Ian Boyne

Prime Minister Bruce Golding is emerging as a zealous, free-trade advocate, scathingly chiding critics of the economic partnership agreement (EPA) for their spirit of mendicancy, and being applauded by The Gleaner in the process.

In its editorial on Monday, February 4, titled 'Well said, Mr Golding', The Gleaner says "as much as we wince at the imagery, there is a kind of mendicancy existing in the Caribbean which has been expressed in the almost knee-jerk opposition to the signing of the free trade pact between the European Union and the CARIFORUM countries". Our job, advises The Gleaner, "is not to sit around simpering in fear about the dangers of this big world".

Both the Prime Minister and The Gleaner editorial writer should, therefore, have keen interest in the latest offering from Cambridge University's Ha-Joon Chang, who has the honour of being awarded the Leontief Prize for Advancing the Frontiers of Economic Thought, which had previously been won by economic luminaries Amartya Sen and John Kenneth Galbraith.

The author of 11 books, including the highly-acclaimed Kicking Away the Ladder, Chang has just released his Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (2008).

Empirical richness

What is most fascinating about this book is its empirical richness and data-laden analysis: This is not a book which merely recites leftist rhetoric. It is rigorously empirical and is set to send the neo-liberals scampering for fresh arguments. (One awaits the response of the gadfly of globalisation, Jagdish Bhagwati).

Chang's thesis is simple: The neo-liberals - whom he terms the Bad Samaritans - are recommending strategies which the successful countries - whether the early industrialisers like America, Britain or the later industrialisers like the NICs - never practised. "History tells us that in the early stage of their development, all successful countries used some mixture of protection, subsidies and regulation in order to develop their economies.

Asian tigers

Unfortunately, another lesson of history is that rich countries have kicked away the ladder by forcing free-market free-trade policies on poor countries". The entire book adduces the mass of evidence to prove this thesis. Chang cites examples of the Asian tigers like his own South Korea as well as the latest toast of the pro-globalisation advocates, China and India.

"Britain, the supposed home of free trade, was one of the most protectionist countries until it converted to free trade in the mid-19th century," says Chang, drawing on his robust data. "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 industries such as steel, chemicals and machinery, even Britain, the chief architect of the first wave of globalisation, abandoned free trade and reintroduced tariffs in 1932."

Charges Ha-Joon Chang: "The history of the first globalisation in the late 19th and early 20th centuries has been rewritten today in order to fit the current neo-liberal orthodoxy".

Nobody should be writing or speaking about free trade today until he has read "Bad Samaritans" and wrestled with its recounting of economic history.

Japan's interventionist strategies are legendary: Imports were rightly controlled; there was state-directed financing of industry; subsidies for exports; and heavily regulated foreign investment(and outright bans in some cases) Also countries like Finland, Norway, Italy and Austria also used non-neo-liberal strategies to grow their economies, just as other Europeans had done. Governments directed bank credit to strategic industries. The only exceptions in terms of the practise of free trade was the Netherlands and Switzerland.

That the East Asian Tigers had a more state-directed development, rather than the neo-liberal strategies which have been attributed to them, is by now well known. And Harvard's Dani Rodrik has amply demonstrated that India's growth dynamics were in place before the much-touted 1991 liberalisation phase.

neo-liberalism

India had one of the most protectionist economies in the world. And no one can accuse China of being neo-liberal. So where are the actual success cases for the model which the developed world is foisting on the developing world?

Chile is one Latin American country the neo-liberals point to, but not so fast, says Ha-Joon Chang. Chile's experiment with neo-liberalism under the famed Chicago Boys (Milton Friedman et al) ended in disaster with the financial crash of 1982. Chile then had to nationalise the whole banking sector.

Says Chang: "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 research and development (R and D). It also used capital controls in the 1990s to successfully reduce the inflow of short-term speculative funds". Significantly, Ha-Joon Chang shows that when you look at the actual economic performance data under neo-liberal regimes, compared to more state interventionist regimes, the latter consistently do better. Which leads us to ask, why push policies on the developing world which have not worked in either the developed or developing world? Why not encourage more heterodox methods as people like Joseph Stiglitz and Dani Rodrik have been advocating? Let's look at the raw data and not follow the faith-based economics of the free traders.

Economic growth

During the 1960s and 1970s when developing countries were supposedly using the wrong strategies of protectionism and state intervention, per capita income grew by 3.0 per cent annually. This is better than they have done since liberalisation. Latin America grew in the 1990s at about half the rate at which it grew during the bad old days of protectionism and state interventionism (1.7 per cent versus 3.1 per cent). And between 2000 and 2005, the region has done even worse. So much for the success rate of neo-liberal policies. With regard to Africa, per capita income grew slowly in the 1960s and 1970s, but since liberalisation in the 1980s the region has seen a fall in living standards. "The poor growth record of neo-liberal globalisation since the 1980s is particularly embarrassing. Accelerating growth was the proclaimed goal of neo-liberal reform. As a result of neo-liberal polices, income inequality has increased in most countries but growth has actually slowed down significantly".

Chang makes the point that "the truth of post-1945 globalisation is almost the polar opposite of then official history. During the period of controlled globalisation, underpinned by nationalistic policies between the 1950s and 1970s, the world economy, especially the developing world, was growing faster, was more stable and had more equitable income than in the past two and a half decades of rapid and uncontrolled neo-liberal globalisation." Yet, we are being asked to pursue the very strategies which have produced these poor results. (Another excellent book published late last year is Professor Erik Reinert's, How Rich Countries Got Rich and Why Poor Countries Stay Poor.) It is important to wage a war of ideas in economics so that there is no intellectual hegemony of the neo-liberals.

Neo-liberal globalisation

Our politicians and policy-makers must be exposed to the best scholarship if we are not to be duped by these enthusiasts of neo-liberal globalisation. If we feel it's inevitable and irrevocable, we will accept the prescriptions wholesale, ignorant of the evidence all around that patients are dying!

"Free trade works neither in practice nor in theory. Despite its abysmal record, the Bad Samaritan rich countries have strongly promoted trade liberalisation in developing countries since the 1980s," says the distinguished Cambridge economist who won the 2003 Myrdal Prize (named after the brilliant economist Gunnar Myrdal).

Two prominent economic historians have shown that between 1945 and 1971, when global finance was not liberalised, developing countries suffered no banking crises, 16 currency crises and one twin crisis (simultaneous banking and currency crises). Yet, between 1973 and 1997 there were 17 banking crises, 57 currency crises and 21 twin cases. This is excluding post-1997 crises such as occurred in Brazil, Russia and Argentina.

And in an excellent paper by Economist Kunibert Raffer (The Main Lesson from the Asian Crisis: Dragons Should not Fundamentally Change Their Policies) he shows that it was 'Bad Samaritan' advice from the World Bank and the IMF which caused the Asian financial crisis of 1997. Also, he showed they recovered fast precisely because they ignored neo-liberal advice and adopted state interventionist methods, using Keynesian counter-cyclical fiscal policies.

Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism also raises serious questions about central bank independence (which, unfortunately, the Golding administration is pledged to adopting) and cautions about the excesses of inflation targeting. Again, he is armed with statistics: During the 1960s and 1970s when Brazil's inflation rate was 42 per cent a year it was one of the fastest-growing economies in the world. During Korea's miracle years of growth it had inflation rates of 17.4 per cent. "The tight monetary and fiscal policies that are needed to lower inflation are likely also to reduce economic activity which in turn will lower demand for labour and thus increase unemployment and reduce wages. So a tough control on inflation is a two-edged sword for workers," says the distinguished economist.

Chang issues a warning which I hope the Government will not ignore: "Given the costs of pursuing a restrictive monetary policy, giving independence to the central bank is the last thing a developing country should do, because it will institutionally entrench monetarist macroeconomic policy that is particularly unsuitable to developing countries.

This is all the more so when there is no clear evidence that greater central bank independence even lowers the rate of inflation in developing countries, let alone help with other desirable goals like higher growth and lower unemployment". Chang also warns about the obsessive fixation with balancing budgets and avoiding deficits at all costs. (Discussions about the National Housing Trust are interesting in this regard).

"Keynesianism for the rich, monetarism for the poor," is how Chang titles one section, interestingly. Rich countries run deficits while warning us about them. Chang makes the telling point: "A level playing field leads to unfair competition when the players are unequal. In fact, in most sports unequal players are not allowed to compete against each other - for the obvious reason that it would be unfair. Global economic competition is a game of unequal players".

Ian Boyne is a veteran journalist who may be reached at ianboyne1@yahoo.com.