Economic policy and the possibility of a green change: Bad Samaritans – Take Two

David has reviewed Ha-Joon Chang’s book Bad Samaritans for well sharp already – his review is here –  I’d like to pick up on few more points the book raises, and explore how they can help us tackle the economic and environmental challenges we face.

Chang’s book is an easy to read and entertaining demolition of free-trade and economic development myths.

Chang demonstrates that rich nations got rich precisely by using the techniques and policies they try to prevent poor nations from using now, such as protection of infant industries, controlling foreign trade, regulating foreign investment, setting up public enterprises, ‘borrowing’ ideas & technology, and not being too fiscally prudent.

Unfortunately, as David pointed out, Chang does not sufficiently address the growing global impact of resource constraints (especially but not only water & oil) and environmental threats (such as climate change impacts), but some of Chang’s ideas can be adapted to help us tackle these challenges.

There are three ideas, in particular, that I’d like to pick up on: strategic economics; fairness in international trade agreements; and the possibility of rapid cultural change.

Strategic Economics

The basic theoretical argument for international free-trade is the theory of comparative advantage, which demonstrates that even if your country is less efficient at making everything its trading partners, it is still to everybody’s advantage to trade, because everybody has a relative advantage at making something, and so, if resources are free to shift uses, and if people receive compensation, no-one need be worse off.

The latter two conditions are rarely met, so people are made worse off, but that’s not the strongest criticism of the theory:

The more serious problem – at least for an economist like myself – is that the theory is about efficiency in the short-run use of resources, and not about increasing available resources through economic development in the long-run…free-trade theory does not tell us that free-trade is good for economic development. (Chang, 2007, p.73)

In other words, conventional economic theory is tactical, and not strategic, but it is strategic choices that are critical for economic development.

To paraphrase one of Chang’s telling examples, we do not send a six-year-old boy out to work, because we recognise that he will be better off in the long-run if we keep him in school and let him get a chance to grow-up and develop skills. Just as a six-year-old cannot compete with a fully trained and experience thirty-six year old, it can take time and investment for a country to develop capability to change direction and compete in new economic areas.

New Zealand is, by some indicators, a developed economy, but on the other hand, like many under-developed economies our exports are dominated by commodities and we have a chronic current account deficit. It is 25 years since New Zealand had a surplus on current account, and in that time we have conformed more and more to the free-trade ideal. Those policies haven’t helped, I would argue, because  – due to the structure of our economy – we need to use development policies, not short-term GDP maximising policies. Not only that, when designing our economic policies we need to be considering the impact of climate change and resource depletion on the global economy of the future, and positioning ourselves to deal with those challenges as well as possible.

I’ll leave you to fill in the party names yourself, but when rating the economic policies on offer at the upcoming General Election, do we stick to the free-trade free-market mantras, with a bit of road and information highway building to export and import the same products ever more rapidly? Do we stick to free trade, build roads and broadband a bit more slowly, and toss in a fund for a bit of investment in mad-science (G.E.)  for agri-business? Or do we recognise that we need to invest in deeper change for sustainability, understanding that this is for our best long-term advantage, and that our economic and ecological crises are intertwined (e.g. two of our top three merchandise import categories are motor vehicles and fuel oils)?

Fairness in trade agreements

Chang essentially makes two arguments in favour of non-free trade agreements.

First, Chang argues from enlightened self-interest: that in the long-run, if poor countries grow faster, then they will represent a much bigger market to sell to (if the global economy grows faster than your proportional share of it declines, you are better off) (Chang, 2007, pp.220-221). This is not such a persuasive argument from a green perspective: if resources and environmental capacity are limited, there will likely be an upper bound on sustainable global consumption, and not everyone will be able consume at current developed-world levels. But even if we reject the materialist formulation of the enlightened self-interest argument, we may be persuaded by other forms of it, such as the contribution a sense of fairness in world-trade might make to world peace in a time of increasing economic and environmental challenges.

Second, Chang argues that trade agreements should assist poorer countries because it is the right and fair thing to do. Chang points out that the ‘level playing field’ analogy much beloved by free-traders breaks down because in sport we want a level playing field for competitions between evenly matched opponents. (Chang, 2007, pp. 218-220) Global trade between developed and under-developed nations is not a even match. It is akin to, as Chang memorably puts it (p. 218) matching his eleven-year-old daughter’s soccer team against the Brazillian national squad. Indeed, in sports, where opponents are known to be unequal, it is quite common to even things up in various ways, such as golf handicaps, or age and weight range teams. We should, Chang suggests, do something similar in trade agreements.

Cultural change

“Culture”, however hard an entity to identify and pin down, has impacts on economic and social outcomes in societies. but it is not fixed, and is no cause for fatalism. Chang cites a number of historical cases (Including the “Lazy Japanese and Thieving Germans” examples of the chapter title)  to show that culture is not immutable, that it changes with economic development, and that it can change in response to ideological exhortation.

…in order to promote behavioral traits that are helpful for economic development, we need a combination of ideological exhortation, policy measures that to promote economic development, and the institutional changes that foster the desired cultural changes. It is not an easy job to get this right, but once you do, culture can be changed much more quickly than is normally assumed. Very often what seemed like an eternal national character can change within a couple of decades, if there are sufficient supporting changes in the underlying economic structure and institutions. (Chang, 2007, p.201)

Obviously the kinds of cultural change that we would want to make in search of a green economy and society (sustainable and fair) are different than those we might want to make in search of straight out economic growth, but the optimistic conclusion about the possibility of rapid and far-reaching change remains. Now is not forever, and today’s conditions are not tomorrow’s destiny.

Conclusion

We may wish to choose a different set of social goals than the kind Chang seems to have in mind. I don’t believe we can simply go on seeking endless economic growth and assuming bountiful nature and technological wizardry will provide. But Chang’s optimism – backed by persuasive arguments and example – about the possibility of change, his optimism about the potential effectiveness of public policy, his confidence that nations can take charge of their economic destiny (even if it may be hard work) – these are the powerful messages we can take from Bad Samaritans to help us forge our own future.

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