By Hunter Wallace
Ha-Joon Chang’s Kicking Away The Ladder: Development Strategy In Historical Perspective is a blistering critique of what is known as the “Washington Consensus.”
According to the “Washington Consensus,” there are a number of “good policies” which developing countries need to follow to achieve economic growth – things like trade liberalization, privatization of state-owned enterprises, deregulation, liberalization of foreign investment, etc. Chang argues that developed countries are guilty of “kicking away the ladder” by using global institutions like the IMF, World Bank, and WTO to deny developing countries the ability to use the policies that they used to ascend to the top of the world economic order.
Starting with Britain and the United States, which have been the world’s leading champions of free-trade and neo-liberal economics, Chang shows how both countries used ITT policies (industrial, trade, technology policies) to reach the apex of economic development in 1860 and 1945 respectively. He also analyzes the economic development of France, Germany, Sweden, Belgium, Switzerland, the Netherlands, Japan, and the East Asian Tigers (South Korea, Taiwan, Malaysia, Singapore) to show how they all used similar “catch-up” policies.
Chang’s careful study of “how the rich countries became rich” leads him to the conclusion that economic development is ultimately about the mastery of foreign technologies and ascending the international food chain in high-value manufacturing. Small countries which are close to the technological frontier – Belgium, the Netherlands, and Switzerland – have been more laissez-faire. Larger countries which have needed to “catch-up” with their industrial rivals – the United States, France, Japan – have been more interventionist.
Chang is careful to distinguish between policies and institutions. The tariff, for example, is an institution, while trade policy can be tuned as easily as a radio to changing conditions. He is adamant that the tariff is not the only or even necessarily the most important policy tool that has been used to nurture infant industries:
“There were many other tools, such as export subsidies, tariff rebates on inputs used for exports, conferring of monopoly rights, cartel arrangements, directed credits, investment planning, manpower planning, R&D supports and the promotion of institutions that allow public-private cooperation.”
There’s also currency manipulation, government procurement contracts, state-owned enterprises, direct subsidies, regulations, infrastructure spending, and education spending by which the state intervenes in the economy. In particular, Japan has been an innovator in developing a wide array of policy tools beyond the traditional tariff.
A close historical examination of major institutions in the developed countries – liberal democracy, modern bureaucracies, modern judiciaries, intellectual property rights (trademark, copyrights, patents), corporate governance institutions (bankruptcy, competition, limited liability), central banking, securities regulation, the welfare state (health insurance, unemployment insurance), and labor laws – shows that these institutions are the result rather than the cause of economic development.
Consider the case of Western liberal democracy. In the developed countries, universal suffrage including women and minorities was achieved in the US (1965), the UK (1928), Switzerland (1971), Sweden (1918), Australia (1962), Austria (1912), Belgium (1948), Canada (1970), Denmark (1915), Finland (1944), France (1946), Germany (1946), Italy (1946), Japan (1952), Netherlands (1919), New Zealand (1907), Norway (1913), Portugal (1970), and Spain (1977).
The UK became the world’s richest, most industrialized nation without liberal democracy, child labor laws, or securities regulation. Similarly, the US succeeded the UK while denying blacks the right to vote in the Southern states and without a national healthcare system. Did you know that Canada denied patents to pharmaceutical products until the 1990s or that the American chemicals industry was built using stolen German patents after World War I? Surely, you know that Soviets used industrial espionage to acquire the atomic bomb.
Chang’s disturbing conclusion is that when countries reach the technological frontier and become wealthy and developed – like the UK in 1860, or the US in 1945 – they export the “free-trade” doctrine in order to “pull away” from their rivals. During the first liberal world order, the UK did this by colonization and imposing unequal treaties on countries such as China, Persia and the Ottoman Empire. In the second liberal world order, the US does this through the IMF, World Bank, and WTO.
While I can see how foreign competition from advanced industrialized nations strangles infant industries in the Third World, I am not sure that I completely buy into Chang’s conclusion. The US, for example, has switched to free-trade for largely geopolitical reasons. In order to maintain the US Empire and win the Cold War, America sacrificed its economic self interest and allowed foreign competitors to destroy many of its own industries. It was good Cold War politics to trade with Japan, West Germany, and Italy to bind those countries to the American led world order, but it wasn’t good economics. Similarly, Britain’s embrace of free-trade may have “kicked away the ladder” for Ireland, India, and China, but was that true of the United States and Germany which eventually eclipsed Britain in industrial power?
There are plenty of countries climbing up the ladder of economic development behind the United States. If history is our guide, the US itself will be forced to abandon free-trade at some point as the second liberal international order begins to collapse.