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Monday, 23 March 2009

Bad Samaritans, By Ha - Joon Chang (A Review)

Bad Samaritans, Ha- Joon Chang
A Zambian Economist Review

I first came across the “infant industry argument” during my A-level economics class at Bearwood College. It was forever imprinted on my memory as an absurd excuse by inefficient states for protectionism. We were taught that the process to good economic development was through free trade and more importantly history and theory supported it. Of course since then I have come across fantastic papers that debunk the one sided nature of the free trade indoctrination, with Robert Driskill’s ‘Deconstructing the argument for free trade’ probably being among the best of them. However, it remains the case that this simplistic and biased view of free trade continues to dominate current development economic thinking and media punditry. Such is the scale of the challenge that the brilliant South Korean economist Ha-Joon Chang seeks to overcome in this entertaining and highly readable book. In my view the book successfully demolishes the free trade and economic development myths that are perpetuated by “neo-liberal economists” and the “bad Samaritan” institutions of the IMF, World Bank and WTO and their supporting governments.

Anyone preaching a different doctrine of development from the "neo-liberal" brigade is naturally declared a heretic and consigned to the periphery of mainstream economic thought. Not Ha-Joon Chang. A renowned development economist, who has worked as a consultant for the World Bank, Asian Development Bank, various UN agencies and many governments around the world. A recipient of the prestigious Leontief Prize and good friend of Nobel Laureate Joseph Stiglitz, Professor Chang has published many articles on the subject, including the critically acclaimed 'Kicking Away the Ladder - Development Strategy in Historical Perspective'. If anyone knows how the South East Asian miracle was born and any lessons it holds for poor nation, it is Chang.

Bad Samaritans aims to reverse the conventional wisdom and logic about development, especially the “official narrative” about how rich countries became prosperous and the implications it has for the advice being provided by the IMF / World Bank to developing nations like Zambia. By taking an in-depth look at the history and policies of developed nations, Bad Samaritans successfully demolishes the current free trade model of economic development and in its place erects a pragmatic and reasonable alternative. There are many important points raised in the book, but four critical conclusions are worth highlighting in this short space.

First, history rejects “free trade” and supports the “infant industry” argument as a model for development. According to Bad Samaritans, the “official version” of free trade globalisation is that Britain and the USA have been long adherents of free trade and this was responsible for their march towards growth and prosperity. Chang demonstrates that not only did these economies and other European nations emerge from protectionism, which they have denied developing countries, but they often imposed free trade on weaker countries to perpetuate their inbuilt advantages. To make matters worse (or better depending on your stand point), virtually all successful economies, developed and developing, got where they are through selective and strategic integration with the world economy rather than through unconditional global integration. Crucially, according to Chang, the performance of the developing countries was much better when they had a large amount of policy autonomy during the 'bad old days' of state-led industrialisation than when they were totally deprived of it during the first globalisation (in the era of colonial rule and unequal treaties) or when they had much less policy autonomy (as in the past quarter of a century).

Second, economic theory, properly understood demonstrates the limited nature of free trade theory and lends credence to the infant industry argument. The modern argument for free trade is based on the Heckscher –Ohlin-Samuelson (HOS) argument where comparative advantage is derived from differences in endowment of key factors of production, with each country specialising on those things where it has a relative advantage. Under the HOS theory free trade is beneficial, even in the face of protectionism (i.e. unilateral free trade) because the country concentrates on what it’s good at and imports the rest. The basic flaws of this theory are well understood and include issues related to immobility of economic factors of production and weak compensation mechanisms of losers from trade. Where Chang deals it a fatal blow is the cogent argument that the theory is about efficiency in the short run use of given resources and not about increasing available resources through economic development in the long run (which is what we really want). In the words of Chang, "contrary to what [free trade] proponents would have us believe, free trade theory does not tell us that free trade is good for economic development". Underline the phrase “economic development”.

Thirdly, the path to development lies in sacrificing today’s pleasure for long term benefit. The current free trade globalisation, according to Bad Samaritans, is built on a false premise that effective economic development embodies certain key requirements: privatisation of state utilities; unrestricted FDI; very low inflation; balancing the budget (no deficits!); deregulated capital markets; fully convertible currencies; thriving democracy; and, zero tolerance on corruption. Bad Samaritans provides evidence that contradicts each of these requirements. In particular, Chang shows that had countries such as South Korea and Japan followed these policies early on in their economic development, their industries would have been wiped out by external competition. Japan and South Korean would have remained as developing states rather than the economic powerhouses that we see today. By extension, if developing countries are to advance economically they need to rely on a different model to that proposed by the neo-liberal framework. It is important for developing countries to “defy the market” and deliberately promote economic activities that will raise their productivity in the long run — mainly, though not exclusively, manufacturing industries. Chang argues that this process involves capability-building, which, in turn, requires sacrificing certain short-term gains for the sake of raising long-term productivity (and thus standards of living) — possibly for decades.

Finally, if developed nations really want to help developing countries they should accept asymmetric protection. According to Chang, the proper role of developed countries and institutions like the World Bank, IMF, and the WTO, is to get out of the way of developing countries and more importantly accept asymmetric protection for developing states. Neo-liberal, free trade policies serve only to impede and kill off long-term development efforts. Rather than allow developing economies to nurture and grow their home-grown “infant industries,” free trade policies encourage developing countries to focus their economies on less-productive activities such as agriculture which bring gains only in the short run. True economic development, according to Chang, follows from emulating and mastering advanced foreign technologies, applying them to manufacturing, and protecting national industries from foreign competition for a long time. It is decades before such efforts will bear measurable fruit but Chang argues there is no other viable path to an industrialized economy. The challenge for bad Samaritan nations is to give developing countries headroom for them to grow.

These are very fundamental and radical conclusions from a book that is buried in evidence and yet profoundly easy to read. However, there are one or two places where the lack of detail leaves Chang with the need to return to them in the future. One particular area that was glaringly noticeable is the discussion of state led capitalism. While Bad Samaritans ably demonstrates the many flaws with various IMF / World Bank engineered privatisation programs and offers examples of where state owned companies have been successful (e.g. Singapore Airlines) it largely repeats what has already been documented elsewhere. The book would have been more useful discussing what sort of ownership or organisational structures that can be pursued to make for successful state led enterprises. For example, why is Singapore Airlines very successful and other state airlines have failed? Then there’s the all issue of "strategic industries". How does one go about distinguishing areas where the state should or should not consider direct production? I was also slightly disappointed that Chang failed to mention the complicated problem of government taking part in markets where other players already exists and the problems that has for regulation. These are probably issues beyond the scope of the book, but nevertheless pertinent to visioning how Chang's advice can be applied at the country level.

Reading Bad Samaritans and the conclusions inevitably fills one with hope and despair. The despair stems from that it seems like perhaps we are condemned to a different economic fate by the powerful nations that make the rules of international engagement. After all, changing how the bad Samaritans interact with Africa is a slow, if not an impossible task. Chang shows not only that these richer nations have double standards in dealing with ailing nations, but they are systematically erecting an international system of trade that is not to our advantage e.g. preventing African governments from accessing new technology through perverse patent systems. One can’t help but wonder whether the obstacles, however inadvertent, are just too many against African countries.

But there’s also hope, which in my view rests at three levels: at the global, country and personal levels.

At the global level, the credit crunch should rightly be viewed as an opportunity. The current global turbulence has lifted the lid off the fallacy of neo-liberalism unreserved trust in free and unregulated markets. Crucially, the reaction of western governments in face of rising unemployment, financial meltdown and social discontent has been characterised with significant state interventionism (e.g. nationalisation of banks), rising deficits and increased tendencies towards protectionism. Ironically, it is the state driven markets of China and India that now hold the key to global prosperity as their insatiable demand for commodities seek to stabilise the global ship. The age of the IMF and World Bank bully boys may not be over but the model they have espoused appears to be on the verge of collapse. After all, if the USA and France are abandoning neo-liberalism at this critical time, where is the argument for other nations not to do the same?

For Zambia, there are hopeful lessons too, which our current leaders would do well to reflect on :

  • There is an alternative to continuous subservience to IMF and World Bank who were the supreme architect of our failed privatization policy of the early 1990s and have been the key proponents of the current ideology that has led to our vulnerability in face of the current commodity price slump. Had Zambia developed a different model we would have earned significant windfall from the mines and we would have been able to diversify our economy. The IMF / World Bank policies for selling everything because we are incompetent were wrong. We must learn not to repeat these past mistakes.
  • Developing nations can depend on their home grown experts and solutions. Bad Samaritans demonstrates that nations such as South Korea and China have relied on their own experts to devise solutions. These experts may not be economists educated in the finest institutions in the west, but their understanding of local constraints and care for the implication of their advice more than compensates for what bad Samaritan sponsored advisers might offer. We need to trust our own Zambian experts and offer them the chance to come up with indigenous solutions.
  • FDI needs careful thought and should take into account that FDI can be both useful and harmful to long term prosperity. We should not be afraid to ask and answer the important questions: Is it in Zambia's interest that 70% plus of our banking system is foreign owned ? We need to consider whether it is for our long term benefit that all of our mines are in foreign hands. If we have learnt anything from our history it is that ultimate stability can only be guaranteed if Zambians themselves retain some residual control over the future of their economy. Yes, we need foreign direct investment, but we should not do that at the expense of securing a better future for Zambian children in the long term.
Finally, on a more personal level, the Bad Samaritans thesis accords with my established triangulation for development. A question that always goes through my mind as I review these books is the extent to which they impact on my own view of development as an economist. Regular readers will know that I hold dear the belief that strong societies are those supported by a tripod of strong markets, strong democratic foundation and religious or cultural institutions. In many respects Bad Samaritans confirms and strengthens the tripod. Whilst Chang is sceptical of the David Landes view that culture explains differences in development, we are all in agreement of the strong and dynamic role it plays in creating durable societies. Equally on democracy, although Chang rightly scorns the 'modernization hypothesis' that tries to establish causality between income and democracy, unity is found with Amartya Sen’s conclusion that democracy has 'intrinsic value' and important in it's own right. Where I find Chang particularly enlightening is in the concept of how we ensure strong markets emerge in developing countries that form the basis of durable societies. To Chang strong markets are not found in neo-liberal free trade but in a pragmatic long view of what delivers development. Sometimes domestic markets have to be protected, as one would a young child, until they grow and are able to compete and stand strong. The mistake of the neo-liberal ideology is to make strong markets synonymous with unregulated markets. Chang is clear that the goal is not state or free markets, but finding the right balance that delivered strong and durable markets that underpin long term productivity.

To be sure like any book Bad Samaritans has its own imperfections, one of which I have pointed out. However, in my view Bad Samaritans significantly advances the debate on how best developing countries can grow and contribute towards global prosperity. If I had money, I would get every Zambian parliamentarian a copy, with extra copies given out free to every visitor at State House. It is a must read.

14 comments:

  1. Cho,

    Another great review, detailed and fair. Rather than reiterate what you have already so capably summarized, or Ha-Joon Chang's extensively researched position, I'll instead take up the gauntlet of, "discussing what sort of ownership or organisational structures that can be pursued to make for successful state led enterprises."

    For the last week or so, the US media has been abuzz with stories about anger over AIG's decision to award so-called "retention bonuses" to hundreds of derivative traders in the midst of 165+ billion dollars in government bailout of the company. I bring this up because smarter companies doing something very different to "retain" employees, they are re-valuing employee stock options in line with the crash in many company stock prices and realigned predictions of short to medium term share price performance. This not only improves overall employee compensation, it also stimulates short term capital inflows when options are exercised (though long term obligations are of course increased, that should have been accounted for in the re-valuation process).

    There is an existing movement that seeks to redefine trade in terms of "fairness" rather than "freeness". Both words are loaded, partly due to the rampant hyperbole of the advertising industry no doubt, but descriptive nonetheless. Fair trade advocates assert that free trade rhetoric stems from an inherently selfish motivation, an anti-social tendency to view trade in terms of personal profit, to view truth as a commodity and asymmetric information as competitive advantage. Fair trade advocates tend to view this as rather childish, short term planning that ultimately creates unnecessary inefficiencies and inequities that ultimately stifle development and wealth creation for all participants. The basic premise behind fair trade is partnership, full value for goods and services at all levels of the supply chain, with transparent financing that fosters trust and loyalty from suppliers and labor as well as end consumers.

    There is renewed talk of petroleum exploration in the country of late. Let's face it, Zambia is not exactly a huge repository of petroleum exploration and extraction expertise, so there will be one or more outside partners and/or consultants involved at every stage of the process going forward. Who that is can make an enormous difference in the sort of oil industry the nation winds up with. For example, near the border between Papua New Guinea and Indonesia one can find two very different installations tapping two very similar petroleum deposits. The Indonesian side is widely reported as an environmental disaster area that will require decades if not centuries to clean up, though such reports are difficult to confirm due to the intense restrictions on media coverage of the facility imposed by the state oil company. The installation on the Papuan side is the center of a national wildlife refuge and rehabilitation project run jointly with Chevron, which takes every opportunity to display their low-impact "green oil" investment to as many media outlets as will give them free publicity. Local biodiversity and water quality has been improving steadily and dramatically since the project began.

    What does this have to do with successful state led enterprises (SLE's)? Well for starters, stop partnering with hedge funds and venture capitalists looking to make a quick buck off free trade. Most of the money they are offering is borrowed anyway, which will effectively place a majority of "real" profits derived from operations outside of the taxable profits of these particular companies and onto the balance sheets of banks overseas in other jurisdictions. Even an operation like Lumwana which is quite likely to be successful, has to pay about 7% each year on a billion dollars of debt as well as pay back the principal. Even assuming that they aggressively pay down this debt steadily over the next decade, that is still 1.35 billion dollars of actual operating profits that will remain out of reach of the taxpayers. This is before we get to tax incentives and tariff exceptions, that's just the corporate financing structure. Responsible fair trade investment entities such as the Norwegian public employees pension funds are happy to invest in mining, as long as it is done cleanly and fairly. They have a list of companies that they won't do business with, such as Vedanta. They are aware that this is a more expensive way to operate, but their investors aren't looking for 30%, they are looking for stable and ethically responsible (cynical read: profitable but politically defensible).

    Another chronic criticism of state led enterprise is political patronage in hiring and performance evaluation resulting in reduced productivity, over-compensation, lack of accountability and a shortage of appropriate expertise. Similar phenomena occur in family businesses (not publicly traded), so while not limited to SLE's, precedent abounds. Family businesses are actually a rather appropriate place to look for ways that SLE's can be successful, since they are often able to defy market forces, at least when it comes to priorities for reinvestment and compensation. Successful family businesses are generally not heavily debt-financed beyond the start-up phase, and most such debt is fully collateralized by individual underwriters (i.e. debt to collateral leverage of less than 1 to 1). Such businesses benefit from unpaid labor and overtime by individuals due to expectations of long term ownership stakes as well as personal loyalties. They reinvest profits heavily in pensions, skills training and general education, as well as expansion of market share or product diversity within local economies rather than into broader markets directly or via takeovers and mergers. They are not subject to hostile takeovers and are relatively insulated against intellectual property theft or flight. They tend to emphasize consistency of product quality and repeat business generated by brand loyalty. I think that many of these statements are also true of the successful Japanese and South Korean SLE's.

    I don't know when protect became such a bad root word, while insure still gets a free pass. It would be uncool of me not to move with the slang of the times, so if the "protect" in protectionism is out, let's run "fair" up the trade flagpole and see who salutes.

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  2. Yakima,

    Very insightful.

    Your point on Lumwana echoes Chang's point on privatizations. The point is applicable to all things FDI : it is important to have RIGHT investors. He does not pick up on your great point on debt repayments but focuses on the need for a good track record.

    I think this issue raises the wider point about what attracts good FDI, something u touch on in the exchange with Zedian in a separate post. You emphasize low risk (I think) but equally studies show that FDI is most attracted to larger markets, good labour and infrastructure. Chang's point is that if we get the last two, wecan have more freedom in setting restrictions on the type of FDI.

    I think he has a point : Lumwana has been sold to the public as creating jobs and creating a new town. No one mentions that we get little revenue from it because it is debt financed!

    It's a complex world!

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  3. Cho,

    An excellent and complete review. I hope this too gets picked up by The Post and other newspapers. Even if MPs don't read Bad Samaritans, they should read this review.

    Chang demonstrates that not only did these economies and other European nations emerge from protectionism, which they have denied developing countries, but they often imposed free trade on weaker countries to perpetuate their inbuilt advantages.

    It makes no sense, until you remember that this destroys local industries. Destroying local industries is something that they did during colonialism too - cotton in Egypt, tea in China, etc.

    In that respect, there is very little difference between colonialism and neocolonialism.

    The challenge for bad Samaritan nations is to give developing countries headroom for them to grow.

    If they want them to grow.

    The book would have been more useful discussing what sort of ownership or organisational structures that can be pursued to make for successful state led enterprises. For example, why is Singapore Airlines very successful and other state airlines have failed?

    There is an excerpt in "From Third World To First, The Singapore Story" by President Lee Kwan Yew:

    " At a dinner in 1972, with all union leaders and top management present, and before SIA was launched, I spelled out the need for a Singapore airline to be competitive and self-supporting; it would close down if it incurred losses. We could not afford to run an airline just to show the flag like other countries did. Right from the beginning, management and union clearly understood that their survival depended on being profitable. Cooperation between union and management helped Singapore Airlines succeed. "

    This contrasts rather sharply with allowing for instance politicians to run up bills with ZAMTEL, in the knowledge that they do not need to be paid back, because ZAMTEL is up for privatisation.

    I guess the answer is simple - instead of selfserving (to the West) neoliberal development theory, we need to get back to common sense business practice.

    Singapore Airlines and SAUDI-ARAMO show that parastatals can be very well run, if they keep their eye on profitability and are not allowed to be abused by members of the legislature or civil service.

    Reading Bad Samaritans and the conclusions inevitably fills one with hope and despair. The despair stems from that it seems like perhaps we are condemned to a different economic fate by the powerful nations that make the rules of international engagement.

    And that is why I am convinced that the way forward lies in the development of internal market. Let's produce to meet local demand first, before we export anything.

    Even if Zambia has little control over international trade (beyond copper if it takes the mines back), it can develop local markets and encourage trade between national regions.

    Why import cell phones when they can be assembled locally, and even parts manufactured locally. And if the state protected those manufacturers, while encouraging competition between national manufacturers, that can only have a positive effect on employment, and reduce the expenditure of foreign currency on imported goods, reducing the need for foreign currency, period.

    Again, an excellent review.

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  4. Cell phones are complex instruments which require a lot of technological knowledge to design. Protecting local manufacturers would mean that as technology advances and cell phones improve, better phones made outside the country would be smuggled in. The complexity of products made today has been underestimated, protectionism today would not work as well as it did 50 years ago.

    Singapore Airlines is the rare exception to state airline management, Saudi Aramco generates so much profit from low cost oil that any inefficiencies can be overlooked. Better to follow economic models that are more likely to achieve goals.

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  5. I found this 13 page .pdf file from the Financial Times, courtesy of the Center for Economic and Policy Research. It includes a review by Martin Wolf, Chief Economics Commentator for FT, numerous additional comments by prominent members of the international economics community, and closes with a direct response from Ha-Joon Chang himself. Very informative read.

    http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/financial-times-discusses-ha-joon-s-new-book,-bad-samaritans/

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  6. One answer I see from Martin Wolf's review is that South Korea focused on export led growth as compared to India and Africa. In other words, their products had to be globally competitive to succeed. So this gave them access to bigger markets than India and Africa which had domestic markets with low purchasing power. Also by making products which were globally competitive, it gave their industries an opportunity to survive in the long run.

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  7. Re: Mobile phone plant in Zambia.
    I am not sure how much 'assembly' is being done in this plant. If they have spent only $10M to set up the plant they are surely only doing some very high level assembly.
    Also this market is very competitive and most manufacturers are actually not making money from this activity. A lot of them are just making enough to keep these facilities open. Zambia is not a big enough market to support a manufacturing plant unless they've set their sight on an ultra cheap model for the emerging markets.

    The PANEL

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  8. The PANEL,

    We need to think outside of the box. Are we really saying that even the screws that hold your mobile phone together can't be manufactured in Zambia? What if we only imported the computer chip? That alone would reduce the price. And add a tariff to eliminate competition of imported cell phones...

    Yakima,

    Ha-Joon Chang's response:

    When discussing the (alleged irrelevance of) lessons of history, Martin pays almost exclusive attention to the US case. This is understandable, as the fact that the country used to be the most protectionist in the world for over a century until the Second World War is such a shock, given its role as the standard bearer of free trade in the recent past. Martin, as Anne Krueger does in her comment, argues that the US was an exception that grew ‘despite’ protectionism. I do not agree with this interpretation, but even if it were the case, how does he propose to explain the fact that virtually all of today’s rich countries, and not just the US, have a protectionist past? Perhaps the US succeeded despite protectionism because of its large market, but then how about Taiwan or Finland that had tiny markets? If large-scale, highquality immigration offset the ill-effects of protectionism in the US, how about countries like Sweden or Germany that were losing qualified people and practising protectionism in the late-19th century? It may be possible to dismiss the US as an "exception", but if there are another two dozen countries that have to be dismissed as "exceptions", then the theory has simply too many holes (the exercise reminds me of the pre-Copernican practice of drawing "epi-circles" in order to square evidence with geocentrism).

    I agree with Martin that I do not say much on what very poor economies should do. I see it as a shortcoming of my work. However, let me remind Martin that South Korea’s per capita income in 1961, at $82, was less than half that of Ghana ($179) and the country was described as a "bottomless pit" by the USAID in the late 1950s. If Korea could do it, why not other countries? I agree that the challenges facing the poorest countries today may be bigger than the ones faced by Korea in the 1960s. But one important reason for that is the intolerance for those "nationalistic" policies used by Korea in the past, on the part of the rich countries and multilateral institutions. My plea in the book is that this has to change and countries should be allowed to choose what they need and want, as such choice usually produce better results, as I have pointed out earlier. Martin summarised this argument at the end of his review much better than I can, so I will not elaborate on this point.

    As for the comments of Alan Winters and Arvind Panagaryia, I hope they had at least the decency of reading the book (or at least reading the review more carefully, for Martin does give me a fair hearing except in the area of trade) if they were to denounce it with strong language ("ill-conceived", said Arvind, and Alan likens my argument to ‘nineteenth-century’ medicine). For I don’t recognize my work in their caricaturisation of my argument as solely trade-focused and based on some outdated model and no empirical evidence.

    Alan’s assertion that my argument is not serious because it is based on the "nineteenth century model" is very unfortunate. If he read the book, he cannot possibly accuse me of advocating a nineteenth century model – for my discussion is right up to today’s practice, such as huge R&D subsidies that the US gives to its industries to harsh regulation of foreign direct investment by Japan and Finland until the 1980s. If there is an idea in this debate that is "nineteenth-century", it is Alan’s implicit belief that human knowledge progresses linearly. This idea has proven problematic even in natural sciences, but no philosopher of science would take it seriously these days when it comes to social sciences. The interesting thing is that Alan would be actually in greater trouble if human knowledge progressed linearly and therefore newer theories were always better – for protectionist theories are newer than free trade theories.
    Finally, I think it is wrong to dismiss one’s opponent’s theory by labeling them with negative words (‘nineteenth-century’).

    How would Alan feel if I described him and his colleagues as "defenders of free-trade theory that was so strongly advocated by American slave-owners and opium trafficking British imperialists"? Arvind’s argument that the failure of Heavy and Chemical Industrialisation (HCI) in Korea proves the wisdom of free trade may have cut some ice when Ian Little first said it in the early 1980s, when many of the HCI industries were in trouble (teething problems complicated by world recession), but it is a hollow argument today. Let’s get some facts straight. Korea did go through a bad patch in the late 1970s and the early 1980s, but it was in part due to the Second Oil Shock and the ensuing world recession, not just because of the HCI programme. Moreover, Korea did not abandon the HCI programme after the shock, as Arvind suggests. It re-organised and closed some of the firms that had little hope of doing well, but it kept supporting the good ones. Finally, if the HCI programme was a failure, how does Arvind explain that most of the leading industries of the 1980s onwards – steel, shipbuilding, automobile, electronics – have been the ones that had been set up and promoted through HCI, often against the advice of free-trade economists? (This is in fact a question that Ian Little himself could not answer when I put it to him in the early 1990s).

    As for Arvind’s invocation of the Indian case as the proof that infant industry protection is not good, I have no problem in admitting that not all protectionist policies are going to be successful and that India’s protectionism especially until the 1970s was not well managed. Whatever the strategy is, there are going to be failures. All I am showing in the book is that, contrary to the conventional wisdom, protectionist strategy has a much higher chance of success than free-trade strategy. Invoking the Indian example to dismiss the infant industry argument is like arguing for the abolition of parenting because there is a man in his fifties who is still living off his parents.

    Anne’s language is gentler than Alan’s and Arvind’s but the substantive disagreement is no less. She says that while Korea "did not abandon all protection during the rapid growth years (1960 to 1990), tariff rates were dropped substantially, quantitative restrictions were abandoned, and the degree of protection to import-competing producers was no greater than the incentives for exporters". This kind of characterisation has already been discredited by the early 1990s among those who work on East Asia.

    Let me remind her some of the evidence. Average tariff rates, at 20-30 per cent, were still quite high during the period. Moreover, the average conceals very high variation – the country had zero tariffs for some products while others had tariff rates around 100 per cent (so going against her advice for ‘nondiscriminatory’ policies). Quantitative restrictions were widespread – there were a lot more explicit QRs than Anne and her people acknowledge, and many QRs were not very visible because they were practised through domestic laws (for example, laws governing the state-owned railway companies).

    Most importantly, Korea practised strict foreign exchange rationing by the government until the 1980s, so tariff figures do not give us the real picture of protectionism across sectors. There were many items whose tariffs were relatively low on paper but which simply could not be imported (so facing an effective tariff rate of infinity) because they were far down the government priority list.

    Finally, I can only agree with most of the things that Edmund Phelps said in his comment. His view on economic development is, although expressed in a slightly different language, exactly the same as mine. As he puts succinctly, I believe that "a country’s comparative advantages are entirely artificial". In other words, economies develop in the particular ways they do because someone somewhere makes a conscious decision to "invest acquire skills, and gain knowledge" in particular areas. In the same way in which business managers often go deliberately against market signals in making such decision (Nokia ran losses in its electronics business for 17 years), governments can, and often should, go against market signals. Of course, if that is done to permanently insulate a country from international market forces, it would lead to a disaster like North Korea, but as far as the final aim is to fully join the world economy, protecting the car industry for 40 years (as Japan did until the 1970s) or setting up a stateowned steel monopoly against the advice of the World Bank (as Korea did in the early 1970s) may be justified.

    Reading the comments by Alan, Anne, and Arvind, I feel like this. I am a man whose book recommending the Mediterranean diet has been reviewed by a well-known anti-fat dietician, who unintentionally misrepresented me as praising beneficial qualities of all fats, when I had only praised olive oil. This was bad enough, but then a few other anti-fat dieticians read the review, go into a Pavlovian reaction on seeing the word, "fat", and accuse me of promoting excessive consumption of all fats, brandishing American obesity figures and Scottish heart-attack statistics. I regretfully have come to conclusion that I was absolutely right to say what I said at the end of chapter three in the book – "Trade is simply too important for economic development to be left to free trade economists".

    Ha-Joon Chang teaches Economics at the University of Cambridge.

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  9. MrK,
    Good point. But the raw materials needed to manufacture the screws would have to be imported.

    All I am saying is that while I welcome efforts being made to shore up our manufacturing industry, it may be difficult to offer products at a competitive price in a global environment. Even the likes of Nokia and Motorola do not have manufacturing plants everywhere but they've focussed on locations that are highly efficient with a very low cost base. This applies to all the big players in consumer electronics.

    The other question is whether a Zambian Chongololo would want to be seen with a cell phone made by m-Tech when his colleague has the latest offering from the Nokia or Samsung.
    I am not saying the product would be of an inferior quality but I simply can’t see how they will compete with the big players unless they find a niche market.

    The PANEL

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  10. The Panel,

    MrK, Good point. But the raw materials needed to manufacture the screws would have to be imported.

    Zambia has nickel mines. Or, the screws could be made from copper.

    Even the process of just stamping these screws from imported metals adds value and creates a job.

    I am not saying the product would be of an inferior quality but I simply can’t see how they will compete with the big players unless they find a niche market.

    Protecting Zambian manufacturing from competition with imported goods are what tariffs are all about. They would eliminate international competition.

    We have to start thinking about value added, and keep as much of the production of what are now imported goods in the country.

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  11. The Panel/Mrk,

    I have also questioned before the viability of mobile assembly plants in Zambia.

    My view of the world market is that as a country you need to identify what assets you have, be it raw materials, manpower, geographic location, etc, and determine who needs it, for how much, and so so. Basically do the what, who, why, when, where, how stuff. Yes it's a lot more difficult in practice, but without that you will end up with white elephants or bailing out businesses that are not viable.

    I was playing back a clip on the BBC website just yesterday about Zambeef where the Managing Director was saying his business is virtually unscathed by the slowdown! And I thought, this is one guy who has done his 5Ws.

    Can we say the same about m-tech and their mobile assembly? Only time will tell.

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  12. Cho,
    I recently discovered your blog and as a student of economics I find your views very interesting and informative. You make a great review of Bad Samaritans. The model Chang prescribes I think calls for a great sense of patriotism which is an ingredeient seriously lacking especially among the current crop of leaders. I wonder if Chang just deliberately leaves out this issue, including governance, or does it not matter at all.
    Secondly, I'd like to hear your views on the effects of the consumerist and shortermism culture that free market policies have quite successfully implanted in many Zambians. If development is to be sustained, sure it'd need savings to ensure reinvestment over time - we can't expect that the fiscal deficits would keep going forever- a savings culture has contributed to the success of china, korea etc

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  13. nm2k,

    Thanks!

    Many issue there!

    Chang does discuss governance but as I said he is skeptical over whether democratic governance holds any "economic benefits" beyond its intrinsic benefits.

    The patriotism issue is interesting as question of why policymakers in developing countries don't embrace more balanced approach to policy making or do not rely on their experts. I think Chang sees this as mainly an issue of external influence that has made it difficult for developing countries to pursue their own course. All governments are patriotic, but culture and external pressures make it difficult in terms of how they express that patriotism. Interestingly you could even the leap to free market may well be the quest for "protecting your geo-political relevance".

    On short-termism, I think it is fair to say that many Zambians free market or not have not got sufficient income to save and reinvest over time. But it is certainly correct that the free market ideology does not help in enshrining a culture of "short term pain" for "long term benefit". This is clear at the national level, but the extent to which one would discern this at an individual level is complicated.

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  14. From this Unitedstatesian's perspective, it would seem that if Zambia alone attempted to confront the world's economic powers to provide propitious circumstances for its development, it would certainly fail...

    Unity among many would be required.

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