What They Don’t Tell You About Capitalism
Interview with Ha-Joon Chang
Ha-Joon Chang is one of the world’s leading development economists. Currently professor in the faculty of politics and economics at Cambridge University, he has served as a consultant to the World Bank, the Asian Development Bank and the European Investment Bank as well as to Oxfam and various United Nations agencies. He is the author of a number of critically acclaimed books, including ‘23 things they don’t tell you about capitalism (2010)‘, ‘Kicking Away the Ladder: Development Strategy in Historical Perspective’, and ‘Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism’. In the interview with The European Financial Review, he answered some of the most important questions on the history of capitalism, the free market myth, his views the effect of neo-liberal economics on the world’s poorer countries, and the future of the world system and international development.
1. Looking back over economic history, how did rich countries get rich, and why are poor countries poor? What is free market myth? Is there better models/policies for economic development?
The common myth is that today’s rich countries got rich through free-market, free-trade policies while today’s poor countries are poor because they have not used such policies.
However, starting from 18th-century Britain, through to 19th-century US, Germany, and Sweden, to late 20th-century France, Norway, Finland, Japan, South Korea, and Taiwan, most of today’s rich countries have not become rich through free-market, free-trade policies. They used trade protectionism, subsidies, regulation on foreign investment, and other policy measures that are intended to protect and nurture their ‘infant industries’ against superior foreign competitors from abroad. Having practiced free trade most of the time, the Netherlands and Switzerland are partial exceptions to this, but even they do not fit today’s orthodoxy, as these countries refused to protect patents until the early 20th century.
Moreover, during the 1960s and the 1970s, when they are supposed to have pursued disastrous protectionist, interventionist development strategies, the developing countries in Africa and Latin America grew (in per capita terms) much faster than they have since the 1980s, when they are supposed to have ‘seen the light’ and adopted free-market, free-trade policies (1.6% vs. 0.2% in the case of Sub-Saharan Africa and 3.1% vs. 1.1% in the case of Latin America).
“The evidence shows that there are many different ways to run capitalism and free-market capitalism is not the only, nor even the most effective, way to run it, especially in the earlier stages of economic development.”
In other words, historical evidence does not support the popular myth that countries with freer markets do better – or at least grow faster (even if they may have high inequalities). The evidence shows that there are many different ways to run capitalism and free-market capitalism is not the only, nor even the most effective, way to run it, especially in the earlier stages of economic development.
2. What are the various ways developed nations influence the economic policies of poor countries? What’s their impact and motivations? Who has benefited?
Developed countries have exercised enormous influence on economic policies of poor countries over the last few centuries and often made them implement policies that are against their interests.
In the beginning, it was through imperialism – colonial rules and, for countries that were nominally independent (such as China, Thailand, and Turkey), unequal treaties, which deprived the weaker countries of policy autonomy, especially in relation to tariff setting. The most prominent example of such unequal treaties was the Nanking Treaty, which China was forced to sign after its defeat in the Opium Wars. When they signed unequal treaties, the weaker countries were made to fix their tariffs at a flat rate of 3-5%, thereby making it impossible for them to use tariffs as a tool to promote ‘infant industries’.
After World War II, the age of imperialism ended and developing countries in Asia and Africa started acquiring independence (the Latin American countries became independent in the early 19th century, although they were all bound by unequal treaties until the 1870s or the 1880s). Until the 1970s, a mixture of post-colonial guilt and the competition with the Soviet bloc meant that the developed countries were willing to allow quite a lot of policy freedom to the developing countries. For example, relatively few conditions were attached to their bilateral aids and to the loans from the multilateral financial organisations (like the World Bank and the IMF) that the rich countries control.
All this, however, changed from the 1980s. With the rise of neo-liberalism in the developed countries (especially the US and the UK), the fading of the post-colonial guilt conscience, and the decline of the Soviet bloc, the rich countries have increased pressure on the developing countries to adopt what they see as ‘good’ policies, namely free-market policies, comprised of liberalisation of international trade and investment, de-regulation of domestic industries, privatisation of state-owned enterprises, and (very often, although not always) opening of capital market.
These policies were forced upon the developing countries through the conditions attached to the loans by the World Bank and the IMF. Conditions attached to bilateral foreign aid were also used to strengthen free-market policies in developing countries. In 1995, the World Trade Organisation (WTO) was launched and was used to push for further trade liberalisation in developing countries.
There was a mixture of motives behind the push for free-market policies by the developed countries. Some actors pursued it out of self-interest – corporations seeking to gain entry into new markets, for example. But others did it for more ideological reasons. Many people in the developed countries genuinely believed that their own countries developed on the basis of free-market policies and wanted the poorer countries to benefit from the same policies. Still others advocated free-market policies mainly because they were ‘going with the flow’, rather than because they had self-interest or ideological conviction in promoting it.
In the process, some people have definitely benefited in the short run – such as corporations that were able to export more, private equity funds that have been able to snap up a former state-owned enterprise at a bargain price, hedge funds which made a killing by betting against a developing country’s currency, etc.. However, I would say that, in the long run, even many of those people would have been better off if they let the developing countries use policies that are more suitable for their conditions because that would have enabled the developing countries grow faster than they have, thereby expanding export and investment opportunities. Just think whether China would have been such a great economic opportunity that it has become today, had it adopted Russian-style free-market reform instead of its gradualist approach, which made its explosive economic growth possible.
3. Why are there huge wage gaps between poor and rich countries? Can this be justified?
“Much of the wage gaps have to be explained by immigration control by the rich countries…just think whether a bus driver in Stockholm is paid 50 times more than his counterpart in New Delhi because he is 50-times more skilled. “
According to economic textbooks, the wage gaps between rich and poor countries exist basically because poor country people have much lower productivities.
However, much of the wage gaps have to be explained by immigration control by the rich countries. If you find this assertion curious, just think whether a bus driver in Stockholm is paid 50 times more than his counterpart in New Delhi because he is 50-times more skilled. If anything, the Indian driver is the more skilled one, given the conditions on Indian roads. If we had free international migration, the Swedish bus driver, and indeed 80-90% of the workforce in the rich countries, can be, and will be, replaced by immigrants from poorer countries. Most people in rich countries get the wages they do now only because they exclusively share their labour market with some very productive people, who outperform their counterparts in the developing countries by hundreds, or even thousands, of times.
On the one hand, this kind of wage gap cannot be justified – how can you have two people doing the same job with equal efficiency being paid wages that are 20, 50, or even 100 times different. On the other hand, it would be wrong to jump from this observation to the conclusion that a full-scale liberalisation of international migration is the solution to world’s poverty. Apart from the fact that there are too few rich countries that are able to absorb all immigrants from poor countries and provide all of them with decent standards of living, such solution will create an absolute chaos, by creating strains on physical infrastructure, undermining the very notions of nationhood, and most likely leading to armed conflicts between the ‘natives’ and the ‘migrants’. The solution to world poverty should be in creating an environment where poor countries can develop faster by using policies that are appropriate to them.
“The solution to world poverty should be in creating an environment where poor countries can develop faster by using policies that are appropriate to them.”
4. What do you see for the future of poor countries under the current world system? What do you think the international community should do to help poor countries out of poverty?
It has been difficult enough for the developing countries to protect and nurture their infant industries under the current world system, perfected in 1995 with the launch of the WTO.
However, even after that, the developed countries have pushed for more and more liberalisation and opening-up on the part of the developing countries. For example, in the Doha Round of the WTO negotiations, they have pushed for a dramatic reduction in industrial tariffs in the developing countries. For another example, the US and the EU have been promoting bilateral ‘free-trade’ agreements with developing countries, which are ‘WTO-plus’ in their liberalisation requirements.
Fortunately, things are changing – albeit slowly. Some of this was already coming – for example, the Doha Round negotiations have been stalled for several years because the rich countries have demanded far too much from the developing countries. However, the 2008 financial crisis has done a lot to change the international mood. While it has not persuaded all – or even the majority – of the believers in the free international movement of capital, the crisis has somewhat deflated the enthusiasm for free-market policies and, importantly, changed the IMF’s position on this issue (from total support for capital market opening to the encouragement of the partial use of capital control).
International community can help developing countries above all by expanding the ‘policy space’ in which those countries can pursue policies that are more suitable to their abilities and needs.
5. In your view, what makes good capitalism? Can you give us some examples in terms of countries or policies? What is your view on the planned economy?
There can be no single answer to ‘what makes good capitalism?’, because everyone has different values. For me, the first virtue of capitalism is its ability to create wealth and cater for diverse consumer demands. The common belief is that this ability of capitalism is maximised when we maximise the degree of freedom in the market, but this is not true. In the long run, the ability of capitalism to maximise wealth is enhanced by appropriate regulations – for example, restrictions of activities that maximise short-term profits at the costs of long-term growth and stability, as we have seen in the 2008 global financial crisis.
Good capitalism also has to ensure that everyone in the society has a decent life – in terms of material standards of living, job security, and social welfare provision (especially childhood support, healthcare and old-age pension). Living in excessively unequal society makes even the lives of the rich also unpleasant. For example, in some Latin American countries, kidnapping rich businessmen has become a booming business and many businessmen have to travel in armoured cars with bodyguards.
6. What impacts do you think the rise of China will have on the world economy and economic policies? If China had followed the free market policy, what would the Chinese economy look like today?
When talking about the rise of China, we have to remember that it is still a poor country. Its economy may have become, at least on some estimate, the second biggest in the world, but that is in large part due to the sheer size of its population and its per capita income is still only around 1/20th that of countries like the US and Sweden (around $2,300 against around $46,000, as of 2007).
“China has now become a major donor and investor, and this, at least for the moment, has given other developing countries unexpected bargaining power vis-à-vis the developed countries. “
China has now become a major donor and investor, and this, at least for the moment, has given other developing countries unexpected bargaining power vis-à-vis the developed countries. Unlike in the 1980s and the 1990s, if they are not happy with the terms of the loans and aids that they are being given, these countries now can credibly threaten the IMF, the World Bank, and the rich donor countries that they will talk to the Chinese, who tend not to attach so many conditions to their loans and aids. Of course, I am not saying that China is an angel. It also pursues its own interests and it is possible that it begins to attach more conditions as it becomes more powerful. However, at the moment it is acting as a positive force from the point of view of other developing countries.
One reason why China may not attach so many conditions is probably because, in its transition away from Communism, it has succeeded with its own approach, rather then by following the dominant (free-market) recipe promoted by the rich countries and the international financial institutions.
Compared to the late 1970s, when Deng Xiaoping came to power, the Chinese economy is something like 10 times bigger than it was. Had China followed the free-market model, it would have gone through the collapse and the chaos like the Soviet Union and the Eastern European countries did, when they implemented their ‘big bang’ market reform in the early 1990s.
7. How can we rebuild the world economy after the crash of 2008? What are the lessons we can learn from this financial crisis? What economic theories should be fundamentally re-examined? How can economists help?
The 2008 financial crisis has shown us, at the most general level, that free-market capitalism does not work. More specifically, it has shown us how the unchecked explosion of complex financial products in the last two, three decades have completely overwhelmed our ability to control our economy.
“The fundamental premises of the neo-classical economic theory need to change and other schools of economics that have more nuanced understanding of human motivation and economic behaviour need to be taken more seriously.”
In creating the free-market ideology (or rather updating the 19th-century free-market ideology), the dominant neo-classical economic theory has played a key role. By starting from the premises that human beings are fully rational and fully selfish, the theory leads to the conclusion that leaving things to the market is the best policy, as the market participants know what they are doing. The fundamental premises of this theory need to change and other schools of economics that have more nuanced understanding of human motivation and economic behaviour – such as the post-Keynesian school, the Behaviouralist school, and the Institutionalist school – need to be taken more seriously.
This article was first published in The European Financial Review February/March 2011 edition.
About the author
Born in South Korea, Ha-Joon Chang is a specialist in development economics and Reader in the Political Economy of Development at the University of Cambridge. In 2005, Chang was awarded the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. He is author of Kicking Away the Ladder: Development Strategy in Historical Perspective (2002), which won the 2003 Gunnar Myrdal Prize; Bad Samaritans: Rich Nations, Poor Policies and the Threat to the Developing World (2007), and 23 things they don’t tell you about capitalism (2010).