We have been sold a narrative about the relationship between democracy and the “free market” that has captivated both political parties and the business class in the United States.
It goes something like this: True democracy supports a free market, and free markets are, of course, the key factor in economic development. So, therefore, democracy and the market are allies in the development of a healthy society.
Ha-Joon Chang, in his book Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, argues that this narrative is false, on both counts.
First, he makes a strong historical case that “free market” policies, today labeled “neoliberalism,” are not the optimal path toward economic development. Further, he shows that most (if not all) of today’s rich societies once violated the principles that they now preach to — and force upon — developing nations.
Chang calls this “kicking away the ladder,” a phrase originally coined by German economist, Friedrich List, who “criticized Britain for preaching free trade to other countries, while having achieved economic supremacy through high tariffs and extensive subsidies”:
[I]t is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him.
Those who “kick away the ladder” are “Bad Samaritans”: They take advantage of developing countries by insisting that they follow policies which the rich countries violated in order to get to where they are today. The Bad Samaritans’ core principle is, “do as we say, not as we do.”
Second, Chang shows that democracy and the free market are often diametrically at odds.
Democracy, he argues, operates on the principle of “one man (one person), one vote,” whereas the free market follows the principle of “one dollar, one vote.”
It follows that the free market can, and often does, work to suppress democracy by favoring the rich over the masses of the population. This fact has become overwhelmingly clear over the past several decades of American politics.
Economic Development and the Free Market
Today the United States is the foremost evangelist for the Church of the Free Market. But this wasn’t always the case.
In fact, the United States, and today’s other fierce advocate for neoliberalism, Britain, both used extensive state intervention and protectionism to allow their industries to develop, enabling them to grow strong enough to compete with other nations.
Britain and the US are not the homes of free trade; in fact, for a long time they were the most protectionist countries in the world. Not all countries have succeeded through protection and subsidies, but few have done so without them…
The best-performing economies have been those that opened up their economics selectively and gradually.
Because these two countries are incredibly rich today, it is easy for free marketeers to re-write history, claiming that the United States’ current infatuation with the free market is what allowed them to develop in the first place.
This is the false narrative that we are sold ad nauseum by both the mainstream media and political elites.
To develop, Chang argues, the United States rejected the advice of the foremost economist of the day, Adam Smith, and decided not to pursue their “comparative advantage” (at the time, production of cotton, among other things).
Instead, the US followed the guidance of Alexander Hamilton, who fiercely promoted the idea that the growing country should work to develop its industries, which should be protected from excess competition until they are ready, just as a child should not be tossed into the labor force.
Hamilton believed that it was important to shield “infant industries,” rather than exposing them to the free market, until they are fully developed and ready to compete.
In the [Report on the Subject of Manufactures], Hamilton proposed a series of measures to achieve the industrial development of his country, including protective tariffs and import bans; subsidies; export ban on key raw materials; import liberalization of and tariff rebates on industrial inputs; prizes and patents for inventions; regulation of product standards; and development of financial and transportation infrastructures.
These policies were, at least in part, implemented before, during, and long after the War of 1812, continuing through Abraham Lincoln’s presidency and the Civil War.
In short, Chang notes, Hamilton’s “infant industry programme created the condition for…rapid industrial development.”
Lincoln went on to “[raise] industrial tariffs to their highest level so far in US history.” On and on it goes.
Despite being the most protectionist country in the world throughout the 19th century and right up to the 1920s, the US was also the fastest growing economy...
It was only after the Second World War that the US – with its industrial supremacy now unchallenged – liberalized its trade and started championing the cause of free trade.
Even more recently, and most interestingly during administrations that preached the neoliberal doctrine with the most fervor, the United States has implemented extreme protectionist measures to shield itself from competition, for the purpose of accelerating development.
Ronald Reagan, perhaps the most striking example, was one of the most anti-free market presidents in history, despite his high-minded rhetoric.
So, through the protection of key industries and investment in the future rather than the pursuit of their present comparative advantage, the United States developed into the richest economy in the world. Yet today it has rewritten history, and is currently pushing free market policies onto developing economies, thus hindering their growth and demoralizing their people.
The Free Market vs. Democracy: A Bitter Fight
“For developing countries, free trade has rarely been a matter of choice; it was often an imposition from outside, sometimes even through military power.”
Chang observes throughout Bad Samaritans that free market policies do not require democracy; in fact, democracy is often a direct hindrance to these policies, as the masses tend to be opposed to their implementation.
Take the case of Chile, whose democratically elected president Salvador Allende was violently overthrown in a coup supported by the United States: while Allende was a socialist, advocating for the nationalization of key industries in order to develop the Chilean economy for the benefit of the people, Augusto Pinochet, the military dictator who took power following the coup, was a fierce free marketeer.
This is a case in which democracy and neoliberal policies clearly come into conflict. While the late neoliberal economist Milton Friedman praised Chile under Pinochet, calling it an economic miracle, the reality was far more complex.
While there was some economic growth, the population suffered. Unemployment skyrocketed, income distribution heavily favored elite sectors, the percentage of the population living in poverty dramatically increased, and there was a massive economic crash beginning in 1982; hardly a “miracle” by any rational standards (See: Economic Reforms in Chile: From Dictatorship to Democracy and Shock Doctrine: The Rise of Disaster Capitalism for more on this topic).
But it was what we have come to expect from unfettered, free market capitalism — big business and elites swim in wealth, while the majority are shafted, and crises shake the economy with startling regularity.
Chile is just one example of many. Through organizations such as the IMF, the WTO, and the World Bank, developing nations are forced into economic systems that are the opposite of what they would need to grow at any substantial rate.
Free market policies promoted by the Bad Samaritans have brought more areas of our life under the ‘one dollar, one vote’ rule of the market. In so far as there is a natural tension between free markets and democracy, this means that democracy is constrain by such policies even if that was not the intention. But there is more. The Bad Samaritans have recommended policies that actively seek to undermine democracy in developing countries.
Despite all of the flowery rhetoric, democracy does not necessarily flow from free market policies, and in many cases, the opposite is true. In order to ram through free market reforms, democracy and popular movements must be suppressed.
In other words, democracy is acceptable to neo-liberals only in so far as it does not contradict the free market; this is why some of them saw no contradiction between supporting the Pinochet dictatorship and praising democracy. To put it bluntly, they want democracy only if it is largely powerless.
Further, there are many policies that are favored by the majority of the population which would contribute to economic growth, but that are opposed by the Bad Samaritans.
For example, democracy may re-direct government spending into more productive areas – e.g., away from military spending to education or infrastructure investment. This will help economic development. As another example, democracy may promote economic growth by creating a welfare state. Contrary to the popular perception, a well-designed welfare state, especially if combined with a good retraining programme, can reduce the cost of unemployment to the workers and thus make them less resistant to automaton that raises productivity (it is not a coincidence that Sweden has the world’s highest number of industrial robots per worker).
So there should be a kind of balance, which depends upon the particulars of each situation.
Chang does not contend that all free trade is bad, or that all neoliberal policies are inherently destructive. However, if democracy is suppressed, economic development will suffer, particularly in poorer, developing countries lacking resources.
And if you believe, as Nobel Laureate Amartya Sen does, that “democracy has intrinsic value and should be a criterion in any reasonable definition of development,” the balance should favor democracy over neoliberalism.
Economic development is no simple matter. There are many factors to consider, such as resources, geography, the current economic situation, and so on. There can be no one-size-fits-all prescription, but Chang lays out a few key principles which he believes would help developing nations, thus improving the global economy as a whole.
The first is sure to enrage free market fundamentalists: Chang advises that developing economies “defy the market.”
…markets have a strong tendency to reinforce the status quo. The free market dictates that countries stick to what they are already good at. Stated bluntly, this means that poor countries are supposed to continue with their current engagement in low-productivity activities. But their engagement in those activities is exactly what makes them poor.
If they want to leave poverty behind, they have to defy the market and do the more difficult things that bring them higher incomes.
Instead of pursuing their current “comparative advantage,” developing countries must “enter difficult and more advanced industries” and protect themselves by not entering into competition too early.
Specifically, Chang argues that poor countries should acquire “higher capabilities in manufacturing,” which is what he believes “distinguishes rich countries from poor ones.”
This, of course, is not a painless process.
Investment in capacity-building can take quite a long time to bear fruit…It took Toyota more than 30 years of protection and subsidies to become competitive in the international car market, even at the lower end of it…It took the US 130 years to develop its economy enough to feel confident about doing away with tariffs. Without such long time horizons, Japan might still be mainly exporting silk, Britain wool and the US cotton.
The other principle Chang advocates is related to the above: “sacrificing certain short-term gains for the sake of raising long-term productivity (and thus standards of living) — possibly for decades.”
This is difficult advice to sell to countries in which large portions of the population are living in poverty. But every developed nation went through a period of investment in the future while “sacrificing short-term gains,” so it simply must be done by today’s developing nations as well.
The third principle is one which rich countries play an essential role in implementing. Chang argues that “the playing field” should be tilted in favor of developing countries.
Bad Samaritans argue against this notion by claiming that it is somehow unfair to allow developing countries “to use extra policy tools for protection, subsidies and regulation, as these constitute unfair competition.”
But this argument is patently absurd. The playing field is tilted already, in favor of richer nations. Because they are already rich, they can impose “free market” policies on other nations without fearing the disastrous consequences.
A level playing field leads to unfair competition when the players are unequal. When one team in a football game is, say, the Brazilian national team and the other team is made up of my 11-year-old daughter Yuna’s friends, it is only fair that the girls are allowed to attack downhill. In this case, a tilted, rather than a level, playing field is the way to ensure fair competition.
Rich countries often use the tactic of promoting a “level playing field” to justify subordinating poor countries, and giving themselves the ability to exploit their resources at will. The rich countries don’t want competition, they want an opponent that will do whatever they say.
But Chang argues that this approach is not only contrary to the interests of the poor countries, but that it hurts rich countries as well. Allowing poor countries to develop would provide “the Bad Samaritan rich countries with a vastly bigger market to exploit.”
So it benefits all to permit developing countries to use policies that violate the neoliberal dogmas. This is not special treatment, it is fairness.
In closing, Chang argues that we must break the status quo, and stop relying on “easy” answers to difficult questions.
Most of us, including myself, do bad things not because we derive great material benefit from them or strongly believe in them, but because they are the easiest thing to do. Many Bad Samaritans go along with wrong policies for the simple reason that it’s easier to be conformist.
Why go around looking for ‘inconvenient truths’ when you can just accept what most politicians and newspapers say? Why bother to find out what is really going on in poor countries when you can easily blame it on corruption, laziness or the profligacy of their people? Why go out of your way to check up on your own country’s history when the ‘official’ version suggests that is has always been the home of all virtues? —free trade, creativity, democracy, prudence, you name it.
The United States and other rich countries have to be honest about their current role in the world economy, they have to be honest about their own history and how they developed, and they have to drop the role of Bad Samaritan and allow poor countries to pursue policies that will foster development and prosperity in the long run, rather than “kicking away the ladder” and jamming neoliberal ideology down their throats.
There really is no other way.