JK Fowler

Kicking Away the Ladder: The “Real” History of Free Trade by Ha-Joon Chang

Ha-Joon Chang, within Kicking Away the Ladder: The “Real” History of Free Trade“, presents a compelling case for debunking the neoclassical discourse on globalization which states that, “free trade, more than free movements of capital and labor, is the key to global prosperity” (Chang, 2003). Chang successfully reveals the shortcomings of an “official” history of capitalism based on half-truths and an inability (or unwillingness) of most of today’s most developed countries (i.e. U.S. and Britain) to recognize that they used active interventionist trade and industrial policies which aimed to promote infant industries during their catch up periods. Through an exploration of Britain, the U.S., Germany, France, Sweden, The Netherlands, Switzerland, and Japan and the East Asian newly industrialized countries, specific industrial policies point clearly to the fact that almost all NDCs not only used promotion strategies in relation to their infant industries but they also employed aggressive tariff protection, abolished patent laws, and importantly used a mix of policies not a single policy as some NDCs would have us believe. Developing countries, Chang points out, have grown much faster, “when they used ‘bad’ trade and industrial policies  between 1960 and 1980 than when they used ‘good’ policies during the following two decades”. In recommending “good” policies, therefore, NDCs are “kicking away the ladder” to successful development, disallowing other LDCs the same conditions that initially allowed them to flourish.

“Growth Strategies” by Dani Rodrik

Dani Rodrik, within his working paper “Growth Strategies”, makes two key arguments: a) that neoclassical economic analysis is a lot more flexible than its practitioners in the policy domain have generally given it credit; and b) that igniting economic growth and sustaining it are somewhat different enterprises. To bolster his first argument, Rodrik explains that, “first-order economic principals – protection of property rights, contract enforcement, market-based competition, appropriate incentives, sound money, and debt sustainability do not map into unique policy packages” (Rodrik, 2003). Function and form of good governance, Rodrik explains, are not necessarily correspondent. Those looking to reform can (and have) reshaped the institutional designs of neoclassical economics by taking into account local constraints and learning to take advantage of local opportunities. He fills out his second argument by stating that it is often the case that sustaining growth is often harden than igniting it because of the fact that sound institutional underpinnings must be created to, “maintain productive dynamism and endow the economy with resilience to shocks over the long term”. This takes time, transparency, and a government committed to doing so. Rodrik uses countries which have pursued unorthodox, two-track, gradualist reform paths and found relative success as informative examples of the fact that there is not one, uniform way of approaching growth. Taking into account the economic and political contexts of the countries involved is paramount according to Rodrik and rule of thumb economics, “can be safely discarded”.

The Case of Mauritius

Chang’s book speaks very closely to the case of Mauritius but in many respects, due to Mauritius’ economic and political histories, the tiny island is a bit of an anomaly. Because of their dependence on sugar, the U.S. (and primarily the E.U.) have willingly offered non-orthodox protectionist treaties to Mauritius from associations such as the E.E.C. and the Lome Convention (which gave the island an assured market at high guaranteed prices for over one-third of the total Africa, Caribbean, and Pacific quote for the European Economic Community). Mauritius’ developmental history has been filled with a mix of fairly successful hetero/orthodox policy decisions, relatively stable government, and perhaps most importantly, the aforementioned perfectionist sugar (and later textile) trade agreements. Because of the colonial ties which Mauritius has kept very much intact as well as the respective colonial powers’ reliance upon Mauritius for a large percentage of its sugar imports (Mauritius exported close to 500,000 tons of raw centrifugal sugar to the E.U. in 2006), it is understandable why the NDCs have not pressured Mauritius to adopt the “good,” neoclassical policies towards development. The “ladder” has very much still remained and Mauritius continues to climb it.

In line with this, Rodrik’s claim that rule of thumb economics may be discarded seems to ring true with the case of Mauritius. The aforementioned trade agreements (particular to Mauritius) led to huge profits which were then partially reinvested into tourism, manufacturing, and the basic infrastructure but due to the extremely favorable terms of such trade agreements, there was a clear disincentive against diversification. The government of Mauritius then stepped in considering its local constrains and opportunities (Rodrik, 2003) and offered as many incentives (infrastructure, site and factory space at low rents, cheap energy, duty-free raw materials, etc) as possible to lure investors into manufacturing for export. But again, favorable trade agreements played a key role in expanding the government-led E.P.Z with the Multifibre Agreement (MFA). Neoclassical economics has most definitely played a role in Mauritius development but its limits have not only been changed or pushed. Instead, Mauritius has often stepped far beyond the confines of neoclassical theory into heterodoxy and has found great success as a result. This only lends itself further to Rodrik’s claim that one size does not fit all in the case of economic and social development and growth.

The Case of Madagascar

Madagascar, particularly during the early years of the military dictatorship in the 1970’s, was run under a socialist economy and unfortunately lends itself to many of the neoclassical arguments against state intervention. The Great Island goes largely against Chang’s claim that many LDCs that have used “bad” policies have encountered strong growth. With largely stagnant GDP growth throughout the 1970–2007 period, the GDP grew at a mere 1% in the 1970’s compared to a long term average of 2.26%. Government economic and social policies have largely been distorted in favor of the urban populations and during the state interventionist period of the 1970’s, Madagascar departed from the Franc Zone and the pegging of the Malagasy Franc to a currency basket (with foreign exchange restrictions) and this contributed to economic underperformance. Further intervention, rent-seeking and corruption marked the 70’s and export taxation plagued farmers who received less that 8% of vanilla’s price at times. An export tax in the mid-70’s drove the nominal rates of assistance to -70% and heavy taxation on the producers was worsened. These “bad” policies (traditionally looked down on by neoclassicals) may have, in fact, been bad. This is where Rodrik steps in.

There are innumerable complexities as for why Madagascar’s growth has been largely stagnant, particularly during the 1970’s. Good governance, however, has been particularly important in Madagascar’s case. To Rodrik’s point, it is clear that although the form of governance does not necessarily constitute its function, the government’s economic and social policies in Madagascar have often lent themselves to the critique that they were largely unaware of local constraints or opportunities and were largely dysfunctional. Initial GDP growth and GDP per capita growth in the 70’s was not sustained because the country lacked sound institutional underpinnings as well as any form of dynamism to adapt to the inevitable shocks that arise when running a country’s economic and political machine. With Rodrik’s arguments in mind, it is clear that the Madagascar government has not always taken into account the economic and political contexts in which it was operating and unfortunately for the people of the country, there have been many tumultuous political movements in recent history.