1.4. A ‘Health Warning’
What this book is about to say will undoubtedly disturb many people, both intellectually and morally. Many of the myths that they have taken for granted or even passionately believed in will be challenged, in the same way that many of my own assumptions were challenged in the process of researching it. Some of the conclusions may be morally uncomfortable for some readers. Of course, I claim no moral superiority for the arguments put forward. I hope, however, to reveal some of the complexities surrounding these issues which have long been obscured by ahistorical and often moralistic arguments.
Chapter 2
Policies for Economic Development:
Industrial, Trade and Technology Policies in Historical Perspective
2.1. Introduction
In the previous chapter, I pointed out that there have been surprisingly few attempts to apply lessons learned from the historical experiences of developed countries to problems of contemporary development. Also, as will become clearer further on, the few references to these historical experiences tend to be full of myths that support the orthodox version of the history of economic policy in the NDCs, which emphasize the benefits of free trade and laissez-faire industrial policy. The story, which underlies virtually all recommendations for Washington Consensus-type policies, goes something like the following.[1]
From the eighteenth century onward, the industrial success of laissez-faire Britain proved the superiority of free-market and free-trade policies. Through such policies, which unleashed the entrepreneurial energy of the nation, it overtook interventionist France, its main competitor at the time, establishing itself as the supreme world economic power. Britain was then able to play the role of the architect and hegemon of a new ‘Liberal’ world economic order, particularly once it had abandoned its deplorable agricultural protection (the Corn Laws) and other remnants of old mercantilist protectionist measures in 1846.
In its quest for this Liberal world order, Britain’s ultimate weapon was its economic success based on a free-market/free-trade system; this made other countries realize the limitations of their mercantilist policies and start to adopt free (or at least freer) trade from around 1860. However, Britain was also greatly helped in its project by the works of its classical economists such as Adam Smith and David Ricardo, who theoretically proved the superiority of laissez-faire policy, in particular free trade. According to Willy de Clercq, the European Commissioner for External Economic Relations during the early days of the Uruguay Round (1985-9):
Only as a result of the theoretical legitimacy of free trade when measured against widespread mercantilism provided by David Ricardo, John Stuart Mill and David Hume, Adam Smith and others from the Scottish Enlightenment, and as a consequence of the relative stability provided by the UK as the only and relatively benevolent superpower or hegemon during the second half of the nineteenth century, was free trade able to flourish for the first time [in the late nineteenth century].[2]
This Liberal world order, perfected around 1870, was based on: laissez-faire industrial policies at home; low barriers to the international flows of goods, capital and labour; and the macroeconomic stability, both nationally and internationally, which was guaranteed by the Gold Standard and the principle of balanced budgets. A period of unprecedented prosperity followed.
Unfortunately, according to this story, things started to go wrong with the onset of the First World War. In response to the ensuing instability of the world economic and political system, countries once again started to erect trade barriers. In 1930, the USA abandoned free trade and enacted the infamous Smoot-Hawley tariff. According to de Clercq, this tariff ‘had disastrous effects on international trade and after a while ... on American economic growth and employment. Nowadays, some economists even believe that the Great Depression was caused primarily by these tariffs’.[3] The likes of Germany and Japan erected high trade barriers and also started creating powerful cartels, which were closely linked with fascism and these countries’ external aggression in the following decades.[4] The world free trade system finally ended in 1932, when Britain, hitherto its champion, succumbed to temptation and reintroduced tariffs. The resulting contraction and instability in the world economy, and then the Second World War, destroyed the last remnants of the first Liberal world order.
After the Second World War, so the story goes, some significant progress was made in trade liberalization through the early GATT (General Agreement on Trade and Tariffs) talks. However, dirigiste approaches to economic management dominated the policy-making scene until the 1970s in the developed world, and until the early 1980s in developing countries (as well as the Communist world until its collapse in 1989). According to Sachs and Warner, a number of factors contributed to the pursuit of protectionism and interventionism in developing countries.[5] ‘Wrong’ theories, such as the infant industry argument, the ‘big push’ theory of Rosensetin-Rodan (1943), and Latin American structuralism, not to speak of various Marxist theories, prevailed. Protectionist policies were also motivated by political requirements, such as the need for nation building and the need to ‘buy off’ certain interest groups. There were also legacies of wartime control that persisted into peacetime.
Fortunately, it is held, interventionist policies have been largely abandoned across the world since the 1980s with the rise of Neo-Liberalism, which emphasizes the virtues of small government, laissez-faire policies and international openness. By the late 1970s economic growth had begun to falter in most countries in the developing world, with the exception of those in East and Southeast Asia, which were already pursuing ‘good’ policies. This growth failure, which often manifested itself in the economic crises of the early 1980s, exposed the limitations of old-style interventionism and protectionism.
As a result, most developing countries have come to embrace Neo-Liberal policy reform. The most symbolic of these conversions, according to Bhagwati, are: Brazil’s embrace of Neo-Liberal doctrine under the presidency of Fernando Henrique Cardoso, a leading Dependency theorist until the 1980s; the entry of traditionally anti-US Mexico into the NAFTA (North American Free Trade Agreement); and the move towards an open, liberal economy by India, once the bastion of protectionism and regulation.[6] The crowning glory of this trend towards liberalization and opening-up was the fall of Communism in 1989, which finally ended the ‘historical anomaly’ of a closed world trading system that had prevailed in the early postwar years.[7]
When combined with the establishment of new global governance institutions represented by the WTO, these policy changes at the national level have created a new global economic system, which is comparable in its potential prosperity only to the earlier ‘golden age’ of Liberalism (1870-1914).[8] Renato Ruggiero, the first Director-General of the WTO, argues that thanks to this new world order we now have ‘the potential for eradicating global poverty in the early part of the next [21st] century – a utopian notion even a few decades ago, but a real possibility today’.[9]
1
Sachs and Warner 1995 is one of the more balanced and better informed, but ultimately flawed, versions of this. Bhagwati (1985, 1998) offer a less balanced but probably more representative version. Essays by leading international policy makers espousing this view can be found in Bhagwati and Hirsch 1998, a volume of essays compiled in honour of Arthur Dunkel, who oversaw the Uruguay Round (1986-93) during his tenure as the Director-General of the GATT (General Agreement on Tariffs and Trade). The articles by de Clercq and by Ruggiero cited below are from this collection.
4
This unfortunate link between state interventionism and autocracy, according to this version of the story, was subsequently broken after the end of the Second World War, when the American Occupation Authorities in these countries, realising them to be the root cause of fascism, disbanded the cartels.