he mentions that I rarely see is that a large part of the Chinese manufactures are actually Japanese parts and tooling used to make stuff sent to the US. We say it’s Chinese but the embedded technology and tooling used to make it is Japanese. The Japanese also hide trade statistics to make them seem as poor as possible when actually even though their population is plummeting everyone has a job that wants one.

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