Can The (Economic) Ladder Be Restored?
ED “Why Don’t You Sanction Me?” Kain promised a coming thread on protectionism a couple of days back but so far no (copyright protected) dice. So I thought I would initiate the discussion. I think it could be a good one–and we can get the libertarian members of the League all riled up :).
As a first shot in this direction, I point anyone interested to check out Ha Joon Chang’s recent book Bad Samaritans.
Summarizing the essentials of his argument in an article entitled Kicking Away the Ladder, Chang writes:
There is currently great pressure on developing countries to adopt a set of “good policies” and “good institutions” – such as liberalisation of trade and investment and strong patent law – to foster their economic development. When some developing countries show reluctance in adopting them, the proponents of this recipe often find it difficult to understand these countries’ stupidity in not accepting such a tried and tested recipe for development. After all, they argue, these are the policies and the institutions that the developed countries had used in the past in order to become rich. Their belief in their own recommendation is so absolute that in their view it has to be imposed on the developing countries through strong bilateral and multilateral external pressures, even when these countries don’t want them.
Naturally, there have been heated debates on whether these recommended policies and institutions are appropriate for developing countries. However, curiously, even many of those who are sceptical of the applicability of these policies and institutions to the developing countries take it for granted that these were the policies and the institutions that were used by the developed countries when they themselves were developing countries.
Contrary to the conventional wisdom, the historical fact is that the rich countries did not develop on the basis of the policies and the institutions that they now recommend to, and often force upon, the developing countries. Unfortunately, this fact is little known these days because the “official historians” of capitalism have been very successful in re-writing its history.
His book gives page after page of detail concerning how the US, England, France, Germany, Japan, South Korea, all employed some form of protectionism during their industrialization phase. Just as say a China is doing now. With many of the same problems we hear of today from East Asia: like countries devaluing their currencies in the 19th century, not obeying patent laws (the US was guilty of this one), huge import tariffs, and the like.
I’m not advocating protectionism per se for those countries who have largely passed through the early phases of industrialization. It may be a moot point as the capital may now so global it can’t be controlled by national economies/governments even if they wanted to, but Chang at the very least has showed how the Washington Consensus (via IMF, World Bank) towards the developing world during the 90s/2000s was so hypocritical and destructive. And by not learning those lessons then, history is now repeating itself. The same underlying factors that caused bubbles bursting during that phase in countries around the globe–Mexico, 1997 Asian Crisis (Thailand esp.), Argentina, Russia in the early 90s–are now coming to bear in the US.
In other words, I’m not how well Chang’s policy prescriptions work, but as a critique of self-labeled Free Trade policy relative to the developing world, it is brutal and dead on the money. It also suggests economic policy might need to be set up relative to the developmental position a country is currently at. Instead of saying attempting to impose one economic theory–Keynesian, monetarist, neo-liberal, etc.–to all places at the same time.
You mean a blanket ideology or economic theory can’t be applied blindly to all people all at once? What a revolutionary notion!
But in all seriousness, this is a very good post. I think you’re certainly on to something in regards to the way nations have developed. Japan used protectionist policies to gain the industry leadership it now enjoys, and even though its economy has slowed–perhaps, the very notion of a “growth” economy are at the root of many of these problems. Or perhaps it is not that there is anything wrong with growth, per se, but with the speed and consistency which seem necessary to sustain a free-market system. I think the world, at some point, will have to adjust to a slower growth model, and I think beyond any of this lies certain moral implications that I will get into more in my follow-up. (thanks for starting the series, by the way).
Here’s a good little post on the moral questions involved in the debate, and a preview of what I intend to discuss.Report
I shall respond….it just may be a few days. But for starters, it’s worth noting that perhaps even more than rent control, a belief in the badness of protectionism is as close to a universally held belief amongst economists as you will find. One other thing I would note is that it is certainly possible that protectionism can benefit a nation’s industry in the short run (as I said the other day, Krugman’s work on new trade would seem to imply this); however, in doing so, it often has an absolutely terrible effect on other nations. In terms of Africa and developing nations, I think a more likely cause of problems isn’t so much their adoption of free trade policies as it is their inability to compete with the forms of protectionism that remain in the developed world (especially the absolutely insane agricultural protectionism of both the US and Europe).Report
Mark,
I agree with you on the horribleness of the US/EU farm subsidies. That supports Chang’s thesis that the West imposes a set of policies on other countries that it itself didn’t (historically) and doesn’t even totally now (present) actually follow.
In responding to your point about the near unanimity of economists against protectionism, I have a question. Ricardo’s theory of comparative advantage assumes capital can be (and will be) held within a country. So it may not be so much tariffs (which is what most of the development discussion re: protectionism revolves around) as the ability to hold capital in a place.
If capital is fluid, (as it is now), my question: does Ricardo’s theory (which is the basis of int’l trade theory) no longer hold? Or at least have to be re-thought in some fashion.Report
Call me cold or callous or what you will, but why should America sacrifice good jobs simply out of some noble notion that by doing so we help other nations? Perhaps the very basic concepts we have about how other nations ought to run their economies are flawed. I question the entire economic establishment. Perhaps westernizing and industrializing the whole world is a mistake. And maybe African nations would be better off protecting not only their goods, but their ways of life. A Carribbean island can grow most if not all of its own food, creating livelihoods for its populace, and a self-sustainable culture. Free trade brings in food that is too cheap to compete against, destroys the very most natural jobs and way of life for those people, and forces them into a completely different way of life. Often tourism becomes the sustenance of such people, and they become totally dependent on the whims of rich tourists and the economies of those countries.
Free markets line up nations like dominoes.Report
er, one more thought. I wonder if we need to define what we actually mean by protectionism. And whether that is the same or different than say corporatist economic policy.Report
No, I think the discussion will flesh out whatever various concepts of protectionism we all may have. But it’s up to you. Define as you see fit….Report
A few thoughts:
1.) I’m in complete agreement with E.D. – countries have the right to self-determine their economic policies. There’s no doubt that some of the tactics employed by global financial institutions have been extremely invasive and, at times, coercive, and that’s wrong.
2.) That said, certain forms of protectionism are so devastating to developing nations that I can find no reasonable justification for their continued existence. This year’s college debate topic happens to be agricultural subsidies, and having done some research on the subject, it’s hard to overstate how badly rural African farmers are screwed over when we dump cheap, subsidized cotton and foodstuffs on their domestic markets.
3.) I think advocates of protectionism frequently suffer from extreme selection bias. I’ve written on this before, but it’s worth repeating: no one talks about failed experiments in industrial policy. Moreover, even “successful” protectionist measures frequently incur unintended costs further down the road. The United States’ experiment with industrial tariffs, for example, was a major bone of contention between the North and South leading up to the Civil War.
Having said all that, here’s a concise explanation of why I’m generally in favor of free trade:
1.) The consensus of credentialed economists is overwhelmingly in favor of removing trade barriers (off the top of my head, the only exception I can think of is Dani Rodrick). Economics, of course, isn’t as unambiguous as high school geometry, but it is a fairly rigorous, empirically-minded field, and I’m inclined to defer to the authority of experts who’ve spent a long time studying this stuff.
2.) Periods of expanding free trade strongly correlate with significant increases in global prosperity.
3.) As I’ve argued elsewhere (http://bestelectionever.wordpress.com/2009/02/10/what-protectionism-looks-like/), I think our political process would warp any effort to revive protectionism beyond all recognition.
4.) A protectionist backlash would seriously undermine multilateral cooperation with a host of important allies. I also think that multilateral mechanisms like the WTO are genuinely useful for alleviating commercial tensions.Report
Chris: No doubt that the West has been more than a bit hypocritical in its imposition of policies on developing nations. Frankly, if a developing nation imposes high tariffs on Western goods, the likely effect on the Western nation is going to be de minimis; whereas a Western nation imposing a high tariff on a developing nation’s goods (or subsidizing a good that is produced cheaply in a developing nation) may well prevent the developing nation from, well, developing.
As for the issue of Ricardian theory on comparative advantage no longer holding true…..First, you’ll get a much better explanation on that from a professional economist, although the answer is going to be a “no.”; several rather well-known such economists are remarkably willing to entertain questions such as that. That said, it’s well worth pointing to Krugman for a pretty good answer (it really pains me as a libertarian to so repeatedly cite him, but the fact is that there’s probably no one better on the issue of international trade). See this article, for starters: http://web.mit.edu/krugman/www/ricardo.htm
Also – Krugman’s Nobel-winning theories are largely credited as refining Ricardo.
ED – the thing about trade is that ultimately it winds up benefiting both nations (although one may benefit more than the other, but both wind up in better shape). So, even if you don’t much care about the developing world (which I think is a mistake, not just on humanitarian grounds, but also on realpolitik grounds), as long as you accept the principle of comparative advantage, free trade does not hurt either country. It may, to be sure, hurt a particular industry in a country; but what is unseen is the benefits it has on other industries in that country.
But one of the great hindrances to free trade is, I think, the fact that it’s something of a prisoner’s dilemma. If only one nation reduces its protectionism, it may do poorly because of the other nation’s barriers; if neither nation does so, neither is worse off; and if both nations do so, both are better off. This is why increasing free trade via treaty and international organizations is essential (a concept that puts me at odds with some libertarians).Report
For me, this question splits into two. On one side, I place a high value on regional sustainability. I wouldn’t put import duties on food items but I would make sure that good farm land didn’t get developed. This would keep the price of farm land low. It wouldn’t be direct protectionism but it would have a similar effect.
The other much more woolly problem is external economic integration. It is a bit like a prisoners dilemma except infinitely more complex. You can expect all players to be cheating to some extent. I’ve had a concern for the last few years of the underlying structure of what passes for free trade. It seems that the whole globe is built on the model that they keep their currency low in respect to the dollar for trade advantage. I suppose this would be OK if the US was really innovation, living within its means and continually achieving new records of productivity. The problem is that is just isn’t and can’t. Ultimately, the US is going to have to find someway to index other currencies to counteract pegging and purposeful currency weakening.Report
Okay, I’ll have to write a longer post on this, but here’s a couple quick thoughts:
1) Mark, I agree that any trade agreements need to be made mutually through trade-treaties as it were to protect both players from cheating. This often is not the case, and is often hampered by the players cheating nonetheless–which is why I said in an earlier post that I don’t believe in free trade because it doesn’t truly exist. Everybody plays some protection card or another.
2) Economists may “all” agree on free trade, but they agree in economics theory terms, not real-world terms. In other words, it’s all well and good to say that free trade and globalism lead to the allocation of labor to the cheapest (most efficient) regions, leading to the distribution of cheaper goods, and so forth, right? Cheap labor, better profits, cheaper goods, and thus more goods, higher prosperity, etc.
Now, the moral qualms I have with this are manifold. First of all, I think there is a problem with a society being driven by consumerism, and with a capitalist economy driven by constant growth rather than relative stability. Quarterly profit reports, the constant demand for fast-paced growth–these things are simply not sustainable. In theory they may be. In theory constantly finding cheaper labor and resources to provide cheaper goods sounds great. But in the real world we have limited resources. We have certain populations (our own, for instance) whose labor we should place higher value on than those of other nations.
I understand your concern with developing nations, Mark, but if those nations protected their farms from our cheap, subsidized crops then they wouldn’t have to worry about us undermining their economy. Hell, even if our crops weren’t subsidized we might be able to dump them on an African nation and still undermine their agriculture if they didn’t erect barriers against it. In other words, take away “free” trade and those countries have a chance of self-sufficiency. Introduce it, and you see these massive urban shanty towns erected as the farmers go to the cities to find work, and don’t find it…
I think healthy trade combined with a strong internal economy is much more sustainable. It might mean we can’t buy things quite as cheap, but it does mean we could sustain a larger middle class. And as Deneen wrote recently, perhaps we’d start thinking of ourselves as workers or citizens instead of consumers.
So much to think about on this. I’m not against trade. I think if one country makes great cars, they should be able to sell those to other countries. And I think there are deals to be made, like we have with the Japanese who now build many of their cars on American soil. But this theoretical utopian system of free trade is in practice a much more chaotic creature.
More later. I just think it’s important to distinguish between economic theory and real world practice. And when we just talk economics, we sometimes leave out morality altogether….Report
E.D. –
I’m sympathetic to your premises, but erecting a few trade barriers is emphatically not going to change our culture of consumption. That sort of thing requires a mindset shift that can’t be forced through by policymakers in Washington. Meanwhile, the real costs of protectionism Mark and I keep hammering at are going to have a huge impact on our collective well-being.
It’s also worth noting that economic growth can be morally beneficial under the right circumstances. Benjamin Friedman’s “Moral Consequences of Economic Growth” makes this point rather elegantly: shared prosperity enhances tolerance, reduces sectarian tensions, and frequently energizes civil and cultural institutions. Granted, you may not share Friedman’s political premises, but I think conservatives ought to consider the upside of economic growth as well.Report
Just to add to Will’s point – another moral consequence of free trade is that there appears to be a pretty strong correlation between free trade and peaceful relations. In other words, there is a strong argument to be made that increased free trade is an essential element to world peace. This actually makes quite a bit of sense when you think about it – the more your economy is dependent on the free flow of goods to and from other nations, the less likely you will be to act aggressively towards those other nations. There’s also a fair amount of research suggesting that free trade is the best way to encourage the spread of liberalism/pluralism more generally.
And that says nothing about the moral implications of the unintended consequences of protectionism (especially Third World food shortages; I really can’t emphasize that enough).Report
Meanwhile, the real costs of protectionism Mark and I keep hammering at are going to have a huge impact on our collective well-being.
What exactly do you mean by ‘collective well-being’? Is it simply lower priced goods and the glow of prosperity, or something broader?Report
excellent discussion.
one area I’m thinking a great deal about in relation to all this is financial protection. In Lexus & Olive Tree, T. Friedman had this riff on the “electronic herd” who would come rambling in to your territory, eat up your grass, and then bolt. That freaked me out at the time and still does in some ways.
Cascadian makes a similar point. My worry is that having let currencies free-float (mostly barrier-less) that you end up with the herd over-investing in currencies, which devalues them (flooded with excess, sometimes funny money US Dollars), driving up prices in hyperinflation and asset bubbles, which then pop, leading to deflation and mass debt. I think the same process that happened in a bunch of places in the 90s is happening in the States now.
And yet the Chinese are (for now) still buying Treasury bonds. But I gotta wonder at what point Uncle Sam’s credit line is no longer trustworthy. If there’s a run on these t-bills, trying to sell them in and convert back to native currency or another one, then look out.
I’m not sure what the alternative is but somebody needs to come up with one fast because the current system is totally destabilizing. I know Ron Paul wants to go back to the Gold Standard–any others people know about?Report
Chris –
David Frum’s take on the Gold Standard seems pretty apt to me:
http://frum.nationalreview.com/post/?q=NWQyYjc1ZjNjZTc5ZTcxODM1NDQ5ZDhhODZjZTU5YmQ=Report
The issue of foreign ownership of American debt is really quite frightening, which is one reason why our massive deficit spending of the last 8+ years is so disturbing to me.
That said, in terms of currency stabilization and/or something of a global equilibrium, that definitely sounds like a Dave question. But I do know that the gold standard, or at least the pure gold standard advocated by Ron Paul, is a really bad idea. There’s really little reason to think that it is any more stable than any other form of currency (and a lot of economists will cite it as a major cause of the Great Depression). As our friend Kip has pointed out a few times, you could fit all the gold ever mined in human history in a cube the size of a baseball diamond. The justification for the gold standard in many ways derives from the mistaken belief that gold production roughly tracks increases in overall productivity; but of course there are gold booms and busts, and technological advances in the production of goods that ensure that productivity will not track particularly well with the extraction of gold (which also has the downside of existing in the earth in finite quantities).Report
Thanks for the link Will.
Frum conflates going off the gold standard (really starting around WWI) with going off the pegged currency Bretton Woods system. Which occurred under Nixon. The two are related but distinct.
The criticisms he makes from the 19th c. and the problems of a pegged system (its general rigidity) are very valid. On the other hand, he elides I think over the real instability the alternative creates. As countries went off the gold standard you immediately had the speculative super-bubble of the Roaring 20s and then the Stock Market Crash. The volatility in the world markets since ’73, really since the 80s, into the 90s and now in the 2000s, seems also related to a quick response to floating currency model.Report
I wonder if Frum has had second thoughts since his ‘possible recession’ has turned into a full on doozy. I don’t recall that Ron Paul ever advocated the Gold Standard exactly. I believe he supported removing the monopoly of the dollar, people would be able to contract or peg their wages, products or debts to any instrument they liked. How do ‘L’ibertarians argue against a domestic market for currencies?Report