Countries like Finland, Norway, Italy and Austria – which were all relatively backward at the end of the Second World War and saw the need for rapid industrial development – also used strategies similar to those used by France and Japan to promote their industries. All of them had relatively high tariffs until the 1960s. They all actively used SOEs to upgrade their industries. This was particularly successful in Finland and Norway. In Finland, Norway and Austria, the government was very much involved in directing the flow of bank credit to strategic industries. Finland heavily controlled foreign investment. In many parts of Italy, local government provided support for marketing and R&D to small and medium-sized firms in the locality.
Thus practically all of today’s rich countries used nationalistic policies (e.g., tariffs, subsidies, restrictions on foreign trade) to promote their infant industries, though the exact mix of policies used, as well as their timing and duration, differed across countries. There were some exceptions, notably the Netherlands (which has had the best free-trade credentials since the 19th century) and Switzerland (until the First World War) consistently practised free trade. But even they do not conform to today’s neo-liberal ideal, as they did not protect patents until the early 20th century. The Netherlands introduced a patent law in 1817, but abolished it in 1869 and did not re-introduce it until 1912. The Swiss introduced their first patent law in 1888, but it protected only mechanical inventions. It introduced a full patent law only in 1907 (more on these cases in chapter 6).
Against the kind of historical evidence that I have presented in this chapter, free trade economists have argued that the mere co-existence of protectionism and economic development does not prove that the former caused the latter.[47] This is true. But I am at least trying to explain one phenomenon – economic development – with another that co-existed with it – protectionism. Free trade economists have to explain how free trade can be an explanation for the economic success of today’s rich countries, when it simply had not been practised very much before they became rich.
The Roman politician and philosopher Cicero once said: ‘Not to know what has been transacted in former times is to be always a child. If no use is made of the labours of past ages, the world must remain always in the infancy of knowledge.’
Nowhere is this observation more relevant than in the design of development policy, but nowhere is it more ignored. Though we have a wealth of historical experiences to draw upon, we do not bother to learn from them, and unquestioningly accept the prevailing myth that today’s rich countries developed through free-trade, free-market policy.
But history tells us that, in the early stage of their development, virtually all successful countries used some mixture of protection, subsidies and regulation in order to develop their economies. The history of the successful developing countries that I discussed in chapter 1 shows that. Furthermore, the history of today’s rich countries also confirms it, as I have discussed in this chapter.
Unfortunately, another lesson of history is that rich countries have ‘kicked away the ladder’ by forcing free-market, free-trade policies on poor countries.Already established countries do not want more competitors emerging through the nationalistic policies they themselves successfully used in the past. Even the newest member of the club of rich countries, my native Korea, has not been an exception to this pattern. Despite once having been one of the most protectionist countries in the world, it now advocates steep cuts in industrial tariffs, if not total free trade, in the WTO. Despite once having been the world piracy capital, it gets upset that the Chinese and the Vietnamese are producing pirate CDs of Korean pop music and pirate DVDs of Korean movies. Worse, these Korean free-marketeers are often the same people who, not so long ago, actually drafted and implemented interventionist, protectionist policies in their earlier jobs.Most of them probably learned their free market economics from pirate-copied American economics textbooks, while listening to pirate-copied rock and roll music and watching pirate-copied videos of Hollywood films in their spare time.
Even more prevalent and important than ‘ladder-kicking’, however, is historical amnesia. In the Prologue, I explained the gradual and subtle process in which history is re-written to fit a country’s present self-image. As a result, many rich country people recommend free-trade, free-market policies in the honest belief that these are policies that their own ancestors used in order to make their countries rich. When the poor countries protest that those policies hurt, those protests are dismissed as being intellectually misguided[48] or as serving the interests of their corrupt leaders.[49] It never occurs to those Bad Samaritans that the policies they recommend are fundamentally at odds with what history teaches us to be the best development policies. The intention behind their policy recommendations may be honourable, but their effects are no less harmful than those from policy recommendations motivated by deliberate ladder-kicking.
Fortunately, history also shows that it is not inevitable that successful countries act as Bad Samaritans, and, more importantly, that it is in their enlightened self-interest not to. The most recent and important episode of this kind occurred between the launch of the Marshall Plan in 1947 and the rise of neo-liberalism in the 1980s.
In June 1947, the US abandoned its previous policy of deliberately weakening the German economy and launched the Marshall Plan, which channelled a large amount of money into European post-war reconstruction.* Even though the sum involved in this was not huge, the Marshall Plan played an important role in kickstarting the war-torn European economies by financing essential import bills and financing the re-building of infrastructure. It was a political signal that the US saw it in its interest that other nations, even its former enemies, prosper. The US also led other rich countries in helping, or at least allowing, poor countries develop their economies through nationalistic policies. Through the GATT (General Agreement on Tariffs and Trade), also set up in 1947, the US and other rich countries allowed developing countries to protect and subsidize their producers more actively than the rich countries. This was a huge contrast to the days of colonialism and unequal treaties, when developing countries were forced into free trade. This was partly due to the sense of colonial guilt in countries like Britain and France, but it was mostly because of the more enlightened attitude of the then new hegemon of the global economy, the US, towards the economic development of poorer nations.
The result of this enlightened strategy was spectacular. The rich countries experienced the so-called ‘Golden Age of Capitalism’ (1950–73).[50]Per capita income growth rate in Europe shot up from 1.3% in the liberal golden age (1870–1913) to 4.1%. It rose from 1.8% to 2.5% in the US, while it skyrocketed from 1.5% to 8.1% in Japan. These spectacular growth performances were combined with low income inequality and economic stability. Significantly, developing countries also performed very well during this period. As I pointed out in chapter 1, during the 1960s and the 1970s, when they used nationalistic policies under the ‘permissive’ international system, they grew at 3% in per capita terms. This is way above what they had achieved under old liberal policies during ‘first globalization’ (1870–1913) and twice the rate they have recorded since the 1980s under neo-liberal policies.
48
In their celebrated article cited in chapter 1, Jeffrey Sachs and Andrew Warner discusses how ‘wrong’ theories have influenced developing countries to adopt ‘wrong’ policies. J. Sachs & A. Warner (1995), ‘Economic Reform and the Process of Global Integration’,
49
When the Cancún talk of the WTO collapsed, Willem Buiter, the distinguished Dutch economist who was then the chief economist of the EBRD (European Bank for Reconstruction and Development) argued: ‘Although the leaders of the developing nations rule countries that are, on average, poor or very poor, it does not follow that these leaders necessarily speak on behalf of the poor and poorest in their countries. Some do; others represent corrupt and repressive élites that feed off the rents created by imposing barriers to trade and other distortions, at the expense of their poorest and most defenceless citizens’. See Willem Buiter, ‘If anything is rescued from Cancún, politics must take precedence over economics’, letter to the editor,
*
The Marshall Plan was announced by George Marshall, the then US secretary of state, in his address at Harvard University on 5 June 1947. Its details were negotiated in a meeting held in Paris from 12 July 1947. It was started in 1948 and ended in 1951, channelling some $13 billion (equivalent to $130 billion today) into the war-torn economies of Europe. The Marshall Plan replaced the Morgenthau Plan that had dictated postwar American foreign policy until then. The Morgenthau Plan, named after the treasury secretary of the time (1934–45), focused on putting an end to Germany’s expansionist ambition by ‘pastoralizing’ it. When combined with the Soviet Union’s desire to seize advanced German machinery, it was very effective in destroying the German economy. However, it soon became obvious that such a plan was unviable. After his visit to Germany in 1947, the former US president Herbert Hoover denounced the Morgenthau Plan as ‘illusory’, and argued that it would not work unless the German population was reduced by 25 million, from 65 million to 40 million. For an enlightening discussion on the subject, see E. Reinert (2003), ‘Increasing Poverty in a Globalised World: