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But the truth is that free traders make the lives of those whom they are trying to help more difficult. The evidence for this is everywhere. Despite adopting supposedly “good” policies, like liberal foreign trade and investment and strong patent protection, many developing countries have actually been performing rather badly over the last two and a half decades. The annual per capita growth rate of the developing world has halved in this period, compared to the “bad old days” of protectionism and government intervention in the 1960s and the 1970s. Even this modest rate has been achieved only because the average includes China and India—two fast-growing giants, which have gradually liberalised their economies but have resolutely refused to put on Thomas Friedman’s golden straitjacket.
Growth failure has been particularly noticeable in Latin America and Africa, where orthodox neoliberal programmes were implemented more thoroughly than in Asia. In the 1960s and the 1970s, per capita income in Latin America grew at 3.1 per cent a 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 neoliberalism, Latin America has been growing at less than a third of this rate. Even if we discount the 1980s as a decade of adjustment and look at the 1990s, we find that per capita income in the region grew at around half the rate of the “bad old days” (3.1 per cent vs 1.7 per cent). Between 2000 and 2005, the region has done even worse; it virtually stood still, with per capita income growing at only 0.6 per cent a year. As for Africa, its per capita income grew relatively slowly even in the 1960s and the 1970s (1-2 per cent a year). But since the 1980s, the region has seen a fall in living standards. There are, of course, many reasons for this failure, but it is nonetheless a damning indictment of the neoliberal orthodoxy, because most of the African economies have been practically run by the IMF and the World Bank over the past quarter of a century.
In pushing for free-market policies that make life more difficult for poor countries, the bad samaritans frequently deploy the rhetoric of the “level playing field.” They argue that developing countries should not be allowed to use extra policy tools for protection, subsidies and regulation, as these constitute unfair competition. Who can disagree? Well, we all should, if we want to build an international system that promotes economic development. A level playing field leads to unfair competition when the players are unequal. Most sports have strict separation by age and gender, while boxing, wrestling and weightlifting have weight classes, which are often divided very finely. How is it that we think a bout between people with more than a couple of kilos’ weight difference is unfair, and yet we accept that the US and Honduras should compete economically on equal terms?
Global economic competition is a game of unequal players. It pits against each other countries that range from Switzerland to Swaziland. Consequently, it is only fair that we “tilt the playing field” in favour of the weaker countries. In practice, this means allowing them to protect and subsidise their producers more vigorously, and to put stricter regulations on foreign investment. These countries should also be allowed to protect IP rights less stringently, so that they can “borrow” ideas from richer countries. This will have the added benefit of making economic growth in poor countries more compatible with the need to fight global warming, as rich-country technologies tend to be far more energy-efficient.
I am not against markets, international trade or globalisation. And I acknowledge that WTO agreements contain “special and differential treatment” provisions which give poor country members certain rights, and which permit rich countries to treat developing countries more favourably than other rich WTO members. But these provisions are limited and generally just give poor countries longer time periods to liberalise their economic rules. The default position remains blind faith in indiscriminate free trade.
The best way to illustrate my general point is to look at my own native Korea—or, rather, to contrast the two bits that used to be one country until 1948. It is hard to believe today, but northern Korea used to be richer than the south. Japan developed the north industrially when it ruled the country from 1910-45. Even after the Japanese left, North Korea’s industrial legacy enabled it to maintain its economic lead over South Korea well into the 1960s.
Today, South Korea is one of the world’s industrial powerhouses while North Korea languishes in poverty. Much of this is thanks to the fact that South Korea aggressively traded with the outside world and actively absorbed foreign technologies while North Korea pursued its doctrine of self-sufficiency. Through trade, South Korea learned about the existence of better technologies and earned the foreign currency to buy them. In its own way, North Korea has managed some technological feats. For example, it figured out a way to mass-produce vinalon, a synthetic fibre made out of limestone and anthracite, which has allowed it to be self-sufficient in clothing. But, overall, North Korea is technologically stuck in the past, with 1940s Japanese and 1950s Soviet technologies, while South Korea is one of the most technologically dynamic economies in the world.
In the end, economic development is about mastering advanced technologies. In theory, a country can develop such technologies on its own, but technological self-sufficiency quickly hits the wall, as seen in the North Korean case. This is why all successful cases of economic development have involved serious attempts to get hold of advanced foreign technologies. But in order to be able to import technologies from developed countries, developing nations need foreign currency to pay for them. Some of this foreign currency may be provided through foreign aid, but most has to be earned through exports. Without trade, therefore, there will be little technological progress and thus little economic development.
But there is a huge difference between saying that trade is essential for economic development and saying that free trade is best. It is this sleight of hand that free-trade economists have so effectively deployed against their opponents—if you are against free trade, they imply, you must be against trade itself, and so against economic progress.
As South Korea—together with Britain, the US, Japan, Taiwan and many others—shows, active participation in international trade does not require free trade. In the early stages of their development, these countries typically had tariff rates in the region of 30-50 per cent. Likewise, the Korean experience shows that actively absorbing foreign technologies does not require a liberal foreign investment policy.
Indeed, had South Korea donned Friedman’s golden straitjacket in the 1960s, it would still be exporting raw materials like tungsten ore and seaweed. The secret of its success lay in a mix of protection and open trade, of government regulation and free(ish) market, of active courting of foreign investment and draconian regulation of it, and of private enterprise and state control—with the areas of protection constantly changing as new infant industries were developed and old ones became internationally competitive. This is how almost all of today’s rich countries became rich, and it is at the root of almost all recent success stories in the developing world.
Therefore, if they are genuinely to help developing countries develop through trade, wealthy countries need to accept asymmetric protectionism, as they used to between the 1950s and the 1970s. The global economic system should support the efforts of developing countries by allowing them to use more freely the tools of infant industry promotion—such as tariff protection, subsidies, foreign investment regulation and weak IP rights.
There are huge benefits from global integration if it is done in the right way, at the right speed. But if poor countries open up prematurely, the result will be negative. Globalization is too important to be left to free-trade economists, whose policy advice has so ill served the developing world in the past 25 years.