Thursday, November 11, 2010

Ha-Joon Chang on the death of the Washington consensus

A coupe of days ago I blogged about a Financial Times report that the current G20 summit in Seoul is likely to see the end of the Washington consensus that untrammelled markets are the best way to secure development in poor countries. I have since heard similar reports from other sources in the development field.

The case to this move was provided by the Korean-born economist Ha-Joon Chang in a Guardian article earlier this week:
In my lifetime Korea has lived through one of the greatest development miracles – half a century ago, its annual per capita income was around £50, less than half that of Ghana at the time. Today, it stands at £12,000, putting it on a par with Portugal and Slovenia. How was this possible?
Korea of course did things that most people agree are important for economic development, such as investment in infrastructure, health and education. But on top of that, it also practised many policies that are now supposed to be bad for economic development: extensive use of selective industrial policy, combining protectionism with export subsidies; tough regulations on foreign direct investment; active, if not particularly extensive, use of state-owned enterprises; lax protection of patents and other intellectual property rights; heavy regulation of both domestic and international finance.
You read more from Ha-Joon Chang, who teaches at Cambridge, on his own website.

He is also quoted in a recent Christian Science Monitor article:
The government’s emphasis on free trade over aid in its G20 development agenda, however, has left some wondering whether Seoul has wandered from its own development model.

Korea received millions of dollars in aid from the United Nations Development Program and other international donors throughout its development process. Last year, Korea became the first major recipient of overseas development aid to become a major international aid donor.

Korea’s economy also benefited from relatively closed markets during the cold war. Professor Chang calls Seoul’s call for freer markets “fundamentally at odds with how Korea itself developed."
I suppose it is rather like the way you become in favour of strict discipline in the classroom as your own schooldays recede in your memory.

4 comments:

dreamingspire said...

"extensive use of selective industrial policy" We did that, after the war, and things got better until about the end of the 1960s. We did that for a lot longer, and things got worse. Moral: you need competent people in charge.

Patmos Pete said...

The third message from heaven...
If any man worship the beast and his image, and receive his mark in his forehead, or in his hand, The same shall drink of the wine of the wrath of God, which is poured out without mixture into the cup of his indignation; and he shall be tormented with fire and brimstone in the presence of the holy angels, and in the presence of the Lamb: And the smoke of their torment ascendeth up for ever and ever: and they have no rest day nor night, who worship the beast and his image, and whosoever receiveth the mark of his name.

Niklas said...

Ha-Joon Chang's next most often used example of the success of protectionism as development policy is late-nineteenth century Europe. Unfortunately in that case he's got the economic history all wrong.

From the 1879 onwards (the year Bismarck enacted the "iron and rye" tariffs) most European countries began to raise trade barriers, after having lowered them in the mid-nineteenth century (a process supercharged by the Cobden-Chevalier treaty and the German customs union, which originally had low tariffs to the outside world). Ha-Joon Chang thinks that since industrial growth only took off in continental Europe from the last decades of the century, his point is proven.

What he ignores is that tariffs are only an artificial trade barrier. The cost of transport was often a bigger obstacle to trade. The development of transatlantic steamers and transcontinental railways in Europe (to Russia) and in the USA (from the east coast to the breadbaskets of the midwest) drastically reduced the costs of transport and so exposed European producers, especially farmers, to more competition. In most countries the rise in tariffs from 1879 only partly reversed the steep fall in transport costs. In other words, total "protectionism" (political and natural) actually decreased.

Another point is that Northern European countries did very well out of not raising tariffs much (Sweden) or at all (Britain). Denmark developed a highly competitive meat and dairy sector as a result of cheap imported grain and provided British families with much of their bacon and butter. Sweden re-introduced agricultural tariffs in 1888 (after the free traders lost all their parliamentary seats in the Stockholm constituency because one of their candidates turned out to be ineligable), which had little effect on Swedish industry one way or the other and (from what I could see in my own research) did not do much to help farmers either.

Sorry for the history lesson, but Ha-Joon Chang needs it!

Niklas said...

Another point worth making is that tariffs were very much a producer lobby policy. Peasant farmers had great political influence in most European countries, which explains the popularity of agricultural tariffs. Likewise, Bismarck's tariffs allowed German firms to form cosy cartels and screw the consumer.

Ha-Joon Chang's policy and the misnamed "food security" movement are both the same: they will short change consumers (such as the burgeoning urban populations in the developing world), who are the people who are supposed to benefit from development.