As we shall see later, this story paints a powerful but fundamentally misleading picture. Indeed, it should be accepted that there are also some senses in which the late nineteenth century can indeed be described as an era of laissez-faire.
To begin with, as we can see in table 2.1, there was a period in the late nineteenth century, albeit a brief one, when liberal trade regimes prevailed in large parts of the world economy. Starting in 1846 with the repeal of the Corn Laws, Britain made a decided shift to a unilateral free trade regime (which was accomplished by the 1860s), although this move was based on its then unchallenged economic superiority and was intricately linked with its imperial policy. Between 1860 and 1880, many European countries reduced tariff protection substantially. At the same time, most of the rest of the world was forced to practice free trade through colonialism (see section 2.3.1) and, in the cases of a few nominally ‘independent’ countries (such as the Latin American countries, China, Thailand (then Siam), Iran (then Persia) and Turkey (then the Ottoman Empire)), unequal treaties (see section 2.3.2). Of course, the obvious exception to this was the USA, which maintained a very high tariff barrier even during this period. However, given that the USA was still a relatively small part of the world economy, it may not be totally unreasonable to say that this is as close to free trade as the world has ever got (or probably ever will).
More importantly, the scope of state intervention before the First World War (and maybe even up to the Second World War) was quite limited by modern standards. For example, before the 1930s, both the hegemony of the doctrine of balanced budget and the limited scope for taxation (given, among other things, the absence of personal and corporate income taxes in most countries) severely limited the scope for active budgetary policy. The narrow tax base restricted government budgets, so large fiscal outlays for developmental purposes were difficult, even if the government had the intention to make them – railways being an obvious exception in a number of countries. In most countries, fully-fledged central banking did not exist until the early twentieth century, so the scope for monetary policy was also very limited. On the whole, banks were privately-owned and little regulated by the state, so the scope for using ‘directed credit programmes’, which were so widely and successfully used in countries like Japan, Korea, Taiwan and France during the postwar period, was extremely limited. Measures like the nationalization of industry and indicative investment planning, practices that served many European countries, especially France, Austria and Norway, well in the early postwar years, were regarded as unthinkable outside wartime before the Second World War. One somewhat paradoxical consequence of all these limitations was that tariff protection was far more important as a policy tool in the nineteenth century than it is in our time.
| Table 2.1 | ||||||
|---|---|---|---|---|---|---|
| Average Tariff Rates on Manufactured Products for Selected Developed Countries in Their Early Stages of Development | ||||||
| (weighted average; in percentages of value) [1] | ||||||
| 1820[2] | 1875[3] | 1913 | 1925 | 1931 | 1950 | |
| Austria[3] | R | 15-20 | 18 | 16 | 24 | 18 |
| Belgium[4] | 6-8 | 9-10 | 9 | 15 | 14 | 11 |
| Denmark | 25-35 | 15-20 | 14 | 10 | n.a. | 3 |
| France | R | 12-15 | 20 | 21 | 30 | 18 |
| Germany[5] | 8-12 | 4-6 | 13 | 20 | 21 | 26 |
| Italy | n.a. | 8-10 | 18 | 22 | 46 | 25 |
| Japan[6] | R | 5 | 30 | n.a. | n.a. | n.a. |
| Netherlands[4] | 6-8 | 3-5 | 4 | 6 | n.a. | 11 |
| Russia | R | 15-20 | 84 | R | R | R |
| Spain | R | 15-20 | 41 | 41 | 63 | n.a. |
| Sweden | R | 3-5 | 20 | 16 | 21 | 9 |
| Switzerland | 8-12 | 4-6 | 9 | 14 | 19 | n.a. |
| United Kingdom | 45-55 | 0 | 0 | 5 | n.a. | 23 |
| United States | 35-45 | 40-50 | 44 | 37 | 48 | 14 |
Source: Bairoch 1993, p. 40, table 3.3.
R = Numerous and important restrictions on manufactured imports existed and therefore average tariff rates are not meaningful.
1. World Bank (1991, p. 97, Box table S.2) provides a similar table, partly drawing on Bairoch's own studies that form the basis of the above table. However, the World Bank figures, although in most cases very similar to Bairoch's figures, are unweighted averages, which are obviously less preferable to the weighted average ,figures that Bairoch provides.
2. These are very approximate rates, and give range of average rates, not extremes.
3. Austria-Hungary before 1925.
4. In 1820, Belgium was united with the Netherlands.
5. The 1820 figure is for Prussia only.
6. Before 1911, Japan was obliged to keep low tariff rates (up to 5%) through a series of 'unequal treaties' with the European countries and the USA. The World Bank table cited in note 1 above gives Japan's unweighted average tariff rate for all goods (not just manufactured goods) for the years 1925, 1930, 1950 as 13%, 19%, 4%.
Despite these limitations, as I have pointed out in Chapter 1 and will show in more detail in the rest of this chapter, virtually all NDCs actively used interventionist industrial, trade and technology (ITT) policies that are aimed at promoting infant industries during their catch-up periods.[10] As we shall see later, there were some apparent exceptions to this, such as Switzerland and the Netherlands, but these were countries that were either at or very near the technological frontier and thus did not, by definition, need much infant industry promotion. Some countries used activist ITT policies even after the catch-up was successfully achieved (Britain in the early nineteenth century, the USA in the early twentieth century). Tariff protection was obviously a very important policy tool in the ITT policy package used by the NDCs, but, as we shall show later, it was by no means the only one used, or even necessarily the most important.
On the trade front, subsidies and duty drawbacks on inputs for exported goods were frequently used to promote exports. Governments both provided industrial subsidies and used various public investment programmes, especially in infrastructure but also in manufacturing. They supported foreign technology acquisition, sometimes by legal means such as financing study tours and apprenticeships, and sometimes through illegal measures, which included support for industrial espionage, smuggling of contraband machinery and refusal to acknowledge foreign patents. Development of domestic technological capabilities was encouraged through financial support for research and development, education and training. Measures were also taken to raise awareness of advanced technologies (for example, the establishment of model factories, organisation of exhibitions, granting of free imported machinery to private sector firms). In addition, some governments created institutional mechanisms that facilitated public-private cooperation (for example, public-private joint ventures and industry associations with close links with the government). It is important to note that many of these policies are greatly frowned upon these days, even when they have not been made explicitly illegal through bilateral and multilateral agreements.