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Kicking Away the Ladder:
How the Economic and Intellectual Histories of Capitalism Have Been
Re-Written to
Justify Neo-Liberal Capitalism
Ha-Joon Chang (Cambridge
University, UK)
© Copyright 2002 Ha-Joon Chang
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.
Almost all of today’s rich countries used tariff protection and subsidies to
develop their industries. Interestingly, Britain and the USA, the two
countries that are supposed to have reached the summit of the world economy
through their free-market, free-trade policy, are actually the ones that had
most aggressively used protection and subsidies.
Contrary to the popular
myth, Britain had been an aggressive user, and in certain areas a pioneer, of
activist policies intended to promote its industries. Such policies, although
limited in scope, date back from the 14th century (Edward III) and
the 15th century (Henry VII) in relation to woollen manufacturing,
the leading industry of the time.
England then was an exporter of raw wool to the Low Countries, and
Henry VII for example tried to change this by taxing raw wool exports and
poaching skilled workers from the Low Countries.
Particularly between the
trade policy reform of its first Prime Minister Robert Walpole in 1721 and
its adoption of free trade around 1860, Britain used very dirigiste trade and industrial
policies, involving measures very similar to what countries like Japan and
Korea later used in order to develop their industries. During this period, it
protected its industries a lot more heavily than did France, the supposed dirigiste
counterpoint to its free-trade, free-market system. Given this history,
argued Friedrich List, the leading German economist of the mid-19th
century, Britain preaching free trade to less advanced countries like Germany
and the USA was like someone trying to “kick away the ladder” with which he
had climbed to the top.
List was not alone in
seeing the matter in this light. Many American thinkers shared this view.
Indeed, it was American thinkers like Alexander Hamilton, the first Treasury
Secretary of the USA, and the (now-forgotten) economist Daniel Raymond, who
first systematically developed the infant industry argument. Indeed, List,
who is commonly known as the father of the infant industry argument, in fact
started out as a free-trader (he was an ardent supporter of German customs
union – Zollverein) and learnt
about this argument during his exile in the USA during the 1820s
Little known today, the
intellectual interaction between the USA and Germany during the 19th
century did not end there. The German Historical School – represented by
people like Wilhelm Roscher, Bruno Hildebrand, Karl
Knies, Gustav Schmoller,
and Werner Sombart – attracted a lot of American
economists in the late 19th century. The patron saint of American
Neoclassical economics, John Bates Clark, in whose name the most prestigious
award for young (under 40) American economists is given today, went to
Germany in 1873 and studied the German Historical School under Roscher and Knies, although he
gradually drifted away from it.Richard
Ely, one of the leading American economists of the time, also studied under Knies and influenced the American Institutionalist
School through his disciple, John Commons. Ely was one of the founding fathers
of the American Economic Association; to this day, the biggest public lecture
at the Association’s annual meeting is given in Ely’s name, although few of
the present AEA members would know who he was.
Between the Civil War and
the Second World War, the USA was literally the most heavily protected
economy in the world. In this context, it is important to note that the
American Civil War was fought on the issue of tariff as much as, if not more,
on the issue of slavery. Of the two major issues that divided the North and
the South, the South had actually more to fear on the tariff front than on
the slavery front. Abraham Lincoln was a well-known protectionist who cut his
political teeth under the charismatic politician Henry Clay in the Whig
Party, which advocated the “American System” based on infrastructural
development and protectionism (thus named on recognition that free trade is
for the British interest). One of Lincoln’s top economic advisors was the
famous protectionist economist, Henry Carey, who once was described as “the
only American economist of importance” by Marx and Engels
in the early 1850s but has now been almost completely air-brushed out of the
history of American economic thought. On the other hand, Lincoln thought that
African Americans were racially inferior and that slave emancipation was an
idealistic proposal with no prospect of immediate implementation – he is said to have emancipated the slaves
in 1862 as a strategic move to win the War rather than out of some moral
conviction.
In protecting their
industries, the Americans were going against the advice of such prominent
economists as Adam Smith and Jean Baptiste Say, who
saw the country’s future in agriculture. However, the Americans knew exactly
what the game was. They knew that Britain reached the top through protection
and subsidies and therefore that they needed to do the same if they were
going to get anywhere. Criticising the British preaching of free trade to his
country, Ulysses Grant, the Civil War hero and the US President between
1868-1876, retorted that “within 200 years, when America has gotten out of
protection all that it can offer, it too will adopt free trade”. When his
country later reached the top after the Second World War, it too started
“kicking away the ladder” by preaching and forcing free trade to the less
developed countries.
The UK and the USA may be
the more dramatic examples, but almost all the rest of the developed world
today used tariffs, subsidies and other means to promote their industries in
the earlier stages of their development. Cases like Germany, Japan, and Korea
are well known in this respect. But even Sweden, which later came to
represent the “small open economy” to many economists had also strategically
used tariffs, subsidies, cartels, and state support for R&D to develop
key industries, especially textile, steel, and engineering.
There were some exceptions like the Netherlands and Switzerland that have
maintained free trade since the late 18th century. However, these
were countries that were already on the frontier of technological development
by the 18th centuries and therefore did not need much protection.
Also, it should be noted that the Netherlands deployed an impressive range of
interventionist measures up till the 17th century in order to
build up its maritime and commercial supremacy. Moreover, Switzerland did not
have a patent law until 1907, flying directly against the emphasis that
today’s orthodoxy puts on the protection of intellectual property rights (see
below). More interestingly, the Netherlands abolished its 1817 patent law in
1869 on the ground that patents are politically-created monopolies
inconsistent with its free-market principles – a position that seems to elude
most of today’s free-market economists – and did not introduce another patent
law until 1912.
The story is similar in relation to institutional development. In the earlier
stages of their development, today’s developed countries did not even have
such “basic” institutions as professional civil service, central bank, and
patent law. It was only after the Pendleton Act in 1883 that the US federal
government started recruiting its employees through a competitive process.
The central bank, an institution dear to the heart of today’s free-market
economists, did not exist in most of today’s rich countries until the early
20th century – not least because the free-market economists of the
day condemned it as a mechanism for unjustly bailing out imprudent borrowers.
The US central bank (the Federal Reserve Board) was set up only in 1913 and
the Italian central bank did not even have a note issue monopoly until 1926.
Many countries allowed patenting of foreign invention until the late 19th
century. As I mentioned above, Switzerland and the Netherlands refused to
introduce a patent law despite international pressure until 1907 and 1912
respectively, thus freely “stole” technologies from abroad. The examples can
go on.
One important conclusion
that emerges from the history of institutional development is that it took
the developed countries a long time to develop institutions in their earlier
days of development. Institutions typically took decades, and sometimes
generations, to develop. Just to give one example, the need for central banking
was perceived at least in some circles from at least the 17th
century, but the first “real” central bank, the Bank of England, was
instituted only in 1844, some two centuries later.
Another important point
emerges is that the levels of institutional development in today’s developed
countries in the earlier period were much lower than those in today’s
developing countries. For example, measured by the (admittedly highly
imperfect) income level, in 1820, the UK was at a somewhat higher level of
development than that of India today, but it did not even have many of the
most “basic” institutions that India has today. It did not have universal
suffrage (it did not even have universal male
suffrage), a central bank, income tax, generalised limited liability, a
generalised bankruptcy law, a professional bureaucracy, meaningful securities
regulations, and even minimal labour regulations (except for a couple of
minimal and hardly-enforced regulations on child labour).
If the policies and
institutions that the rich countries are recommending to the poor countries
are not the ones that they themselves used when they were developing, what is
going on? We can only conclude that the rich countries are trying to kick
away the ladder that allowed them to climb where they are. It is no
coincidence that economic development has become more difficult during the
last two decades when the developed countries started turning on the pressure
on the developing countries to adopt the so-called “global standard” policies
and institutions.
During this period, the
average annual per capita income growth rate for the developing countries has
been halved from 3% in the previous two decades (1960-80) to 1.5%. In
particular, Latin America virtually stopped growing, while Sub-Saharan Africa
and most ex-Communist countries have experienced a fall in absolute income.
Economic instability has increased markedly, as manifested in the dozens of
financial crises we have witnessed over the last decade alone. Income
inequality has been growing in many developing countries and poverty has
increased, rather than decreased, in a significant number of them.
What can be done to change this?
First, the historical facts about the historical experiences of the developed
countries should be more widely publicised. This is not just a matter of
“getting history right”, but also of allowing the developing countries to
make more informed choices.
Second, 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.
Third, the WTO rules should be re-written so that
the developing countries can more actively use tariffs and subsidies for
industrial development. They should also be allowed to have less stringent
patent laws and other intellectual property rights laws.
Fourth, 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. Special care has
to be taken in order not to demand excessively rapid upgrading of
institutions by the developing countries, especially given that they already
have quite developed institutions when compared to today’s developed
countries at comparable stages of development, and given that establishing
and running new institutions is costly.
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
(hjc1001@econ.cam.ac.uk) teaches in the Faculty of
Economics, University of Cambridge. This article is based on his new book, Kicking
Away the Ladder – Development Strategy in Historical Perspective,
which was published by Anthem Press, London, on 10 June 2002.
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SUGGESTED CITATION:
Ha-Joon Chang, “Kicking Away the Ladder”, post-autistic economics review, issue no. 15, September 4, 2002, article 3. http://www.paecon.net/PAEReview/issue15/Chang15.htm
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