Jan 4, 2009

The myth of free trade

I’ve been reading The Economist for quite a while now. I feel equipped to defend my ideas when IUED types start with their anti-globalization speeches. But I just finished reading a book. It’s called Bad Samaritans, The myth of free trade and the secret history of capitalism, and I have to say I’m not sure yet how I would debate with this guy called Ha-Joon Chang, apparently a heterodox economist. He is definitely convincing. It is not easy to read him and find quick counter arguments to his claims. He is an economist that makes you think.

He believes in a development ladder, as explained in his previous book, that developing countries need to climb in order to get rich but that the West, the World Bank and the IMF are kicking away by advocating free trade. He argues that infant industries need protection to grow and become value creating machines in the same way his 6 year old son needs to go to school before getting a job.

But what make it convincing are his historical examples. Nokia’s electronics division lost money for 17 years before becoming the technological giant it is today; Toyota was bailed out in 1949 and Ford and GM were kicked out by the Japanese government, and is now the biggest carmaker in the world. And almost no country has become rich without industries… What is development anyway? It’s the creation of value...you need businesses, industries that create value as explained here. His development economics are far from the hip “lab” development economics as if life’s just a big commercial. For him, it’s about facts and history, and industrialization. Not small randomized experiments.

This led me to ask myself what if all industries in one country were foreign as in mucho mucho FDI? Wouldn’t this count as industrialization? Only if the value added stays in the country and is invested, I thought.

He insists on long run economic development as opposed to short run optimization, brought about by free trade. In an equal and industrialized world, free trade will be optimal, but it cannot rise poor countries out of poverty. If they specialize in agriculture, everybody gains in the short run, but developing countries will not be able to develop without activities that create value added, like industries.

He argues against too much patents by saying that “the fuel of interest to the fire of genius” has been mostly scientific curiosity and the desire to benefit humanity throughout history, quoting the Royal Society, and that we don’t always need to “bribe” scientists to invent things. He is less convincing on corruption which he deems not that bad, but I guess he is just being consistent with his government promoted industrialization model. In his last chapter he explains how economics shape culture more than culture being responsible for economic underdevelopment. The Japanese were perceived as lazy and the Germans as thieves. Culture changes, but it takes time.

Sometimes he is a bit too ideological, but in the same way free traders are too ideological when they promote free trade without listening. So, is reducing industrial tariffs good for the long run economic development of poor countries?

1 comment:

Yose said...

This "picking winner" arguments he mentions in the examples is not new. Ever since the big-push theory and the latter infant-industry arguments, the necessity of government strategic interventions has been put forward frequently, with examples of Korea in the earlier period and China more recently. But one should not forget the failure of such policies in many other countries. Or look at the case of South East Asia, which developed faster when they embraced freer trade in the 80s. Anyway, if the government needs to pick a winner, which industries or companies should it picks, protects and subsidized to ensure they won't end up as economic wastes.