History Debunks the Free Trade Myth

Ha-Joon Chang
The Guardian, Monday June 24, 2002

You are visiting a developing country as a policy analyst. It has the highest average tariff rate in the world. Most of the population cannot vote, and vote buying and electoral fraud are widespread.

The country has never recruited a single civil servant through an open process. Its public finances are precarious, with loan defaults that worry investors. It has no competition law, has abolished its shambolic bankruptcy law, and does not acknowledge foreigners’ copyrights. In short, it is doing everything against the advice of the IMF, the World Bank, the WTO and the international investment community.

Sounds like a recipe for development disaster? But no. The country is the US – only that the time is around 1880, when its income level was similar to that of Morocco and Indonesia today. Despite wrong policies and sub-standard institutions, it was then one of the fastest-growing – and rapidly becoming one of the richest – counties in the world.

Especially in relation to trade policy. Many top economists, including Adam Smith, had been telling Americans for over a century that they should not protect their industries – exactly what today’s development orthodoxy tells developing countries.

But the Americans knew exactly what the game was. Many knew all too clearly that Britain, which was preaching free trade to their country, became rich on the basis of protectionism and subsidies. Ulysses Grant, the Civil war hero and US president between 1868 and 1876, remarked that "within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade." How prescient – except that his country did rather better than his prediction.

The fact is that rich countries did not develop on the basis of the policies and institutions they now recommend to developing countries. Virtually all of them used tariff protection and subsidies to develop their industries. In the earlier stages of their development, they did not even have basic institutions such as democracy, a central bank and a professional civil service.

There were exceptions, such as Switzerland and the Netherlands, which always maintained free trade. But even these do not conform to today’s development orthodoxy. Above all, they did not protect patents and so freely took technologies from abroad.

Once they became rich, these countries started demanding that the poorer countries practise free trade and introduce advanced institutions – if necessary through colonialism and unequal treaties. Friedrich List, the German economist of the mid-19^th century, argued that in this way the more developed countries wanted to "kick away the ladder" with which they climbed to the top and so deny poorer countries the chance to develop.

After the Second World War, thanks to post-colonial guilt and cold war politics, developing countries were allowed substantial policy autonomy. For a few decades ladder-kicking was at low ebb.

But it has been resumed with renewed vigour in the last two decades, when developed countries have exerted enormous pressures on developing countries to adopt free trade, deregulate their economies, open capital markets, and adopt best-practice institutions such as strong patent laws.

During this period, a marked slowdown has occurred in the growth of the developing countries. The average annual per capita income growth rate in the developing countries has basically been halved, from 3 percent to 1.5 percent, between the 1960 to 1980 period and 1980 to 2000. During the latter period, growth has evaporated in Latin America while the African and most of the ex-communist economies have been shrinking. Growth has also slowed down in the developed countries but less markedly – from 3.2 percent to 2.2 percent – thereby resulting in a growing income gap between the rich and the poor nations.

How do we address this failure?

First, the conditions attached to bilateral and multilateral financial assistance to developing countries should be radically changed. It should be accepted that the orthodox recipe is not working, and also that there can be no best-practice policies that everyone should use.

Second, the WTO rules should be rewritten so that the developing countries can more actively use tariffs and subsidies for industrial development.

Third, improvements in institutions should be encouraged, but this should not be equated with imposing a fixed set of –in practice, today’s, not even yesterday’s – Anglo-American institutions on all countries, nor should it be attempted in haste, as institutional development is a lengthy and costly process.

By being allowed to adopt policies and institutions that are more suitable to their conditions, the developing countries will be able to develop faster. This will also benefit the developed countries in the long run, as it will increase their trade and investment opportunities. That the developed countries cannot see this is the tragedy of our time.

Ha-Joon Chang teaches at the Faculty of Economics, University of Cambridge. This article is based on his book: Kicking Away the Ladder – Development Strategy in Historical Perspective, published by Anthem Press, London, 2002.

© The Guardian 2002 www.guardian.co.uk