Demolishing the myths of neoliberalism

How did the great economic powers reach their positions of huge wealth, enormous annual economic output, and high levels of consumption? Of course, as everyone knows, it was by embracing free trade, opening up to foreign direct investment, and minimising government intervention in the economy.

Well, actually, no it wasn’t. This ‘official history of globalisation’ is fiction, a myth far removed from the facts of economic history.

In reality, countries such as the US and the UK, and more recently Japan, Korea and others, successfully developed their economies not by pursuing liberal economic policies but by the exact opposite: by protecting them and nurturing them through government intervention, subsidies, controls on foreign investment, and the imposition of import tariffs and import bans. Now, however, acting through the WTO and other institutions, these countries want developing nations to trust in the official mythology of globalisation and follow a neoliberalism pathway.

There is one problem: the neoliberal path to development doesn’t actually work.

Economist Ha-Joon Chang comprehensively takes apart the development prescriptions of neoliberalism in his book Bad Samaritans. His own background, growing up in Korea in the 60s and 70s, has given in him first hand experience of how a largely rural economy shattered by war has, in a little over 50 years, become an industrial powerhouse.

In brief, Chang’s book argues the following:

Rich countries become rich by protecting their fledgling industries, not by exposing them to competition before they are strong enough to match it. The legendary ‘level playing field’ is appropriate only when the teams are the same size.

It is reasonable for a developing country to forego short term benefits from foreign direct investment, and to protect and encourage domestic investment in more advanced activities, for the sake of its longer term economic development.

State ownership of major enterprises is not doomed to failure and, in the case of Korea, Taiwan and China, has been an important development avenue. The same is true in Europe too: many well-known and successful French companies are state owned (eg Renault, Alcatel, Rhone-Poulenc).

The problems often associated with state-owned enterprises (principal-agent problems, free riders, soft budgetary constraints) are not unique to them. They occur frequently in the private sector as well.

The privatisation of former state monopolies in services (eg electricity, post, telephones, water) is problematic in developing countries because such countries often possess very poor regulatory capability. The problems are exemplified by the privatisation of the municipal water supply in Cochabamba, Bolivia, which resulted in mass protests.

The theory of comparative advantage is a deeply flawed description of economic reality. A global free trade regime operating on this basis actually condemns developing countries to specialise in sectors that offer low productivity and low growth. The gains of the few from trade liberalisation are outstripped by the losses of the many, especially in developing countries with few social welfare mechanisms.

Intensive efforts by developed countries to protect intellectual property are very recent measures: they were very happy to ‘borrow’ ideas from others to aid their own development in the past. Continuing efforts to extend such protections undermine developing countries efforts to access necessary technology, educational materials, and medicines. The patent system is becoming a barrier to technological and economic development.

The neoliberal obsession with fiscal prudence and low inflation restricts development opportunities, and developing countries may be better advised to run modest budget deficits. This allows them to borrow in order to invest and create jobs. Balance is necessary only over the longer term of the business cycle, and not over each financial year – a year is an entirely arbitrary unit in terms of economic development.

In summary then, Chang demonstrates how wealthy nations used protectionist measures to achieve their own economic development. Now, by forcing developing nations to drop the protectionist measures that they used themselves, and demanding they adopt neoliberal economic measures, wealthy nations are “kicking away the ladder” to development. This is the hypocrisy at the heart of the neoliberal project; it is why Chang describes the wealthy nations as “bad Samaritans”.

Chang’s arguments are clear, coherent, and backed up by plenty of economic and political history. However, despite the fact that I enjoyed seeing the duplicity of neoliberalism shown up with such wit and skill, I still feel uneasy. While one set of assumptions about the path to economic development for poor nations has been comprehensively demolished, another set of assumptions remains intact and unquestioned. These assumptions relate to the meaning of development in the context of a growing ecological crisis.

Equity demands that the people of developing nations are permitted (if not positively supported) to achieve the same standard of living as those in Japan or Korea, the US or Finland. That call for justice cannot be denied. But, while equity cannot be denied, we must ask, at what level of global development can such equity be achieved? The planet simply cannot handle the industrialisation of every nation from Mozambique to Bangladesh, or six billion people with an American-style standard of living.

So, how on earth do we resolve simultaneously the problems of both global economic justice and global ecological sustainability? Ha-Joon Chang addresses the former problem, but he leaves the latter question entirely unconsidered – and it cannot possibly be ignored.

Source

Ha-Joon Chang (2007) Bad Samaritans: The guilty secrets of rich nations and the threat to global prosperity. London: RH Business Books.

Note: Some of Chang’s arguments have been published in shorter articles over recent years in the Post-Autistic Economics Review (here) and Prospect magazine (here), and in a report from Oxfam and the South Centre (here).

Advertisements

Leave a comment

Filed under David, economic analysis, social justice

Comments are closed.