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
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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
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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
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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.
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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
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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.
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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
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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
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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
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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
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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,
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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).
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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
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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
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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
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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
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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
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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
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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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