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Discussion Board 4: The Washington Consensus, corporate personhood, the IMF, World Bank and etc. have created a global economic and political framework. Specifically using the book, "Bad Samaritans", discuss the current socio-political and economic world order within the framework of Principle-Agency Theory (democracy) and overall success. This requires a pre-discussion on the parameters of "success"ha-joon-chang-bad-samaritans.pdf 

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BAD SAMARITANS THE MYTH OF FREE TRADE CAPITALISM AND THE SECRET HISTORY OF HA-JOON CHANG Bloomsbury Press 2007 Contents Prologue Mozambique’s Economic Miracle How to Escape Poverty v 1 The Lexus and the olive tree revisited Myths and facts about globalization 1 1.1 The official history of globalization . . . . . . . . . . . . . . . . . . 3 1.2 The real history of globalization . . . . . . . . . . . . . . . . . . . . 6 1.3 Neo-liberals vs neo-idiotics? . . . . . . . . . . . . . . . . . . . . . . 9 1.4 Who’s running the world economy? . . . . . . . . . . . . . . . . . . 14 1.5 Are the Bad Samaritans winning? . . . . . . . . . . . . . . . . . . . . 21 2 The double life of Daniel Defoe How did the rich countries become rich? 23 2.1 Britain takes on the world . . . . . . . . . . . . . . . . . . . . . . . . 26 2.2 The double life of the British economy . . . . . . . . . . . . . . . . 29 2.3 America enters the fray . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.4 Abraham Lincoln and America’s bid for supremacy . . . . . . . . . 35 2.5 Other countries, guilty secrets . . . . . . . . . . . . . . . . . . . . . 40 2.6 Learning the right lessons from history . . . . . . . . . . . . . . . . 45 3 My six-year-old son should get a job Is free trade always the answer? 49 iii CONTENTS 3.1 Free trade isn’t working . . . . . . . . . . . . . . . . . . . . . . . . . . 51 3.2 Poor theory, poor results . . . . . . . . . . . . . . . . . . . . . . . . . 54 3.3 The international trading system and its discontents . . . . . . . . 59 3.4 Industry for agriculture? . . . . . . . . . . . . . . . . . . . . . . . . . 63 3.5 More trade, fewer ideologies . . . . . . . . . . . . . . . . . . . . . . 66 4 The Finn and the elephant Should we regulate foreign investment? 69 4.1 Is foreign capital essential? . . . . . . . . . . . . . . . . . . . . . . . 70 4.2 The Mother Teresa of foreign capital? . . . . . . . . . . . . . . . . . 73 4.3 ‘More dangerous than military power’ . . . . . . . . . . . . . . . . . 78 4.4 Borderless world? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 4.5 ‘The only thing worse than being exploited by capital. . . ’ . . . . . . 85 5 Man exploits man Private enterprise good, public enterprise bad? 89 5.1 State ownership in the dock . . . . . . . . . . . . . . . . . . . . . . . 91 5.2 State vs private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 5.3 State-owned success stories . . . . . . . . . . . . . . . . . . . . . . . 95 5.4 The case for state ownership . . . . . . . . . . . . . . . . . . . . . . 99 5.5 The pitfalls of privatization . . . . . . . . . . . . . . . . . . . . . . . 103 5.6 Black cat, white cat . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 6 Windows 98 in 1997 Is it wrong to ‘borrow’ ideas? 109 6.1 ‘The fuel of interest to the fire of genius’ . . . . . . . . . . . . . . . . 110 6.2 John Law and the first technological arms race . . . . . . . . . . . . 115 6.3 The lawyers get involved . . . . . . . . . . . . . . . . . . . . . . . . . 119 6.4 Making Mickey Mouse live longer . . . . . . . . . . . . . . . . . . . 122 6.5 Sealed crustless sandwiches and turmeric . . . . . . . . . . . . . . 124 6.6 The tyranny of interlocking patents . . . . . . . . . . . . . . . . . . 126 iv CONTENTS 6.7 Harsh rules and developing countries . . . . . . . . . . . . . . . . . 128 6.8 Getting the balance right . . . . . . . . . . . . . . . . . . . . . . . . . 130 7 Mission impossible? Can financial prudence go too far? 135 7.1 ‘Mugger, armed robber and hit man’ . . . . . . . . . . . . . . . . . . 137 7.2 There is inflation and there is inflation . . . . . . . . . . . . . . . . 139 7.3 Keynesianism for the rich, monetarism for the poor . . . . . . . . 142 8 Zaire vs Indonesia Should we turn our backs on corrupt and undemocratic countries? 145 8.1 Does corruption hurt economic development? . . . . . . . . . . . 147 8.2 Prosperity and honesty . . . . . . . . . . . . . . . . . . . . . . . . . . 151 8.3 Too many market forces . . . . . . . . . . . . . . . . . . . . . . . . . 154 8.4 Democracy and the free market . . . . . . . . . . . . . . . . . . . . 156 8.5 When democracies undermine democracy . . . . . . . . . . . . . . 160 8.6 Democracy and economic development . . . . . . . . . . . . . . . 162 8.7 Politics and economic development . . . . . . . . . . . . . . . . . . 165 9 Lazy Japanese and thieving Germans Are some cultures incapable of economic development? 167 9.1 Does culture influence economic development? . . . . . . . . . . . 170 9.2 What is a culture? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 9.3 Dr Jekyll vs Mr Hyde . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 9.4 Lazy Japanese and thieving Germans . . . . . . . . . . . . . . . . . 179 9.5 Changing culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 9.6 Reinventing culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 9.7 Defying the market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 9.8 Why manufacturing matters . . . . . . . . . . . . . . . . . . . . . . 199 9.9 Don’t try this at home . . . . . . . . . . . . . . . . . . . . . . . . . . 201 9.10 Tilting the playing field . . . . . . . . . . . . . . . . . . . . . . . . . . 204 v CONTENTS 9.11 What is right and what is easy . . . . . . . . . . . . . . . . . . . . . . 206 Acknowledgments 209 Notes 213 vi Prologue Mozambique’s Economic Miracle How to Escape Poverty Mozambique Takes on the Big Boys Nuts and volts June 28th 2061 M A P U T O From The Economist print edition Tres Estrelas announces a new breakthrough in fuel cell technology In a carefully staged event to coincide with the country’s independence day on June 25th , Maputo-based Tres Estrelas, the largest African business group outside South Africa, unveiled a breakthrough technology for mass production of hydrogen fuel cells. ‘When our new plant goes into production in the autumn of 2063,’ Mr Armando Nhumaio, the ebullient chairman of the company announced, ‘we will be able to take on the big boys from Japan and the USA by offering consumers much better value for money.’ Analysts agree that the new technology from Tres Estrelas means hydrogen fuel is set to replace alcohol as the main source of power for automobiles. ‘This is bound to pose a serious challenge to the leading alcohol fuel producers, like Petrobras of Brazil and Alconas of Malaysia,’ says Nelson Mbeki-Malan, the head of the prestigious Energy Economics Research Institute at the University of Western Cape, South Africa. vii PROLOGUE Tres Estrelas has made its own rocket-fuelled journey from humble beginnings. The company started out exporting cashew nuts in 1968, seven years before Mozambique’s independence from the Portuguese. It then did well by diversifying into textiles and sugar refining. Subsequently, it made a bolder move into electronics, first as a subcontractor for the Korean electronics giant, Samsung, and later as an independent producer. But an announcement in 2030 that hydrogen fuel cell production was to be its next venture generated considerable scepticism. ‘Everyone thought we were crazy,’ says Mr Nhumaio. ‘The fuel cell division bled money for 17 years. Luckily, in those days, we did not have many outside shareholders requiring instant results. We persisted in our belief that building a world-class firm requires a long period of preparation.’ The company’s rise symbolizes the economic miracle that is modern Mozambique. In 1995, three years after the end of its bloody 16-year civil war, Mozambique had a per capita income of only $80 and was literally the poorest economy in the world. With deep political divisions, rampant corruption and a sorry 33% literacy rate, its prospects ranged from dire to grim. In 2000, eight years alter the end of the civil war, the average Mozambican still earned only $210 a year, just over half that of the average Ghanaian, who was earning $350. However, since then, Mozambique’s economic miracle has transformed it into one of the richest economies in Africa and a solid upper-middle-income country. With a bit of luck and sweat, it may even be able to join the ranks of the advanced economies in the next two or three decades. ‘We will not rest on our laurels,’ says Mr Nhumaio, whose roguish grin is reported to hide a steely determination. ‘This is a tough industry where technology changes fast. Product life-cycles are short and no one can expect to last long as the market leader based on only one innovation. Competitors may appear on the horizon out of nowhere any day.’ After all, his company has just sprung a nasty surprise on the Americans and the Japanese. Might a relatively unknown fuel cell manufacturer somewhere in Nigeria decide that, if Tres Estrelas was able to move from the darkest shadows to the top of the tree, then perhaps it viii PROLOGUE could too? Mozambique may or may not succeed in living up to my fantasy. But what would your reaction have been, had you been told in 1961, a century before the Mozambican dream, that South Korea would, in 40 years’ time, be one of the world’s leading exporters of mobile phones, a strictly science-fiction product at that time? Hydrogen fuel cells do at least exist today. In 1961, eight years after the end of its fratricidal war with North Korea, South Korea’s yearly income stood at $82 per person. The average Korean earned less than half the average Ghanaian citizen ($179).[1] ∗ The Korean War—which, incidentally, started on June 25, Mozambique’s independence day—was one of the bloodiest in human history, claiming four million lives in just over three years (1950–3). Half of South Korea’s manufacturing base and more than 75% of its railways were destroyed in the conflict. The country had shown some organizational ability by managing to raise its literacy ratio to 71% by 1961 from the paltry 22% level it had inherited in 1945 from its Japanese colonial masters, who had ruled Korea since 1910. But it was widely considered a basket case of developmental failure. A 1950s internal report from USAID—the main US government aid agency then, as now—called Korea a ‘bottomless pit’. At the time, the country’s main exports were tungsten, fish and other primary commodities. As for Samsung,† mid-1950s.[2] When it moved into the semiconductor industry by acquiring a 50% stake in ∗ † Bracketed numbers indicate endnotes. See pp. 213 ff. Samsung in Korean means Three Stars, as does my fictitious Mozambican firm, Tres Estrelas. The last sentence in my imaginary 2061 Economist piece is based on a real Economist article about Samsung, ‘As good as it gets?’ (January 13 2005), whose final sentence reads: ‘Might a relatively unknown electronics manufacturer somewhere in China decide that, if Samsung was able to move from the darkest shadows to the top of the tree, then perhaps it could too?’ The 17 years during which the fuel cell division of my fictitious Mozambican firm lost money is the same investment period during which the electronics division of Nokia, founded in 1960, lost money. ix PROLOGUE Korea Semiconductor in 1974, no one took it seriously. After all, Samsung did not even manufacture colour TV sets until 1977. When it declared its intention, in 1983, to take on the big boys of the semiconductor industry from the US and Japan by designing its own chips, few were convinced. Korea, one of the poorest places in the world, was the sorry country I was born into on October 7 1963. Today I am a citizen of one of the wealthier, if not wealthiest, countries in the world. During my lifetime, per capita income in Korea has grown something like 14 times, in purchasing power terms. It took the UK over two centuries (between the late 18th century and today) and the US around one and half centuries (the 1860s to the present day) to achieve the same result.[3] The material progress I have seen in my 40-odd years is as though I had started life as a British pensioner born when George III was on the throne or as an American grandfather born while Abraham Lincoln was president. The house I was born and lived in until I was six was in what was then the north-western edge of Seoul, Korea’s capital city. It was one of the small (twobedroom) but modern homes that the government built with foreign aid in a programme to upgrade the country’s dilapidated housing stock. It was made with cement bricks and was poorly heated, so it was rather cold in winter—the temperature in Korea’s winter can sink to 15 or even 20 degrees below zero. There was no flushing toilet, of course: that was only for the very rich. Yet my family had some great luxuries that many others lacked, thanks to my father, an elite civil servant in the Finance Ministry who had diligently saved his scholarship money while studying at Harvard for a year. We owned a blackand-white TV set, which exerted a magnetic pull on our neighbours. One family friend, an up-and-coming young dentist at St Mary’s, one of the biggest hospitals in the country, somehow used to find the time to visit us whenever there was a big sports match on TV—ostensibly for reasons totally unrelated to the match. In today’s Korea, he would be contemplating upgrading the second family TV in the bedroom to a plasma screen. A cousin of mine who had just moved from my father’s native city of Kwangju to Seoul came to visit on one occasion and x PROLOGUE quizzed my mother about the strange white cabinet in the living room. It was our refrigerator (the kitchen being too small to accommodate it). My wife, Hee-Jeong, born in Kwangju in 1966, tells me that her neighbours would regularly ‘deposit’ their precious meat in the refrigerator of her mother, the wife of a prosperous doctor, as if she were the manager of an exclusive Swiss private bank. A small cement-brick house with a black-and-white TV and a refrigerator may not sound much, but it was a dream come true for my parents’ generation, who had lived through the most turbulent and deprived times: Japanese colonial rule (1910–45), the Second World War, the division of the country into North and South Korea (1948) and the Korean War. Whenever I and my sister, Yonhee, and brother, Hasok, complained about food, my mother would tell us how spoilt we were. She would remind us that, when they were our age, people of her generation would count themselves lucky if they had an egg. Many families could not afford them; even those who could reserved them for fathers and working older brothers. She used to recall her heartbreak when her little brother, starving during the Korean War at the age of five, said that he would feel better if he could only hold a rice bowl in his hands, even if it was empty. For his part, my father, a man with a healthy appetite who loves his beef, had to survive as a secondary school student during the Korean War on little more than rice, black-market margarine from the US army, soy sauce and chilli paste. At the age of ten, he had to watch helplessly as his seven-year-old younger brother died of dysentery, a killer disease then that is all hut unknown in Korea today. Years later, in 2003, when I was on leave from Cambridge and staying in Korea, I was showing my friend and mentor, Joseph Stiglitz, the Nobel Laureate economist, around the National Museum in Seoul. We came across an exhibition of beautiful black-and-white photographs showing people going about their business in Seoul’s middle-class neighbourhoods during the late 1950s and the early 1960s. It was exactly how I remembered my childhood. Standing behind me and Joe were two young women in their early twenties. One screamed, ‘How can that be Korea? It looks like Vietnam!’ There was less than 20 years’ age gap xi PROLOGUE between us, but scenes that were familiar to me were totally alien to her. I turned to Joe and told him how ‘privileged’ I was as a development economist to have lived through such a change. I felt like an historian of mediaeval England who has actually witnessed the Battle of Hastings or an astronomer who has voyaged back in time to the Big Bang. Our next family house, where I lived between 1969 and 1981, at the height of Korean economic miracle, not only had a flushing toilet but also boasted a central heating system. The boiler, unfortunately, caught fire soon after we moved in and almost burned the house down. I don’t tell you this in complaint; we were lucky to have one—most houses were heated with coal briquettes, which killed thousands of people every winter with carbon monoxide poisoning. But the story does offer an insight into the state of Korean technology in that far-off, yet really so recent, era. In 1970 I started primary school. It was a second rate private school that had 65 children in each class. We were very proud because the state school next door had 90 children per class. Years later, in a seminar at Cambridge, a speaker said that because of budget cuts imposed by the International Monetary Fund (more on this later), the average number of pupils per classroom in several African countries rose from 30-something to 40-something in the 1980s. Then it hit me just how bad things had been in the Korean schools of my childhood. When I was in primary school, the poshest school in the country had 40 children in a class, and everyone wondered, ‘how do they do that?’ State schools in some rapidly expanding urban areas were stretched to the limit, with up to 100 pupils per class and teachers running double, sometimes triple, shifts. Given the conditions, it was little wonder that education involved beating the children liberally and teaching everything by rote. The method has obvious drawbacks, but at least Korea has managed to provide at least six years’ education to virtually every child since the 1960s. In 1972, when I was in Year 3 (US third grade), my school playground suddenly became a campsite for soldiers. They were there to pre-empt any student xii PROLOGUE demonstrations against the martial law being imposed by the president of the country, (former) General Park Chung-Hee. Thankfully, they were not there to take on me and my friends. We Korean kids may be known for our academic precocity, but constitutional politics were frankly a little bit beyond us nine-yearolds. My primary school was attached to a university, whose rebellious students were the soldiers’ target. Indeed, Korean university students were the nation’s conscience throughout the political dark age of the military dictatorship and they also played the leading role in putting an end to it in 1987. After he had come to power in a military coup in 1961, General Park turned ‘civilian’ and won three successive elections. His electoral victories were propelled by his success in launching the country’s economic ‘miracle’ through his Five Year Plans for Economic Development. But the victories were also ensured by election rigging and political dirty tricks. His third and supposedly final term as president was due to end in 1974, but Park just could not let go. Halfway through his third term, he staged what Latin Americans call an ‘auto-coup’. This involved dissolving the parliament and establishing a rigged electoral system to guarantee him the presidency for life. His excuse was that the country could ill afford the chaos of democracy. It had to defend itself against North Korean communism, the people were told, and accelerate its economic development. His proclaimed goal of raising the country’s per capita income to 1,000 US dollars by 1981 was considered overly ambitious, bordering on delusional. President Park launched the ambitious Heavy and Chemical Industrialization (HCI) programme in 1973. The first steel mill and the first modern shipyard went into production, and the first locally designed cars (made mostly from imported parts) rolled off the production lines. New firms were set up in electronics, machinery, chemicals and other advanced industries. During this period, the country’s per capita income grew phenomenally by more than five times, in US dollar terms, between 1972 and 1979. Park’s apparently delusional goal of $1,000 per capita income by 1981 was actually achieved four years ahead of schedule. Exports grew even faster, increasing nine times, in US dollar terms, between xiii PROLOGUE 1972 and 1979.[4] The country’s obsession with economic development was fully reflected in our education. We learned that it was our patriotic duty to report anyone seen smoking foreign cigarettes. The country needed to use every bit of the foreign exchange earned from its exports in order to import machines and other inputs to develop better industries. Valuable foreign currencies were really the blood and sweat of our ‘industrial soldiers’ fighting the export war in the country’s factories. Those squandering them on frivolous things, like illegal foreign cigarettes, were ‘traitors’. I don’t believe any of my friends actually went as far as reporting such ‘acts of treason’. But it did feed the gossip mill when kids saw foreign cigarettes in a friend’s house. The friend’s father—it was almost invariably men who smoked—would be darkly commented on as an unpatriotic and therefore immoral, if not exactly criminal, individual. Spending foreign exchange on anything not essential for industrial development was prohibited or strongly discouraged through import bans, high tariffs and excise taxes (which were called luxury consumption taxes). ‘Luxury’ items included even relatively simple things, like small cars, whisky or cookies. I remember the minor national euphoria when a consignment of Danish cookies was imported under special government permission in the late 1970s, for the same reason, foreign travel was banned unless you had explicit government permission to do business or study abroad. As a result, despite having quite a few relatives living in the US, I had never been outside Korea until I travelled to Cambridge at the age of 23 to start as a graduate student there in 1986. This is not to say that no one smoked foreign cigarettes or ate illicit cookies. A considerable quantity of illegal and semi-legal foreign goods was in circulation. There was some smuggling, especially from Japan, but most of the goods involved were things brought in—illegally or semi-legally—from the numerous American army bases in the country. Those American soldiers who fought in the Korean War may still remember malnourished Korean children running after them begging for chewing gum or chocolates. Even in the Korea of the 1970s, xiv PROLOGUE American army goods were still considered luxuries. Increasingly affluent middle class families could afford to buy M&M chocolates and Tang juice powders from shops and itinerant pedlars. Less affluent people might go to restaurants that served boodae chige, literally ‘army base stew’. This was a cheaper version of the classic Korean stew, kimchee chige, using kimchee (cabbages pickled in garlic and chilli) but substituting the other key ingredient, pork belly, with cheaper meats, like surplus bacon, sausages and spam smuggled out of American army bases. I longed for the chance to sample the tins of spam, corned beef, chocolates, biscuits and countless other things whose names I did not even know, from the boxes of the American Army’s ‘C Ration’ (the canned and dried food ration for the battlefield). A maternal uncle, who was a general in the Korean army, used to accumulate supplies during joint field exercises with his American colleagues and gave them to me as an occasional treat. American soldiers cursed the wretched quality of their field rations. For me they were like a Fortnum & Mason picnic hamper. But, then, I was living in a country where vanilla ice cream had so little vanilla in it that I thought vanilla meant ‘no flavour’, until I learnt English in secondary school. If that was the case with a well-fed upper-middle-class child like me, you can imagine what it must have been like for the rest. When I went to secondary school, my father gave me a Casio electronic calculator, a gift beyond my wildest dreams. Then it was probably worth half a month’s wages for a garment factory worker, .and was a huge expense even for my father, who spared nothing on our education. Some 20 years later, a combination of rapid development in electronics technologies and the rise in Korea’s living standards meant that electronic calculators were so abundant that they were given out as free gifts in department stores. Many of them ended up as toys for toddlers (no, I don’t believe this is why Korean kids are good at maths!). Korea’s economic ‘miracle’ was not, of course, without its dark sides. Many girls from poor families in the countryside were forced to find a job as soon as they left primary school at the age of 12—to ‘get rid of an extra mouth’ and to earn xv PROLOGUE money so that at least one brother could receive higher education. Many ended up as housemaids in urban middle-class families, working for room and board and, if they were lucky, a tiny amount of pocket money. The other girls, and the less fortunate boys, were exploited in factories where conditions were reminiscent of 19th -century’ dark satanic mills’ or today’s sweatshops in China. In the textile and garment industries, which were the main export industries, workers often worked 12 hours or more in very hazardous and unhealthy conditions for low pay. Some factories refused to serve soup in the canteen, lest the workers should require an extra toilet break that might wipe out their wafer-thin profit margins. Conditions were better in the newly emerging heavy industries—cars, steel, chemicals, machinery and so on—but, overall, Korean workers, with their average 53–4 hour working week, put in longer hours than just about anyone else in the world at the time. Urban slums emerged. Because they were usually up in the low mountains that comprise a great deal of the Korean landscape, they were nicknamed ‘Moon Neighbourhoods’, after a popular TV sitcom series of the 1970s. Families of five or six would be squashed into a tiny room and hundreds of people would share one toilet and a single standpipe for running water. Many of these slums would ultimately be cleared forcefully by the police and the residents dumped in far-flung neighbourhoods, with even worse sanitation and poorer road access, to make way for new apartment blocks for the ever-growing middle class. If the poor could not get out of the new slums fast enough (though getting out of the slums was at least possible, given the rapid growth of the economy and the creation of new jobs), the urban sprawl would catch up with them and see them rounded up once again and dumped in an even more remote place. Some people ended up scavenging in the city’s main rubbish dump, Nanji Island. Few people outside Korea were aware that the beautiful public parks surrounding the impressive Seoul Football Stadium they saw during the 2002 World Cup were built literally on top of the old rubbish dump on the island (which nowadays has an ultra-modern eco-friendly methane-burning power station, which taps into xvi PROLOGUE the organic material dumped there). In October 1979, when I was still a secondary school student, President Park was unexpectedly assassinated by the chief of his own Intelligence Service, amid mounting popular discontent with his dictatorship and the economic turmoil following the Second Oil Shock. A brief ‘Spring of Seoul’ followed, with hopes of democracy welling up. But it was brutally ended by the next military government of General Chun Doo-Hwan, which seized power after the two-week armed popular uprising that was crushed in the Kwangju Massacre of May 1980. Despite this grave political setback, by the early 1980s, Korea had become a solid middle-income country, on a par with Ecuador, Mauritius and Costa Rica. But it was still far removed from the prosperous nation we know today. One of the slang expressions common among us high-school students was ‘I’ve been to Hong Kong’, which meant ‘I have had an experience out of this world’. Even today, Hong Kong is still considerably richer than Korea, but the expression reflects the fact that, in the 1960s or the 1970s, Hong Kong’s per capita income was three to four times greater than my country’s. When I went to university in 1982,1 became interested in the issue of intellectual property rights, something that is even more hotly debated today. By that time, Korea had become competent enough to copy advanced products and rich enough to want the finer things in life (music, fashion goods, books). But it was still not sophisticated enough to come up with original ideas and to develop and own international patents, copyrights and trademarks. Today, Korea is one of the most ‘inventive’ nations in the world it ranks among the top five nations in terms of the number of patents granted annually by the US Patent Office. But until the mid-1980s it lived on ‘reverse engineering’. My friends would buy ‘copy’ computers that were made by small workshops, which would take apart IBM machines, copy the parts, and put them together. It was the same with trademarks. At the time, the country was one of the ‘pirate capitals’ nl the world, churning out fake Nike shoes and Louis Vuitton bags in huge quantities. Those who had more delicate consciences would settle for near-counterfeits. xvii PROLOGUE There were shoes that looked like Nike but were called Nice, or shoes that had the Nike swoosh but with an extra prong. Counterfeit goods were rarely sold as the genuine article. Those who bought them were perfectly aware that they were buying fakes; the point was to make a fashion statement, rather than to mislead. Copyrighted items were treated in the same way. Today, Korea exports a large and increasing quantity of copyrighted materials (movies, TV soaps, popular songs), but at the time imported music (LP records) or films (videos) were so expensive that few people could afford the real thing. We grew up listening to pirate rock’n’ roll records, which we called ‘tempura shop records’, because their sound quality was so bad it sounded as if someone was deep-frying in the background. As for foreign books, they were still beyond the means of most students. Coming from a well-off family that was willing to invest in education, I did have some imported books. But most of my books in English were pirated. I could never have entered and survived Cambridge without those illegal books. By the time I was finishing my graduate studies at Cambridge in the late 1980s, Korea had become a solid upper-middle-income country. The surest proof of this was that European countries stopped demanding that Koreans get an entry visa. Most of us by then had no reason to want to emigrate illegally anyway. In 1996, the country even joined the O E C D (Organisation for Economic Co-operation and Development)—the club of the rich countries—and declared itself to have ‘arrived’, although that euphoria was badly deflated by the financial crisis that engulfed Korea in 1997. Since that financial crisis, the country has not been doing as well by its own high standards, mainly because it has overenthusiastically embraced the ‘free market rules’ model. But that is a story for later. Whatever its recent problems have been, Korea’s economic growth and the resulting social transformation over the last four and a half decades have been truly spectacular. It has gone from being one of the poorest countries in the world to a country on a par with Portugal and Slovenia in terms of per capitaincome.[5] A country whose main exports included tungsten ore, fish and wigs made xviii PROLOGUE with human hair has become a high-tech powerhouse, exporting stylish mobile phones and flat-screen TVs coveted all over the world. Better nutrition and health care mean that a child born in Korea today can expect to live 24 years longer than someone born in the early 1960s (77 years instead of 53 years). Instead of 78 babies out of 1,000, only five babies will die within a year of birth, breaking far fewer parents’ hearts. In terms of these life-chance indicators, Korea’s progress is as if Haiti had turned into Switzerland.[6] How has this ‘miracle’ been possible? For most economists, the answer is a very simple one. Korea has succeeded because it has followed the dictates of the free market. It has embraced the principles of sound money (low inflation), small government, private enterprise, free trade and friendliness towards foreign investment. The view is known as neo-liberal economics. Neo-liberal economics is an updated version of the liberal economics of the 18 th-century economist Adam Smith and his followers. It first emerged in the 1960s and has been the dominant economic view since the 1980s. Liberal economists of the 18th and the 19th centuries believed that unlimited competition in the free market was the best way to organise an economy, because it forces everyone to perform with maximum efficiency. Government intervention was judged harmful because it reduces competitive pressure by restricting the entry of the potential competitors, whether through import controls or the creation of monopolies. Neo-liberal economists support certain things that the old liberals did not—most notably certain forms of monopoly (such as patents or the central bank’s monopoly over the issue of bank notes) and political democracy. But in general they share the old liberals’ enthusiasm for the free market. And despite a few ‘tweaks’ in the wake of a whole series of disappointing results of neo-liberal policies applied to developing nations during the past quarter of a century, the core neo-liberal agenda of deregulation, privatization and opening xix PROLOGUE up of international trade and investment has remained the same since the 1980s. In relation to the developing countries, the neo-liberal agenda has been pushed by an alliance of rich country governments led by the US and mediated by the ‘Unholy Trinity’ of international economic organizations that they largely control—the International Monetary Fund ( I M F ), the World Bank and the World Trade Organization ( W T O ). The rich governments use their aid budgets and access to their home markets as carrots to induce the developing countries to adopt neo-liberal policies. This is sometimes to benefit specific firms that lobby, but usually to create an environment in the developing country concerned that is friendly to foreign goods and investment in general. The I M F and the World Bank play their part by attaching to their loans the condition that the recipient countries adopt neo-liberal policies. The W T O contributes by making trading rules that favour free trade in areas where the rich countries are stronger but not where they are weak (e.g., agriculture or textiles). These governments and international organizations are supported by an army of ideologues. Some of these people are highly trained academics who should know the limits of their free-market economics but tend to ignore them when it comes to giving policy advice (as happened especially when they advised the former communist economies in the 1990s). Together, these various bodies and individuals form a powerful propaganda machine, a financial-intellectual complex backed by money and power. This neo-liberal establishment would have us believe that, during its miracle years between the 1960s and the 1980s, Korea pursued a neo-liberal economic development strategy.[7] 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 consultation 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 xx PROLOGUE banks, so it could direct the life blood of business—credit. Some big projects were undertaken directly by state-owned enterprises—the steel maker, P O S C O , being the best example—although the country had a pragmatic, rather than ideological, attitude to the issue of state ownership. If private enterprises worked well, that was fine; if they did not invest in important areas, the government had no qualms about setting up state-owned enterprises ( S O E s); 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 towards foreign patents, encouraging ‘reverse engineering’ and overlooking ‘pirating’ of patented products. The popular impression of Korea as a free-trade economy was created by its export success. But export success does not require free trade, as Japan and China have also shown. Korean exports in the earlier period - things like simple garments and cheap electronics—were all means to earn the hard currencies needed to pay for the advanced technologies and expensive machines that were necessary for the new, more difficult industries, which were protected through tariffs and subsidies. At the same time, tariff protection and subsidies were not there to shield industries from international competition forever, but to give them the time to absorb new technologies and establish new organizational capabilities until they could compete in the world market. The Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state direction. The Korean government did not xxi PROLOGUE vanquish the market as the communist states did. However, it did not have blind faith in the free market either. While it took markets seriously, the Korean strategy recognized that they often need to be corrected through policy intervention. Now, if it was only Korea that became rich through such ‘heretical’ policies, the free-market gurus might be able to dismiss it as merely the exception that proves the rule. However, Korea is no exception. As I shall show later, practically all of today’s developed countries, including Britain and the US, the supposed homes of the free market and free trade, have become rich on the basis of policy recipes that go against the orthodoxy of neo-liberal economics. Today’s rich countries used protection and subsidies, while discriminating against foreign investors—all anathema to today’s economic orthodoxy and now severely restricted by multilateral treaties, like the W T O Agreements, and proscribed by aid donors and international financial organizations (notably the IMF and the World Bank). There are a few countries that did not use much protection, such as the Netherlands and (until the First World War) Switzerland. But they deviated from the orthodoxy in other ways, such as their refusal to protect patents. The records of today’s rich countries on policies regarding foreign investment, state-owned enterprises, macroeconomic management and political institutions also show significant deviations from today’s orthodoxy regarding these matters. Why then don’t the rich countries recommend to today’s developing countries the strategies that served them so well? Why do they instead hand out a fiction about the history of capitalism, and a bad one at that? In 1841, a German economist, Friedrich List, criticized Britain for preaching free trade to other countries, while having achieved its economic supremacy through high tariffs and extensive subsidies. He accused the British of ‘kicking away the ladder’ that they had climbed to reach the world’s top economic position: ‘[i]t is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in xxii PROLOGUE order to deprive others of the means of climbing up after him [italics added]’.[8] Today, there are certainly some people in the rich countries who preach free market and free trade to the poor countries in order to capture larger shares of the latter’s markets and to pre-empt the emergence of possible competitors. They are saying ‘do as we say, not as we did’ and act as ‘Bad Samaritans’, taking advantage of others who are in trouble.∗ But what is more worrying is that many of today’s Bad Samaritans do not even realize that they are hurting the developing countries with their policies. The history of capitalism has been so totally re-written that many people in the rich world do not perceive the historical double standards involved in recommending free trade and free market to developing countries. I am not suggesting that there is a sinister secret committee somewhere that systematically air-brushes undesirable people out of photographs and re-writes historical accounts. However, history is written by the victors and it is human nature to re-interpret the past from the point of view of the present. As a result, the rich countries have, over time, gradually, if often subconsciously, re-written their own histories to make them more consistent with how they see themselves today, rather than as they really were—in much the same way that today people write about Renaissance ‘Italy’ (a country that did not exist until 1871) or include the French-speaking Scandinavians (Norman conqueror kings) in the list of ‘English’ kings and queens. The result is that many Bad Samaritans are recommending free-trade, freemarket policies to the poor countries in the honest but mistaken belief that those are the routes their own countries took in the past to become rich. But they are in fact making the lives of those whom they are trying to help more difficult. Sometimes these Bad Samaritans may be more of a problem than those ∗ The original story is that of the ‘Good Samaritan’ from the Bible. In that parable, a man who was robbed by highwaymen was helped by a ‘Good Samaritan’, despite the fact that the Samaritans were stereotyped as being callous and not above taking advantage of the others in trouble. xxiii PROLOGUE knowingly engaged in ‘kicking away the ladder’, because self-righteousness is often more stubborn than self-interest. So how do we dissuade the Bad Samaritans from hurting the poor countries, whatever their intentions are? What else should they do instead? This book offers some answers through a mix of history, analysis of the world today, some future predictions and suggestions for change. The place to start is with a true history of capitalism and globalization, which I examine in the next two chapters (chapters 1 and 2). In these chapters, I will show how many things that the reader may have accepted as ‘historical facts’ are either wrong or partial truths. Britain and the US are not the homes of free trade; in fact, for a long time they were the most protectionist countries in the world. Not all countries have succeeded through protection and subsidies, but few have done so without them. For developing countries, free trade has a rarely been a matter of choice; it was often an imposition from outside, sometimes even through military power. Most of them did very poorly under free trade; they did much better when they used protection and subsidies. The best-performing economies have been those that opened up their economies selectively and gradually. Neo-liberal free-trade free-market policy claims to sacrifice equity for growth, but in fact it achieves neither; growth has slowed down in the past two and a half decades when markets were freed and borders opened. In the main chapters of the book that follow the historical chapters (chapters 3 to 9), I deploy a mixture of economic theory, history and contemporary evidence to turn much of the conventional wisdom about development on its head. 1. Free trade reduces freedom of choice for poor countries. 2. Keeping foreign companies out may be good for them in the long run. 3. Investing in a company that is going to make a loss for 17 years may be an excellent proposition. 4. Some of the world’s best firms are owned and run by the state. xxiv PROLOGUE 5. ‘Borrowing’ ideas from more productive foreigners is essential for economic development. 6. Low inflation and government prudence may be harmful for economic development. 7. Corruption exists because there is too much, not too little, market. 8. Free market and democracy are not natural partners. 9. Countries are poor not because their people are lazy; their people are ‘lazy’ because they are poor. Like this opening chapter, the closing chapter of the book opens with an alternative ‘future history’—but this time a very bleak one. The scenario is deliberately pessimistic, but it is firmly rooted in reality, showing how close we are to such a future, should we continue with the neo-liberal policies propagated by the Bad Samaritans. In the rest of the chapter, I present some key principles, distilled from the detailed policy alternatives that I discuss throughout the book, which should guide our action if we are to enable developing countries to advance their economies. Despite its bleak scenario, the chapter—and therefore the book—closes with a note of optimism, explaining why I believe most Bad Samaritans can be changed and really made to help developing countries improve their economic situations. xxv CHAPTER 1 The Lexus and the olive tree revisited Myths and facts about globalization Once upon a time, the leading car maker of a developing country exported its first passenger cars to the US. Up to that day, the little company had only made shoddy products—poor copies of quality items made by richer countries. The car was nothing too sophisticated—just a cheap subcompact (one could have called it ‘four wheels and an ashtray’). But it was a big moment for the country and its exporters felt proud. Unfortunately, the product failed. Most thought the little car looked lousy and savvy buyers were reluctant to spend serious money on a family car that came from a place where only second-rate products made. The car had to be withdrawn from the US market. This disaster led to a major debate among the country’s citizens. Many argued that the company should have stuck to its original business of making simple textile machinery. After all, the country’s biggest export item was silk. If the company could not make good cars after 25 years of trying, there was no future for it. The government had given the car maker every opportunity to succeed. It had ensured high profits for it at home through high tariffs and draconian controls on foreign investment in the car industry. Fewer than ten years ago, it even gave public money to save the company from imminent 1 Chapter 1 THE LEXUS AND THE OLIVE TREE REVISITED bankruptcy. So, the critics argued, foreign cars should now be let in freely and foreign car makers, who had been kicked out 20 years before, allowed to set up shop again. Others disagreed. They argued that no country had got anywhere without developing ‘serious’ industries like automobile production. They just needed more time to make cars that appealed to everyone. The year was 1958 and the country was, in fact, Japan. The company was Toyota, and the car was called the Toyopet. Toyota started out as a manufacturer of textile machinery (Toyoda Automatic Loom) and moved into car production in 1933. The Japanese government kicked out General Motors and Ford in 1939 and bailed out Toyota with money from the central bank (Bank of Japan) in 1949. Today, Japanese cars are considered as ‘natural’ as Scottish salmon or French wine, but fewer than 50 years ago, most people, including many Japanese, thought the Japanese car industry simply should not exist. Half a century after the Toyopet debacle, Toyota’s luxury brand Lexus has become something of an icon for globalization, thanks to the American journalist Thomas Friedman’s book, The Lexus and the Olive Tree. The book owes its title to an epiphany that Friedman had on the Shinkansen bullet train during his trip to Japan in 1992. He had paid a visit to a Lexus factory, which mightily impressed him. On his train back from the car factory in Toyota City to Tokyo, he came across yet another newspaper article about the troubles in the Middle East where he had been a long-time correspondent. Then it hit him. He realized that that ‘half the world seemed to be . . . intent on building a better Lexus, dedicated to modernizing, streamlining, and privatizing their economies in order to thrive in the system of globalization. And half of the world—sometimes half the same country, sometimes half the same person—was still caught up in the fight over who owns which olive tree’.[1] According to Friedman, unless they fit themselves into a particular set of economic policies that he calls the Golden Straitjacket, countries in the olivetree world will not be able to join the Lexus world. In describing the Golden 2 THE LEXUS AND THE OLIVE TREE REVISITED Chapter 1 Straitjacket, he pretty much sums up today’s neo-liberal economic orthodoxy: in order to fit into it, a country needs to privatize state-owned enterprises, maintain low inflation, reduce the size of government bureaucracy, balance the budget (if not running a surplus), liberalize trade, deregulate foreign investment, deregulate capital markets, make the currency convertible, reduce corruption and privatize pensions.[2] According to him, this is the only path to success in the new global economy. His Straitjacket is the only gear suitable for the harsh but exhilarating game of globalization. Friedman is categorical: ‘Unfortunately, this Golden Straitjacket is pretty much “one-size fits all” . . . It is not always pretty or gentle or comfortable. But it’s here and it’s the only model on the rack this historical season.’[3] However, the fact is that, had the Japanese government followed the free-trade economists back in the early 1960s, there would have been no Lexus. Toyota today would, at best, be a junior partner to some western car manufacturer, or worse, have been wiped out. The same would have been true for the entire Japanese economy. Had the country donned Friedman’s Golden Straitjacket early on, Japan would have remained the third-rate industrial power that it was in the 1960s, with its income level on a par with Chile, Argentina and South Africa[4] it was then a country whose prime minister was insultingly dismissed as. ‘a transistor-radio salesman’ by the French president, Charles De Gaulle.[5] In other words, had they followed Friedman’s advice, the Japanese would now not be exporting the Lexus but still be fighting over who owns which mulberry tree. 1.1. The official history of globalization Our Toyota story suggests that there is something spectacularly jarring in the fable of globalization promoted by Thomas Friedman and his colleagues. In order to tell you what it is exactly, I need to tell you what I call the ‘official history of globalization’ and discuss its limitations. 3 Chapter 1 THE LEXUS AND THE OLIVE TREE REVISITED According to this history, globalization has progressed over the last three centuries in the following way:[6] Britain adopted free-market and free trade policies in the 18th century, well ahead of other countries. By the middle of the 19th century, the superiority of these policies became so obvious, thanks to Britain’s spectacular economic success, that other countries started liberalizing their trade and deregulating their domestic economies. This liberal world order, perfected around 1870 under British hegemony, was based on: laissez-faire industrial policies at home; low barriers to the international flows of goods, capital and labour; and macroeconomic stability, both nationally and internationally, guaranteed by the principles of sound money (low inflation) and balanced budgets. A period of unprecedented prosperity followed. Unfortunately, things started to go wrong after the First World War. In response to the ensuing instability of the world economy, countries unwisely began to erect trade barriers again. In 1930, the US abandoned free trade and enacted the infamous Smoot-Hawley tariff. Countries like Germany and Japan abandoned liberal policies and erected high trade barriers and created cartels, which were intimately associated with their fascism and external aggression. The world free trade system finally ended in 1932, when Britain, hitherto the champion of free trade, succumbed to temptation and itself re-introduced tariffs. The resulting contraction and instability in the world economy, and then, finally, the Second World War, destroyed the last remnants of the first liberal world order. After the Second World War, the world economy was re-organized on a more liberal line, this time under American hegemony. In particular, some significant progress was made in trade liberalization among the rich countries through the early G A T T (General Agreement on Trade and Tariffs) talks. But protectionism and state intervention still persisted in most developing countries and, needless to say, in the communist countries. Fortunately, illiberal policies have been largely abandoned across the world since the 1980s following the rise of neo-liberalism. By the late 1970s, the failures 4 THE LEXUS AND THE OLIVE TREE REVISITED Chapter 1 of so-called import substitution industrialization ( I S I ) in developing countries— based on protection, subsidies and regulation—had become too obvious to ignore.∗ The economic ‘miracle’ in East Asia, which was already practising free trade and welcoming foreign investment, was a wake-up call for the other developing countries. After the 1982 Third World debt crisis, many developing countries abandoned interventionism and protectionism, and embraced neoliberalism. The crowning glory of this trend towards global integration was the fall of communism in 1989. These national policy changes were made all the more necessary by the unprecedented acceleration in the development of transport and communications technologies. With these developments, the possibilities of entering mutually beneficial economic arrangements with partners in faraway countries—through international trade and investment—increased dramatically. This has made openness an even more crucial determinant of a country’s prosperity than before. Reflecting the deepening global economic integration, the global governance system has recently been strengthened. Most importantly, in 1995 the G A T T was upgraded to the World Trade Organization ( W T O ), a powerful agency pushing for liberalization not just in trade but also in other areas, like foreign investment regulation and intellectual property rights. The W T O now forms the core of the global economic governance system, together with the I M F (International Monetary Fund) —in charge of access to short-term finance— and the World ∗ The idea behind import substitution industrialization is that a backward country starts producing industrial products that it used to import, thereby ‘substituting’ imported industrial products with domestically produced equivalents. This is achieved by making imports artificially expensive by means of tariffs and quotas against imports, or subsidies to domestic producers. The strategy was adopted by many Latin American countries in the 1930s. At the time, most other developing countries were not in a position to practise the I S I strategy, as they were either colonies or subject to ‘unequal treaties’ that deprived them of the right to set their own tariffs (see below). The I S I strategy was adopted by most other developing countries after they gained independence between the mid-1940s and the mid-1960s. 5 Chapter 1 THE LEXUS AND THE OLIVE TREE REVISITED Bank —in charge of longer-term investments—. The result of all these developments, according to the official history, is a globalized world economy comparable in its liberality and potential for prosperity only to the earlier ‘golden age’ of liberalism (1870–1913). Renato Ruggiero, the first director-general of the W T O , solemnly declared that, as a consequence of this new world order, we now have ‘the potential for eradicating global poverty in the early part of the next [21st] century—a Utopian notion even a few decades ago, but a real possibility today.’[7] This version of the history of globalization is widely accepted. It is supposed to be the route map for policy makers in steering their countries towards prosperity. Unfortunately, it paints a fundamentally misleading picture, distorting our understanding of where we have come from, where we are now and where we may be heading for. Let’s see how. 1.2. The real history of globalization On 30 June 1997, Hong Kong was officially handed back to China by its last British governor, Christopher Patten. Many British commentators fretted about the fate of Hong Kong’s democracy under the Chinese Communist Party, although democratic elections in Hong Kong had only been permitted as late as 1994,152 years after the start of British rule and only three years before the planned handover. But no one seems to remember how Hong Kong came to be a British possession in the first place. Hong Kong became a British colony after the Treaty of Nanking in 1842, the result of the Opium War. This was a particularly shameful episode, even by the standards of 19th -century imperialism. The growing British taste for tea had created a huge trade deficit with China. In a desperate attempt to plug the gap, Britain started exporting opium produced in India to China. The mere detail that selling opium was illegal in China could not possibly be allowed to obstruct the noble cause of balancing the books. When a Chinese official seized an illicit 6 THE LEXUS AND THE OLIVE TREE REVISITED Chapter 1 cargo of opium in 1841, the British government used it as an excuse to fix the problem once and for all by declaring war. China was heavily defeated in the war and forced to sign the Treaty of Nanking, which made China lease’ Hong Kong to Britain and give up its right to set its own tariffs. So there it was—the self-proclaimed leader of the ‘liberal’ world declaring war on another country because the latter was getting in the way of its illegal trade in narcotics. The truth is that the free movement of goods, people, and money that developed under British hegemony between 1870 and 1913—the first episode of globalization - was made possible, in large part, by military might, rather than market forces. Apart from Britain itself, the practitioners of free trade during this period were mostly weaker countries that had been forced into, rather than had voluntarily adopted, it as a result of colonial rule or ‘unequal treaties’ (like the Nanking Treaty), which, among other things, deprived them of the right to set tariffs and imposed externally determined low, flat-rate tariffs (3–5%) on them. [8] Despite their key role in promoting ‘free’ trade in the late 19th and early 20th centuries, colonialism and unequal treaties hardly get any mention in the hordes of pro-globalisation books.[9] Even when they are explicitly discussed, their role is seen as positive on the whole. For example,in his acclaimed book, Empire, the British historian Niall Ferguson honestly notes many of the misdeeds of the British empire, including the Opium War, but contends that the British empire was a good thing overall—it was arguably the cheapest way to guarantee free trade, which benefits everyone.[10] However, the countries under colonial rule and unequal treaties did very poorly. Between 1870 and 1913, per capita income in Asia (excluding Japan) grew at 0.4% per year, while that in Africa grew at 0.6% per year.[11] The corresponding figures were 1.3% for Western Europe and 1.8% per year for the USA.[12] It is particularly interesting to note that the Latin American countries, which 7 Chapter 1 THE LEXUS AND THE OLIVE TREE REVISITED by that time had regained tariff autonomy and were boasting some of the highest tariffs in the world, grew as fast as the US did during this period.[13] While they were imposing free trade on weaker nations through colonialism and unequal treaties, rich countries maintained rather high tariffs, especially industrial tariffs, for themselves, as we will see in greater detail in the next chapter. To begin with, Britain, the supposed home of free trade, was one of the most protectionist countries until it converted to free trade in the mid19th century. There was a brief period during the 1860s and the 1870s when something approaching free trade did exist in Europe, especially with zero tariffs in Britain. However, this proved short-lived. From the 1880s, most European countries raised protective barriers again, partly to protect their farmers from cheap food imported from the New World and partly to promote their newly emerging heavy industries, such as steel, chemicals. and machinery.[14] Finally, even Britain, as I have noted, the chief architect of the first wave of globalization, abandoned free trade and re-introduced tariffs in 1932. The official history describes this event as Britain ‘succumbing to the temptation’ of protectionism. But it typically fails to mention that this was due to the decline in British economic supremacy, which in turn was the result of the success of protectionism on the part of competitor countries, especially the USA, in developing their own new industries. Thus, the history of the first globalization in the late 19th and early 20th centuries has been rewritten today in order to fit the current neo-liberal orthodoxy. The history of protectionism in today’s rich countries is vastly underplayed, while the imperialist origin of the high degree of global integration on the part of today’s developing countries is hardly ever mentioned. The final curtain coming down on the episode—that is, Britain’s abandonment of free trade—is also presented in a biased way. It is rarely mentioned that what really made Britain abandon free trade was precisely the successful use of protectionism by its competitors. 8 THE LEXUS AND THE OLIVE TREE REVISITED Chapter 1 1.3. Neo-liberals vs neo-idiotics? In the official history of globalization, the early post-Second-World-War period is portrayed as a period of incomplete globalization. While there was a significant increase in integration among the rich countries, accelerating their growth, it is said, most developing countries refused to fully participate in the global economy until the 1980s, thus holding themselves back from economic progress. This story misrepresents the process of globalization among the rich countries during this period. These countries did significantly lower their tariff barriers between the 1950s and the 1970s. But during this period, they also used many other nationalistic policies to promote their own economic development— subsidies (especially for research and development, or R&D), state-owned enterprises, government direction of banking credits, capital controls and so on. When they started implementing neo-liberal programmes, their growth decelerated. In the 1960s and the 1970s, per capita income in the rich countries grew by 3.2% a year, but its growth rate fell substantially to 2.1% in the next two decades.[15] But more misleading is the portrayal of the experiences of developing countries. The postwar period is described by the official historians of globalization as an era of economic disasters in these countries. This was because, they argue, these countries believed in ‘wrong’ economic theories that made them think they could defy market logic. As a result, they suppressed activities which they were good at (agriculture, mineral extraction and labour-intensive manufacturing) and promoted ‘white elephant’ projects that made them feel proud but were economic nonsense—the most notorious example of this is Indonesia producing heavily subsidized jet aeroplanes. The right to ‘asymmetric protection’ that the developing countries secured in 1964 at the G A T T is portrayed as ‘the proverbial rope on which to hang one’s own economy!’, in a well-known article by Jeffrey Sachs and Andrew Warner.[16] Gustavo Franco, a former president of the Brazilian central bank (1997–99), made the same point more succinctly, if more crudely, when he said his policy 9 Chapter 1 THE LEXUS AND THE OLIVE TREE REVISITED objective was ‘to undo forty years of stupidity’ and that the only choice was ‘to be neo-liberal or neo-idiotic’.[17] The problem with this interpretation is that the ‘bad old days’ in the developing countries weren’t so bad at all. During the 1960s and the 1970s, when they were pursuing the ‘wrong’ policies of protectionism and state intervention, per capita income in the developing countries grew by 3.0% annually.[18] As my esteemed colleague Professor Ajit Singh once pointed out, this was the period of ‘Industrial Revolution in the Third World’.[19] This growth rate is a huge improvement over what they achieved under free trade during the ‘age of impcrialism’ (see above) and compares favourably with the 1–1.5% achieved by the rich countries during the Industrial Revolution in the 19th century. It also remains the best that they have ever recorded. Since the 1980s, after they implemented neo-liberal policies, they grew at only about half the speed seen in the 1960s and the 1970s (1.7%). Growth slowed down in the rich countries too, but the slowdown was less marked (from 3.2% to 2.1%), not least because they did not introduce neo-liberal policies to the same extent as the developing countries did. The average growth rate of developing countries in this period would be even lower if we exclude China and India. These two countries, which accounted for 12% of total developing country income in 1980 and 30% in 2000, have so far refused to put on Thomas Friedman’s Golden Straitjacket.[20] Growth failure has been particularly noticeable in Latin America and Africa, where neo liberal programmes were implemented more thoroughly than in Asia. In the 1960s and the 1970s, per capita income in Latin America was growing at 3.1% per year, slightly faster than the developing country average. Brazil, especially, was growing almost as fast as the East Asian ‘miracle’ economies. Since the 1980s, however, when the continent embraced neo-liberalism, Latin America has been growing at less than one-third of the rate of the ‘bad old days’. Even if we discount the 1980s as a decade of adjustment and take it out of the equation, per capita income in the region during the 1990s grew at basically half 10 THE LEXUS AND THE OLIVE TREE REVISITED Chapter 1 the rate of the ‘bad old days’ (3.1% vs 1.7%). Between 2000 and 2005, the region has done even worse; it virtually stood still, with per capita income growing at only 0.6% per year.[21] As for Africa, its per capita income grew relatively slowly even in the 1960s and the 1970s (1–2% a year). But since the 1980s, the region has seen a. fall in living standards. This record is a damning indictment of the neo-liberal orthodoxy, because most of the African economies have been practically run by the I M F and the World Bank over the past quarter of a century. The poor growth record of neo-liberal globalization since the 1980s is particularly embarrassing. Accelerating growth—if necessary at the cost of increasing inequality and possibly some increase in poverty -was the proclaimed goal of neo-liberal reform. We have been repeatedly told that we first have to ‘create more wealth’ before we can distribute it more widely and that neo-liberalism was the way to do that. As a result of neo-liberal policies, income inequality has increased in most countries as predicted, but growth has actually slowed down significantly.[22] Moreover, economic instability has markedly increased during the period of neo-liberal dominance. The world, especially the developing world, has seen more frequent and larger-scale financial crises since the 1980s. In other words, neo-liberal globalization has failed to deliver on all fronts of economic life—growth, equality and stability. Despite this, we are constantly told how neo-liberal globalization has brought unprecedented benefits. The distortion of facts in the official history of globalization is also evident at country level. Contrary to what the orthodoxy would have us believe, virtually all the successful developing countries since the Second World War initially succeeded through nationalistic policies, using protection, subsidies and other forms of government intervention. I have already discussed the case of my native Korea in some detail in the Prologue, but other ‘miracle’ economies of East Asia have also succeeded through a strategic approach to integration with the global economy. Taiwan used a strat11 Chapter 1 THE LEXUS AND THE OLIVE TREE REVISITED egy that is very similar to that of Korea, although it used state-owned enterprises more extensively while being somewhat friendlier to foreign investors than Korea was. Singapore has had free trade and relied heavily on foreign investment, but, even so, it does not conform in other respects to the neo-liberal ideal. Though it welcomed foreign investors, it used considerable subsidies in order to attract transnational corporations in industries it considered strategic, especially in the form of government investment in infrastructure and education targeted at particular industries. Moreover, it has one of the largest state-owned enterprise sectors in the world, including the Housing Development Board, which supplies 85% of all housing (almost all land is owned by the government). Hong Kong is the exception that proves the rule. It became rich despite having free trade and a laissez-faire industrial policy. But it never was an independent state (not even a city state like Singapore) but a city within a bigger entity. Until 1997, it was a British colony used as a platform for Britain’s trading and financial interests in Asia. Today, it is the financial centre of the Chinese economy. These facts made it less necessary for Hong Kong to have an independent industrial base, although, even so, it was producing twice as much manufacturing output per capita as that of Korea until the mid-1980s, when it started its full absorption into China. But even Hong Kong was not a total free market economy. Most importantly, all land was owned by the government in order to control the housing situation. The more recent economic success stories of China, and increasingly India, are also examples that show the importance of strategic, rather than unconditional, integration with the global economy based on a nationalistic vision. Like the US in the mid-i9th century, or Japan and Korea in the mid-20th century, China used high tariffs to build up its industrial base. Right up to the 1990s, China’s average tariff was over 30%. Admittedly, it has been more welcoming to foreign investment than Japan or Korea were. But it still imposed foreign ownership ceilings and local contents requirements (the requirements that the foreign firms buy at least a certain proportion of their inputs from local suppliers). 12 THE LEXUS AND THE OLIVE TREE REVISITED Chapter 1 India’s recent economic success is often attributed by the pro-globalizers to its trade and financial liberalization in the early 1990s. As some recent research reveals, however, India’s growth acceleration really began in the 1980s, discrediting the simple ‘greater openness accelerates growth’ story.[23] Moreover, even after the early 1990s trade liberalization, India’s average manufacturing tariffs remained at above 30% (it is still 25% today). India’s protectionism before the 1990s was certainly over-done in some sectors. But this is not to say that India would have been even more successful had it adopted free trade at independence in 1947. India has also imposed severe restrictions on foreign direct investment—entry restrictions, ownership restrictions and various performance requirements (e.g., local contents requirements). The one country that seems to have succeeded in the postwar globalization period by using the neo-liberal strategy is Chile. Indeed, Chile adopted the strategy before anyone else, including the US and Britain, following the coup d’etat by General Augusto Pinochet back in 1973. Since then, Chile has grown quite well—although nowhere nearly as fast as the East Asian ‘miracle’ economies.[24] And the country has been constantly cited as a neo-liberal success story. Its good growth performance is undeniable. But even Chile’s story is more complex than the orthodoxy suggests. Chile’s early experiment with neo-liberalism, led by the so-called Chicago Boys (a group of Chilean economists trained at the University of Chicago, one of the centres of neo-liberal economics), was a disaster. It ended in a terrible financial crash in 1982, which had to be resolved by the nationalization of the whole banking sector. Thanks to this crash, the country recovered the prePinochet level of income only in the late 1980s.[25] It was only when Chile’s neo-liberalism got more pragmatic after the crash that the country started doing well. For example, the government provided exporters with a lot of help in overseas marketing and R&D.[26] It also used capital controls in the 1990s to successfully reduce the inflow of short-term speculative funds, although its recent free trade agreement with 13 Chapter 1 THE LEXUS AND THE OLIVE TREE REVISITED the US has forced it to promise never to use them again. More importantly, there is a lot of doubt about the sustainability of Chile’s development. Over the past three decades, the country has lost a lot of manufacturing industries and become excessively dependent on natural-resources-based exports. Not having the technological capabilities to move into higher-productivity activities, Chile faces a clear limit to the level of prosperity it can attain in the long run. To sum up, the truth of post-1945 globalization is almost the polar opposite of the official history. During the period of controlled globalization underpinned by nationalistic policies between the 1950s and the 1970s, the world economy, especially in the developing world, was growing faster, was more stable and had more equitable income distribution than in the past two and a half decades of rapid and uncontrolled neo-liberal globalization. Nevertheless, this period is portrayed in the official history as a one of unmitigated disaster of nationalistic policies, especially in developing countries. This distortion of the historical record is peddled in order to mask the failure of neo-liberal policies. 1.4. Who’s running the world economy? Much of what happens in the global economy is determined by the rich countries, without even trying. They account for 80% of world output, conduct 70% of international trade and make 70–90% (depending on the year) of all foreign direct investments.[27] This means that their national policies can strongly influence the world economy. But more important than their sheer weight is the rich countries’ willingness to throw that very weight about in shaping the rules of the global economy. For example, developed countries induce poorer ‘ countries to adopt particular policies by making them a condition for their foreign aid or by offering them preferential trade agreements in return for ‘good behaviour’ (adoption of neo-liberal policies). Even more important in shaping options for developing countries, however, are the actions of multilateral organizations such as the 14 THE LEXUS AND THE OLIVE TREE REVISITED Chapter 1 ‘Unholy Trinity’—namely the I M F , the World Bank and the W T O ( W T O ). Though they are not merely puppets of the rich countries, the Unholy Trinity are largely controlled by the rich countries, so they devise and implement Bad Samaritan policies that those countries want. The I M F and the World Bank were originally set up in 1944 at a conference between the Allied forces (essentially the US and Britain), which worked out the shape of postwar international economic governance. This conference was held in the New Hampshire resort of Bretton Woods, so these agencies are sometimes collectively called the Bretton Woods Institutions (BWIs). The I M F was set up to lend money to countries in balance of payments crises so that they can reduce their balance of payments deficits without having to resort to deflation. The World Bank was set up to help the reconstruction of war-torn countries in Europe and the economic development of the post-colonial societies that were about to emerge—which is why it is officially called the International Bank for Reconstruction and Development. This was supposed to be done by financing projects in infrastructure development (e.g., roads, bridges, dams). Following the Third World debt crisis of 1982, the roles of both the I M F and the World Bank changed dramatically. They started to exert a much stronger policy influence on developing countries through their joint operation of so-called structural adjustment programmes (SAPs). These programmes covered a much wider range of policies than what the Bretton Woods Institutions had originally been mandated to do. The BWIs now got deeply involved in virtually all areas of economic policy in the developing world. They branched out into areas like government budgets, industrial regulation, agricultural pricing, labour market regulation, privatization and so on. In the 1990s, there was a further advance in this ‘mission creep’ as they started attaching so-called governance conditionalities to their loans. These involved intervention in hitherto unthinkable areas, like democracy, government decentralization, central bank independence and corporate governance. This mission creep raises a serious issue. The World Bank and the I M F initially 15 Chapter 1 THE LEXUS AND THE OLIVE TREE REVISITED started with rather limited mandates. Subsequently, they argued that they have to intervene in new areas outside their original mandates, as they, too, affect economic performance, a failure in which has driven countries to borrow money from them. However, on this reasoning, there is no area of our life in which the BWIs cannot intervene. Everything that goes on in a country has implications for its economic performance. By this logic, the I M F and the World Bank should be able to impose conditionalities on everything from fertility decisions, ethnic integration and gender equality, to cultural values. Don’t get me wrong. I am not one of those people who are against loan conditionalities on principle. It is reasonable for the lender to attach conditions. But conditions should be confined to only those aspects that are most relevant to the repayment of the loan. Otherwise, the lender may intrude in all aspects of the borrower’s life. Suppose I am a small businessman trying to borrow money from my bank in order to expand my factory. It would be natural for my bank manager to impose a unilateral condition on how I am going to repay. It might even be reasonable for him to impose conditions on what kind of construction materials I can use and what kind of machinery I can buy in expanding my factory. But, if he attaches the condition that I cut down on my fat intake on the (not totally irrelevant) grounds that a fatty diet reduces my ability to repay the loan by making me unhealthy, I would find this unreasonably intrusive. Of course, if I am really desperate, I may swallow my pride and agree even to this unreasonable condition. But when he makes it a further condition that I spend less than an hour a day at home (on the grounds that spending less time with the family will increase my time available for business and therefore reduce the chance of loan default), I would probably punch him in the face and storm out of the bank. It is not that my diet and family life have no bearings whatsoever on my ability to manage my business. As my bank manager reasons, they are relevant. But the point is that their relevance is indirect and marginal. In the beginning, the I M F only imposed conditions closely related to the 16 THE LEXUS AND THE OLIVE TREE REVISITED Chapter 1 borrower country’s management of its balance of payments, such as currency devaluation. But then it started putting conditions on government budgets on the grounds that budget deficits are a key cause of balance of payments problems. This led to the imposition of conditions like the privatization of state-owned enterprises, because it was argued that the losses made by those enterprises were an important source of budget deficits in many developing countries. Once such an extension of logic began, there was no stopping. Since everything is related to everything else, anything could be a condition. In 1997, in Korea, for example, the I M F laid down conditions on the amount of debt that private sector companies could have, on the grounds that over-borrowing by these companies was the main reason for Korea’s financial crisis. To add insult to injury, the Bad Samaritan rich nations often demand, as a condition for their financial contribution to I M F packages, that the borrowing country be made to adopt policies that have little to do with fixing its economy but that serve the interests of the rich countries lending the money. For example, on seeing Korea’s 1997 agreement with the I M F , one outraged observer commented: ‘Several features of the I M F plan are replays of the policies that Japan and the United States have long been trying to get Korea to adopt. These included accelerating the . . . reductions of trade barriers to specific Japanese products and opening capital markets so that foreign investors can have majority ownership of Korean firms, engage in hostile takeovers . .. , and expand direct participation in banking and other financial services. Although greater competition from manufactured imports and more foreign ownership could . . . help the Korean economy, Koreans and others saw this . . . as an abuse of IMF power to force Korea at a time of weakness to accept trade and investment policies it had previously rejected’.[28] This was said not by some anti-capitalist anarchist but by Martin Feldstein, the conservative Harvard economist who was the key economic advisor to Ronald Reagan in the 1980s. The I M F -World Bank mission creep, combined with the abuse of conditionali17 Chapter 1 THE LEXUS AND THE OLIVE TREE REVISITED ties by the Bad Samaritan nations, is particularly unacceptable when the policies of the Bretton Woods Institutions have produced slower growth, more unequal income distribution and greater economic instability in most developing countries, as I pointed out earlier in this chapter. How on earth can the I M F and the World Bank persist for so long in pursuing the wrong policies that produce such poor outcomes? This is because their governance structure severely biases them towards the interests of the rich countries. Their decisions are made basically according to the share capital that a country has (in other words, they have a one-dollar-one-vote system). This means that the rich countries, which collectively control 60% of the voting shares, have an absolute control over their policies, while the US has a de facto veto in relation to decisions in the 18 most important areas.[29] One result of this governance structure is that the World Bank and the I M F have imposed on developing countries standard policy packages that are considered to be universally valid by the rich countries, rather than policies that are carefully designed for each particular developing country—predictably producing poor results as a consequence. Another result is that, even when their policies may be appropriate, they have often failed because they are resisted by the locals as impositions from outside. In response to mounting criticisms, the World Bank and the I M F have recently reacted in a number of ways. On the one hand, there have been some window-dressing moves. Thus the I M F now calls the Structural Adjustment Programme the Poverty Reduction and Growth Facility Programme, in order to show that it cares about poverty issues, though the contents of the programme have hardly changed from before. On the other hand, there have been some genuine efforts to open dialogues with a wider constituency, especially the World Bank’s engagement with N G O s (non-governmental organizations). But the impacts of such consultation are at best marginal. Moreover, when increasing numbers of N G O s in developing countries are indirectly funded by the World Bank, the value of such an exercise is becoming more doubtful. 18 THE LEXUS AND THE OLIVE TREE REVISITED Chapter 1 The I M F and the World Bank have also tried to increase the ‘local ownership’ of their programmes by involving local people in their design. However, this has borne few fruits. Many developing countries lack the intellectual resources to argue against powerful international organizations with an army of highly trained economists and a lot of financial clout behind them. Moreover, the World Bank and (he I M F have taken what I call the ‘Henry Ford approach to diversity’ (he once said that a customer could have a car painted ‘any colour . . . so long as it’s black’). The range of local variation in policies that they find acceptable is very narrow. Also, with the increasing tendency for developing countries to elect or appoint ex-World Bank or ex- I M F officials to key economic posts, ‘local’ solutions are increasingly resembling the solutions provided by the Bretton Woods Institutions. Completing the Unholy Trinity, the W T O was launched in 1995, following the conclusion of the so-called Uruguay Round of the G A T T talks. I will discuss the substance of what the W T O does in greater detail in later chapters, so here let me focus just on its governance structure. The W T O has been criticized on a number of grounds. Many believe that it is little more than a tool with which the developed countries pry open developing markets. Others argue that it has become a vehicle for furthering the interests of transnational corporations. There are elements of truth in both of these criticisms, as I will show in later chapters. But, despite these criticisms, the W T O is an international organization in whose running the developing countries have the greatest say. Unlike the I M F or the World Bank, it is ‘democratic’ -in the sense of allowing one country one vote (of course, we can debate whether giving China, with 1.3 billion people, and Luxembourg, with fewer than half a million people, one vote each is really ‘democratic’). And, unlike in the UN, where the five permanent members of the Security Council have veto power, no country has a veto in the W T O . Since they have the numerical advantage, the developing countries count far more in the WTO than they do in the I M F or the World Bank. 19 Chapter 1 THE LEXUS AND THE OLIVE TREE REVISITED Unfortunately, in practice, votes are never taken, and the organization is essentially run by an oligarchy comprising a small number of rich countries. It is reported that, in various ministerial meetings (Geneva 1998, Seattle 1999, Doha 2001, Cancun 2003), all the important negotiations were held in the socalled Green Rooms on a ‘by-invitation-only’ basis. Only the rich countries and some large developing countries that they cannot ignore (e.g., India and Brazil) were invited. Especially during the 1999seattle meeting, it was reported that some developing country delegates who tried to get into Green Rooms without invitations were physically thrown out. But even without such extreme measures, the decisions are likely to be biased towards the rich countries. They can threaten and bribe developing countries by means of their foreign aid budgets or using their influence on the loan decisions by the I M F , the World Bank and ‘regional’ multilateral financial institutions.∗ Moreover, there exists a vast gap in intellectual and negotiation resources between the two groups of countries. A former student of mine, who has just left the diplomatic service of his native country in Africa, once told me that his country had only three people, including himself, to attend all the meetings at the W T O in Geneva. The meetings often numbered more than a dozen a day, so he and his colleagues dropped a few meetings altogether and divided up the rest between the three of them. This meant that they could allocate only two to three hours to each meeting. Sometimes they went in at the right moment and made some useful contributions. Some other times, they were not so lucky and got completely lost. In contrast, the US —to take the example at the other extreme—had dozens of people working on intellectual property rights alone. But my former student said, his country was lucky—more than 20 developing countries do not have a single person based in Geneva, and many have to get by with only one or two people. Many more stories like this could be told, but they ∗ These include the Asian Development Bank ( A D B ), the Inter-American Development Bank ( I D B ), the African Development Bank ( A F D B ) and the European Bank for Reconstruction and Development (kbrd), which deals with the former communist economies. 20 THE LEXUS AND THE OLIVE TREE REVISITED Chapter 1 all suggest that international trade negotiations are a highly lopsided affair; it is like a war where some people fight with pistols while the others engage in aerial bombardment. 1.5. Are the Bad Samaritans winning? Margaret Thatcher, the British prime minister who spearheaded the neo-liberal counter-revolution, once famously dismissed her critics saying that ‘There is no alternative’. The spirit of this argument—known as TINA (There Is No Alternative)—permeates the way globalization is portrayed by the Bad Samaritans. The Bad Samaritans like to present globalization as an inevitable result of relentless developments in the technologies of communication and transportation. They like to portray their critics as backward-looking ‘modern-day Luddites’[30] who ‘fight over who owns which olive tree’. Going against this historical tide only produces disasters, it is argued, as evidenced by the collapse of the world economy during the inter-war period and by the failures of state-led industrialization in the developing countries in the 1960s and the 1970s. It is argued that there is only one way to survive the historic tidal force that is globalization, and that is to put on the one-size-fits-all Golden Straitjacket which virtually all the successful economies have allegedly worn on their way to prosperity. In this chapter, I have shown that the TINA conclusion stems from a fundamentally defective understanding of the forces driving globalization and a distortion of history to fit the theory. Free trade was often imposed on, rather than chosen by, weaker countries. Most countries that had the choice did not choose free trade for more than brief periods. Virtually all successful economies, developed and developing, got where they are through selective, strategic integration with the world economy, rather than through unconditional global integration. The performance of the developing countries was much better when they had a large amount of policy autonomy during the ‘bad old days’ of 21 Chapter 1 THE LEXUS AND THE OLIVE TREE REVISITED state-led industrialization than when they were totally deprived of it during the first globalization (in the era of colonial rule and unequal treaties) or when they had much less policy autonomy (as in the past quarter of a century). There is nothing inevitable about globalization, because it is driven more by politics (that is, human will and decision) than technology, as the Bad Samaritans claim. If it were technology that determined the extent of globalization, it would be impossible to explain how the world was much less globalized in the 1970s (when we had all the modern technologies of transport and communication except the internet) than in the 1870s (when we relied on steamships and wired telegraphy). Technology only defines the outer boundaries of globalization. Exactly what shape it takes depends on what we do with national policies and what international agreements we make. If that is the case, the TINA thesis is wrong. There is an alternative, or rather there are many alternatives, to the neo-liberal globalization that is happening today. The rest of this book is going to explore those alternatives. 22 CHAPTER 2 The double life of Daniel Defoe How did the rich countries become rich? Daniel Defoe, the author of Robinson Crusoe, had a colourful life. Before writing novels, he was a businessman, importing woollen goods, hosiery, wine and tobacco. He also worked in the government in the royal lotteries and in the Glass Duty Office that collected the notorious ‘window tax’, a property tax levied according to the number of a house’s windows. He was also an influential author of political pamphlets and led a double life as a government spy. First he spied for Robert Harley, the Tory speaker of the House of Commons. Later, he complicated his life even further by spying for the Whig government of Robert Walpole, Harley’s political arch-enemy. As if being a businessman, novelist, tax collector, political commentator and spy wasn’t providing sufficient stimulus, Defoe was also an economist. This aspect of his life is even less well known than his spying. Unlike his novels, which include Robinson Crusoe and Moll Flanders, Defoe’s main economic work, A Plan of the English Commerce (1728), is almost forgotten now. The popular biography of Defoe by Richard West does not mention the book at all, while the award-winning biography by Paula Backscheider mentions it largely in relation to marginal subjects, such as Defoe’s view on native Americans.[1] However, the book was a thorough and insightful account of Tudor industrial policy (under 23 Chapter 2 THE DOUBLE LIFE OF DANIEL DEFOE England’s Tudor monarchs) that has much to teach us today. In the book (henceforth A Plan), Defoe describes how the Tudor monarchs, especially Henry V I I and Elizabeth I , used protectionism, subsidies, distribution of monopoly rights, government-sponsored industrial espionage and other means of government intervention to develop England’s woollen manufacturing industry—Europe’s high-tech industry at the time. Until Tudor times, Britain had been a relatively backward economy, relying on exports of raw wool to finance imports. The woollen manufacturing industry was centred in the Low Countries (today Belgium and the Netherlands), especially the cities of Bruges, Ghent and Ypres in Flanders. Britain exported its raw wool and made a reasonable profit. But those foreigners who knew how to convert the wool into clothes were generating much greater profits. It is a law of competition that people who can do difficult things which others cannot will earn more profit. This is the situation that Henry V I I wanted to change in the late 15th century.[2] According to Defoe, Henry V I I sent royal missions to identify locations suited to woollen manufacturing.[3] Like Edward III before him, he poached skilled workers from the Low Countries.[4] He also increased the tax on the export of raw wool, and even temporarily banned its export, in order to encourage further processing of the raw material at home. In 1489, he also banned the export of unfinished cloth, save for coarse pieces below a certain market value, in order to promote further processing at home.[5] His son, Henry V I I I , continued the policy and banned the export of unfinished cloth in 1512, 1513 and 1536. As Defoe emphasizes, Henry V I I did not have any illusions as to how quickly the English producers could catch up with their sophisticated competitors in the Low Countries.[6] The King raised export duties on raw wool only when the English industry was established enough to handle the volume of wool to be processed. Henry then quickly withdrew his ban on raw wool exports when it became clear that Britain simply did not have the capacity to process all the raw wool it produced.[7] Indeed, according to A Plan, it was not until 1578, in the middle of Elizabeth I ’s reign (1558–1603)—nearly 100 years after Henry V I I had 24 THE DOUBLE LIFE OF DANIEL DEFOE Chapter 2 started his ‘import substitution industrialization’ policy in 1489—that Britain had sufficient processing capacity to ban raw wool exports totally.[8] Once in place, however, the export ban drove the competing manufacturers in the Low Countries, who were now deprived of their raw materials, to ruin. Without the policies put in place by Henry V I I and further pursued by his successors, it would have been very difficult, if not impossible, for Britain to have transformed itself from a raw-material exporter into the European centre of the then high-tech industry. Wool manufacture became Britain’s most important export industry. It provided most of the export earnings to finance the massive import of raw materials and food that fed the Industrial Revolution.[9] A Plan shatters the foundation myth of capitalism that Britain succeeded because it figured out the true path to prosperity before other countries—free market and free trade. Daniel Defoe’s fictional hero, Robinson Crusoe, is often used by economics teachers as the pure example of ‘rational economic man’, the hero of neo-liberal free-market economics. They claim that, even though he lives alone, Crusoe has to make ‘economic’ decisions all the time. He has to decide how much to work in order to satisfy his desire for material consumption and leisure. Being a rational man, he puts in precisely the minimum amount of work to achieve the goal. Suppose Crusoe then discovers another man living alone on a nearby island. How should they trade with each other? The free-market theory says that introducing a market (exchange) does not fundamentally alter the nature of Crusoe’s situation. Life goes on much as b...
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