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Kicking Away the Ladder
Development Strategy in Historical Perspective
By Ha-Joon Chang Wimbledon Publishing Company
Copyright © 2003 Ha-Joon Chang
All rights reserved.
ISBN: 978-1-84331-027-3
CHAPTER 1
Introduction: How did the Rich Countries Really Become Rich?
I.I. Introduction
There is currently great pressure on developing countries from the developed world, and the international development policy establishment that it controls, to adopt a set of 'good policies' and 'good institutions' to foster their economic development. According to this agenda, 'good policies' are broadly those prescribed by the so-called Washington Consensus. They include restrictive macroeconomic policy, liberalization of international trade and investment, privatization and deregulation. The 'good institutions' are essentially those that are to be found in developed countries, especially the Anglo-American ones. The key institutions include: democracy; 'good' bureaucracy; an independent judiciary; strongly protected private property rights (including intellectual property rights); and transparent and market-oriented corporate governance and financial institutions (including a politically independent central bank).
As we shall see later in the book, there have been heated debates on whether or not these recommended policies and institutions are in fact appropriate for today's developing countries. Curiously, however, many of those critics who question the applicability of these recommendations nevertheless take it for granted that these 'good' policies and institutions were used by the developed countries when they themselves were in the process of developing.
For example, it is generally accepted that Britain became the world's first industrial superpower because of its laissez-faire policy, while France fell behind as a result of its interventionist policies. Similarly, it is widely believed that that the USA's abandonment of free trade in favour of the protectionist Smoot-Hawley Tariff at the outset of the Great Depression (1930) was, in the words of the famous free-trade economist Bhagwati, 'the most visible and dramatic act of anti-trade folly'. Yet another example of the belief that developed countries attained their economic status through 'good' policies and institutions is the frequent claim that, without patents and other private intellectual property rights, these countries would not have been able to generate the technologies that made them prosperous. The US-based National Law Center for Inter-American Free Trade claims that '[t]he historical record in the industrialized countries, which began as developing countries, demonstrates that intellectual property protection has been one of the most powerful instruments for economic development, export growth, and the diffusion of new technologies, art and culture'. And so on.
But is it really true that the policies and institutions currently recommended to the developing countries are those that were adopted by the developed countries when they themselves were developing? Even at a superficial level, there seem to be bits and pieces of historical evidence that suggest otherwise. Some of us may know that, in contrast to its eighteenth or twentieth-century nature, the French state in the nineteenth century was quite conservative and non-interventionist. We may also have read about the high tariffs in the USA, at least after the Civil War. A few of us have heard somewhere that the US central bank, the Federal Reserve Board, was set up as late as 1913. One or two of us may even know that Switzerland became one of the world's technological leaders in the nineteenth century without a patent law.
In light of such counter-evidence to the orthodox view of capitalism's history, it is fair to ask whether the developed countries are somehow trying to hide the 'secrets of their success'. This book pieces together various elements of historical information which contradict the orthodox view of the history of capitalism, and provides a comprehensive but concise picture of the policies and institutions that the developed countries used when they themselves were developing countries. In other words, what this book is asking is: 'How did the rich countries really become rich?'
The short answer to this question is that the developed countries did not get where they are now through the policies and the institutions that they recommend to developing countries today. Most of them actively used 'bad' trade and industrial policies, such as infant industry protection and export subsidies – practices that these days are frowned upon, if not actively banned, by the WTO (World Trade Organisation). Until they were quite developed (that is, until the late nineteenth to early twentieth century), they had very few of the institutions deemed essential by developing countries today, including such 'basic' institutions as central banks and limited liability companies.
If this is the case, aren't the developed countries, under the guise of recommending 'good' policies and institutions, actually making it difficult for the developing countries to use policies and institutions which they themselves had used in order to develop economically in earlier times? This is the question that this book hopes to address.
1.2. Some Methodological Issues: Drawing Lessons from History
The nineteenth-century German economist Friedrich List (1789–1846) is commonly known as the father of the infant industry argument, namely, the view that in the presence of more developed countries, backward countries cannot develop new industries without state intervention, especially tariff protection. His masterpiece, The National System of Political Economy, was originally published in 1841.
List starts the book with a lengthy historical discussion. In fact he devotes the first 115 pages of his 435-page text to a review of trade and industrial policies in the major countries of the western world up to his time. Included in his survey were the experiences of Venice (and other Italian states), the Hanseatic cities (led by Hamburg and Lübeck), the Netherlands, England, Spain and Portugal, France, Germany and the USA.
Many of these accounts go almost completely against what most of us know (or think we know) about the economic histories of these countries. Particularly striking to the contemporary reader are List's analyses of Britain and the USA – the supposed homes of liberal economic policy.
List argues that Britain was actually the first country to perfect the art of infant industry promotion, which in his view is the principle behind most countries' journey to prosperity. He goes as far as saying that we should 'let [whoever is not convinced of the infant industry argument] first study the history of English industry'. His summary of the British road to industrial success is worth quoting at length.
[H]aving attained to a certain grade of development by means of free trade, the great monarchies [of Britain] perceived that the highest degree of civilisation, power, and wealth can only be attained by a combination of manufactures and commerce with agriculture. They perceived that their newly established native manufactures could never hope to succeed in free competition with the old and long-established manufactures of foreigners [the Italians, the Hansards, the Belgians, and the Dutch] ... Hence they sought, by a system of restrictions, privileges, and encouragements, to transplant on to their native soil the wealth, the talents, and the spirit of enterprise of foreigners.
This is a characterization of British industrial development which is fundamentally at odds with the prevailing view of Britain as a valiant free-trade, free-market economy fighting against the dirigiste countries on the Continent, eventually proving the superiority of its policies with an industrial success unprecedented in human history.
List then goes on to argue that free trade is beneficial among countries at similar levels of industrial development (which is why he strongly advocated a customs union among the German states – Zollverein), but not between those at different levels of development. Like many of his contemporaries in countries that were trying to catch up with Britain, he argues that free trade benefits Britain but not the less developed economies. To be sure, he acknowledges that free trade benefits agricultural exporters in these economies, but this is to the detriment of their national manufacturers and thus of their national economic prosperity in the long run. To him, therefore, the preachings on the virtues of free trade by British politicians and economists of his time were done for nationalistic purposes, even though they were cast in the generalistic languages of what he calls 'cosmopolitical doctrine'. He is worth quoting at length on this point:
It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations.
Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth, [my italics]
As for the USA, List points out that the country had previously been misjudged by the great economic theorists Adam Smith and Jean Baptiste Say as being 'like Poland', namely, destined to rely on agriculture. Indeed, Adam Smith in his Wealth of Nations sternly warned the Americans against any attempt at infant industry promotion:
Were the Americans, either by combination or by any other sort of violence, to stop the importation of European manufactures, and, by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their annual produce, and would obstruct instead of promoting the progress of their country towards real wealth and greatness.
Two generations later, when List was writing his book, many Europeans still shared Smith's view. Fortunately for them, List argues, the Americans firmly rejected Smith's analysis in favour of 'common sense' and 'the instinct of what was necessary for the nation', proceeding to protect their infant industries with great success after 1816.
List's observation was more than vindicated subsequently, as the USA remained the most ardent practitioner – and the intellectual home – of protectionism for a century after he wrote those passages but also became the world's industrial leader by the end of that period (see section 2.2.2 of Chapter 2). List was also proven right by subsequent historical events with regard to his comment on 'kicking away the ladder'. When its industrial supremacy became absolutely clear after the Second World War, the USA was no different from nineteenth-century Britain in promoting free trade, despite the fact that it acquired such supremacy through the nationalistic use of heavy protectionism.
These are important historical facts that we will establish in greater detail in the next chapter. For the moment, however, I would like to draw the reader's attention to List's methodology, that is, his historical approach to economics.
This approach, if applied appropriately, does not limit itself to the collection and cataloguing of historical facts in the hope that some pattern will naturally emerge. Rather, it involves searching for persistent historical patterns, constructing theories to explain them, and applying these theories to contemporary problems, while taking into account changes in technological, institutional and political circumstances.
This approach, which is concrete and inductive, contrasts strongly with the currently dominant Neoclassical approach based on abstract and deductive methods. This sort of methodology was in fact the staple of the German Historical School, which was the dominant school of economics in many continental European countries before the Second World War, and can be found in works written in English by authors such as Polanyi and Shonfield. The School included among its leading members the likes of Wilhelm Roscher, Bruno Hildebrand, Karl Knies, Adolph Wagner (of Wagner's Law fame), Gustav Schmoller, Werner Sombart and (contentiously) Max Weber. Weber, these days mistakenly known only as a sociologist, was in fact a professor of economics in the Universities of Freiburg and Heidelberg.
It is today rarely acknowledged that the German Historical School's influence before the Second World War went well beyond Continental Europe. Yet the school strongly impressed one of the founding fathers of Neoclassical economics, Alfred Marshall, who remarked that its work has 'done more than almost anything else to broaden our ideas, to increase our knowledge of ourselves, and to help us to understand the central plan, as it were, of the Divine government of the world'.
In the late nineteenth and early twentieth centuries, many leading American economists were directly and indirectly influenced by this School. Although he eventually drifted away from its influence, the patron saint of American Neoclassical economics John Bates Clark, in whose name the most prestigious award for young American economists is given today, went to Germany in 1873 and studied under Roscher and Knies. Richard Ely, one of the leading American economists of the time, also studied under Knies. Ely subsequently influenced the American Institutionalist School through his disciple, John Commons. Ely was one of the founding fathers of the American Economic Association(AEA); to this day, the biggest public lecture at the Association's annual meeting is given in Ely's name, although few of the present AEA members would know who he was.
After the Second World War, when the development of post-colonial countries became a major issue, the historical approach was deployed very successfully by many founding fathers of 'development economics'. The likes of Arthur Lewis, Walt Rostow and Simon Kuznets formulated their theories of the 'stages' of economic development on the basis of their extensive knowledge of the history of industrialization in developed countries. Also influential was the 'late development' thesis of the Russian-born American economic historian, Alexander Gerschenkron, who, drawing on European experiences of industrialization, argued that the continuously increasing scale of technology would make it necessary for countries embarking on industrialization to deploy more powerful institutional vehicles in order to mobilise industrial financing. Gerschenkron's work provides an important backdrop to Hirschman's pioneering work in development economics. Kindleberger's classic textbook on development economics makes extensive reference to historical experiences of the developed countries, once again with numerous references to Gerschenkron.
In the 1960s, the heyday of development economics, there were even some collections of essays intended explicity to derive lessons for currently-developing countries from the historical experiences of developed countries. As late as 1969, Gustav Ranis, a leading neoclassical development economist (although of an older, gentler vintage), wrote an article entitled 'Economic Development in Historical Perspective' for the key mainstream journal American Economic Review.
Unfortunately, during the last couple of decades, even development economics and economic history – two sub-fields of economics for which the historical approach is most relevant – have been dominated by mainstream neoclassical economics, which categorically rejects this sort of inductive reasoning. The unfortunate result of this has been that the contemporary discussion on economic development policy-making has been peculiarly ahistorical.
The development literature is certainly full of theoretically-based propositions (e.g., free trade benefits all countries) and may also draw extensively on contemporary experiences (e.g., the literature on the East Asian 'developmental state'). However, we rarely now see discussions that are based on the historical experiences of the now-developed countries (hereafter NDCs). To be sure, there are some scattered historical references, but these are often based on highly-stylized characterizations of historical experiences, and moreover tend to refer only to Britain and the USA. The supposed free-trade, free-market histories of these countries are held up as examples for developing countries. Yet these discussions of the British and US experiences are extremely selective and thus misleading, as will become clearer later in this book.
(Continues...)
Excerpted from Kicking Away the Ladder by Ha-Joon Chang. Copyright © 2003 Ha-Joon Chang. Excerpted by permission of Wimbledon Publishing Company.
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