Title: Kicking Away the Ladder: Development Strategy in Historical Perspective
Author: by Ha-Joon Chang
Scope: 3.5 stars
Readability: 4 stars
My personal rating: 5 stars
See more on my book rating system.

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Topic of Book

The author overviews the history of Industrial nations to see if they followed the current “Washington Consensus” that is currently proposed for developing nations.

My Comments

While I do not believe that Chang really identifies which government policies promote economic development, he makes a compelling case that Western nations used government to sponsor economic growth in the past so it is hypocritical for them not to allow developing nations to do the same.

Key Take-aways

• The policies that Western nations promote for developing nations differ radically from what they did themselves to promote their own industrialization.
• It was only after they industrialized that Western nations became proponents of free trade.
• Institutional reform came largely after economic growth started, so it was not a cause.
• Just before and during the Industrial Revolution, Britain followed mercantilist policies rather than laissez faire. Pre-Industrial Britain favored domestic manufacturing over imports.
• The United States throughout the 19^th Centuries had very high tariffs on industrial goods.
• Germany, France, Sweden and Japan all practiced substantial amounts of government intervention in the economy during their periods of early economic growth.
• Before the mid-1800s the most important means of catch up was the migration of skilled laborers to poorer countries. Many governments actively sponsored this and the British government tried to stop it.
• From then on, an active transfer by the owner of technological knowledge through the licensing of patents emerged as a key channel of technology transfer in a number of industries

Important Quotes from Book

There is currently great pressure on developing countries from the developed world, and the international development policy establishment that it controls, to adopt a set of ‘good policies’ and ‘good institutions’ to foster their economic development.1 According to this agenda, ‘good policies’ are broadly those prescribed by the so-called Washington Consensus. They include restrictive macroeconomic policy, liberalization of international trade and investment, privatization and deregulation.2 The ‘good institutions’ are essentially those that are to be found in developed countries, especially the Anglo-American onesl The key institutions include: democracy; ‘good’ bureaucracy; an independent judiciary; strongly protected private property rights (including intellectual property rights); and transparent and market-oriented corporate governance and financial institutions (including a politically independent central bank).

This book pieces together various elements of historical information which contradict the orthodox view of the history of capitalism, and provides a comprehensive but concise picture of the policies and institutions that the developed countries used when they themselves were developing countries. In other words, what this book is asking is: ‘How did the rich countries really become rich?’

The short answer to this question is that the developed countries did not get where they are now through the policies and the institutions that they recommend to developing countries today. Most of them actively used ‘bad’ trade and industrial policies, such as infant industry protection and export subsidies – practices that these days are frowned upon, if not actively banned, by the WTO (World Trade Organisation). Until they were quite developed (that is, until the late nineteenth to early twentieth century), they had very few of the institutions deemed essential by developing countries today, including such ‘basic’ institutions as central banks and limited liability companies.

The nineteenth-century German economist Friedrich List (1789-1846) is commonly known as the father of the infant industry argument, namely, the view that in the presence of more developed countries, backward countries cannot develop new industries without state intervention, especially tariff protection. His masterpiece, The National System of Political Economy, was originally published in 1841.

List then goes on to argue that free trade is beneficial among countries at similar levels of industrial development (which is why he strongly advocated a customs union among the German states — Zollverein), but not between those at different levels of development.

My main conclusion is that many of the institutions that are these days regarded as necessary for economic development were actually in large part the outcome, rather than the cause, of economic development in the now developed countries.

Britain

Henry VII … was deeply impressed by the prosperity in the Low Countries based on wool manufacturing, and from 1489 onwards he put in place schemes to promote British wool manufacturing. The measures used included sending royal missions to identify locations suited to wool manufacturing,20 poaching skilled workers from the Low Countries,21 increasing duties on, and even temporarily banning the export of, raw wool.

The 1721 reform of the mercantile law introduced by Robert Walpole, the first British Prime Minister, during the reign of George I (1714-27) signified a dramatic shift in the focus of British industrial and trade policies.

In contrast, the policies introduced after 1721 were deliberately aimed at promoting manufacturing industries. What is very interesting to note here is that the policies introduced by the 1721 reform, as well as the principles behind them, were uncannily similar to those used by countries like Japan, Korea and Taiwan during the postwar period, as we shall see below.

Although there was a round of tariff reduction in 1833, the big change came in 1846, when the Corn Law was repealed and tariffs on many manufacturing goods abolished.

Symbolic though the repeal of Corn Law may have been, the real shift to free trade only happened in the 1850s. It was only after Gladstone’s budgets of the 1850s, and especially that of 1860, in conjunction with the Anglo-French free trade treaty (the so-called Cobden-Chevalier Treaty) signed that year, that most tariffs were eliminated.

Moreover, the free-trade regime did not last long. By the 1880s, some hard-pressed British manufacturers were asking for protection. By the early twentieth century, reintroduction of protectionism was one of the hottest issues in British politics, as the country was rapidly losing its manufacturing advantage to the USA and Germany: testimony to this was the influence of the Tariff Reform League, formed in 1903 under the leadership of the charismatic politician Joseph Chamberlain.The era of free trade ended when Britain finally acknowledged that it had lost its manufacturing eminence and re-introduced tariffs on a large scale in 1932.

United States

Many point out that it was Alexander Hamilton, in his Reports of the Secretary of the Treasury on the Subject of Manufactures (1791), and not Friedrich List as is often thought, who first systematically set out the infant industry argument.

In his Reports, Hamilton argued that competition from abroad and ‘forces of habit’ would mean that new industries that could soon become internationally competitive (‘infant industries’)58 would not be started in the USA, unless their initial losses were guaranteed by government aid. This aid, he said, could take the form of import duties or, in rare cases, prohibition of import.59 It is interesting to note that there is a close resemblance between this view and that espoused by Walpole… In turn, it should also be noted that both the Walpolean and the Hamiltonian views are remarkably similar to the view that lies behind East Asia’s postwar industrial policy.

It was only after the Second World War that the USA – with its industrial supremacy unchallenged – finally liberalized its trade and started championing the cause of free trade.

Bairoch points out that, throughout the nineteenth century and up to the 1920s, the USA was the fastest growing economy in the world, despite being the most protectionist during almost all of this period.88 There is also no evidence that the only significant reduction of protectionism in the US economy, between 1846 and 1861, had any noticeable positive impact on the country’s development. Most interestingly, the two best 20-year GDP per capita growth performances during the 1830-1910 period were 1870-1890 (2.1 per cent) and 1890-1910 (two percent) – both periods of particularly high protectionism.

France

As with Germany, there is an enduring myth about French economic policy. This is the view, propagated mainly by British Liberal opinion, that France has always been a state-led economy — a kind of antithesis to laissez-faire Britain. This characterization may largely apply to the pre-Revolutionary period and to the post-Second World War period; it does not however apply to the rest of the country’s history.

After the fall of Napoleon, the laissez-faire policy regime became firmly established, and persisted until the Second World War. The limitations of this regime are regarded by many historians as one of the major sources of the country’s relative industrial stagnation during the nineteenth century.

The French government was almost as laissez-faire in its attitude towards economic matters as the then very laissez-faire British government, especially during the Third Republic.

It was only after the Second World War that the French elite was galvanized into reorganizing their state machinery in order to address the problem of the country’s relative industrial backwardness.

Sweden

However, from about 1830 onward, protection was progressively lowered.A very low tariff regime was maintained until the end of the nineteenth century, especially after the 1857 abolition of tariffs on foodstuffs, raw materials, and machines.As table 2.1 shows, around 1875 Sweden had one of the lowest tariff rates of any of the major economies listed.

This free-trade phase, however, was short-lived. From around 1880 Sweden started using tariffs as a means of protecting the agricultural sector from the newly-emerging American competition. After 1892 (until when it had been bound by many commercial treaties) it also provided tariff protection and subsidies to the industrial sector, especially the newly-emerging engineering sector.143 As we can see from table 2.1, by 1913 its average tariff rate on manufactured products was among the highest in Europe. Indeed, according to one study conducted in the 1930s, Sweden ranked second after Russia among the 14 European countries studied, in terms of its degree of manufacturing protection.

Japan

Moreover, the Meiji state tried to import and adapt from the more advanced countries those institutions that it regarded as necessary for industrial development… The criminal law was influenced by the French law, while the commercial and civil laws were largely German, with some British elements. The army was built in the German mould (with some French influence), and the navy in the British. The central bank was modelled on the Belgian one, and the overall banking system on the American. The universities were American, and the schools initially American but quickly changed to the French and German models, and so on.

Here we can find some parallel between Japan after 1911, on the one hand, and Germany and Sweden in the late nineteenth and early twentieth centuries, on the other hand. All of them used ‘focused’ tariff protection, whereby the overall tariff regime remained moderately protective but strong protection was accorded to some key industries, rather than the ‘blanket’ protection used by countries such as the USA, Russia and Spain at the time.

Despite some lingering disagreements, there is now a broad consensus that the spectacular growth of these countries, with the exception of Hong Kong, is fundamentally due to activist industrial, trade and technology (ITT) policies by the state.

Britain instituted a strong set of policies intended to prevent the development of manufacturing in the colonies, especially America.

Outside the formal colonies, the British (and other NDCs’) attempts to impede the development of manufacturing in less developed countries mainly took the form of imposing free trade through so-called ‘unequal treaties’ during the nineteenth century. These treaties normally involved the imposition of tariff ceilings, typically at the five per cent flat rate, and the deprivation of tariff autonomy.

Until the mid-nineteenth century, when the machinery came to embody key technologies, the most important means of technological transfer was the movement of skilled workers, in whom most technological knowledge was then embodied. As a result, the less advanced countries tried to recruit skilled workers from the more advanced countries, especially from Britain, and also to bring back nationals who were employed in establishments in these countries. This was often done through a concerted effort orchestrated and endorsed by their governments – while the governments of the more advanced countries tried their best to prevent such migration.

Despite all these efforts, legitimate and illegitimate, technological catching-up was not easy. As the recent literature on technology transfer shows, technology contains a lot of tacit knowledge that cannot easily be transferred. This problem could not even be solved by the importation of skilled workers, even in the days when they embodied most of the key technologies. These people faced language and cultural barriers, and more importantly did not have access to the same technological infrastructure as they had at home.

By the middle of the nineteenth century, the key technologies had become so complex that the importing of skilled workers and machinery was not enough to achieve command over a technology.

From then on, an active transfer by the owner of technological knowledge through the licensing of patents emerged as a key channel of technology transfer in a number of industries.

“What is notable is that, despite the emergence of an international IPR regime in the last years of the nineteenth century, even the most advanced co

My discussion in this chapter reveals that almost all NDCs had adopted some form of infant industry promotion strategy when they were in catching-up positions. In many countries, tariff protection was a key component of this strategy, but was neither the only nor even necessarily the most important component in the strategy. Interestingly, it was the UK and the USA, the supposed homes of free trade policy, which used tariff protection most aggressively (see untries were still routinely violating the IPR of other countries’ citizens well into the twentieth century.

Contrary to popular myth, Britain had been an aggressive user, and in certain areas a pioneer, of activist ITT policies intended to promote infant industries until it established its industrial hegemony so clearly in the mid-nineteenth century and adopted free trade.

One important fact that has emerged from my discussion in this chapter is that the NDCs shifted their policy stances according to their relative position in the international competitive struggle. Part of this is deliberate ‘ladder-kicking’, but it also seems to be due to natural human tendency to reinterpret the past from the point of view of the present.

When they were in catching-up positions, the NDCs protected infant industries, poached skilled workers and smuggled contraband machines from more developed countries, engaged in industrial espionage, and wilfully violated patents and trademarks. However, once they joined the league of the most developed nations, they began to advocate free trade and prevent the outflow of skilled workers and technologies; they also became strong protectors of patents and trademarks. In this way, the poachers appear to have turned gamekeepers with disturbing regularity.

There was a considerable degree of diversity among the NDCs in terms of their policy mix, depending on their objectives and the conditions they faced.

It took the NDCs decades, if not centuries, to develop institutions from the time when the need for them began to be perceived.

The diffusion of new institutions from innovating countries to the rest of the NDCs also took a considerable time.

When it comes to the time period between an institutional innovation and its adoption as an ‘international standard’ among the NDCs (i.e., with the vast majority of countries espousing it), we are not even talking in decades but in generations.

What is even more pertinent here is the fact that, in general, the NDCs were institutionally much less advanced in those times than the currently developing countries are at similar stages of development.

The comparison shows that, in the 1820s, most of the NDCs were, broadly speaking, at a level of development somewhere between Bangladesh ($720 per capita income) and Egypt ($1,927 per capita income)…  By 1875, most NDCs had moved beyond the Nigeria-India level of income, but even the richest ones (the UK, New Zealand and Australia) were at the level of today’s China ($3,098) or Peru ($3,232)…   By 1913, the wealthiest NDCs (the UK, the USA, Australia and New Zealand) had reached the level of the richer of today’s developing countries (for example, Brazil, Mexico, Colombia and Thailand).

The picture that emerges from our historical survey seems clear enough. In trying to catch-up with the frontier economies, the NDCs used interventionist industrial, trade and technology policies in order to promote their infant industries. The forms and emphases of these policies may have been varied according to different countries, but there is no denying that they actively used such policies. In relative terms (that is, taking into account the productivity gap with the more advanced countries), many of them actually protected their industries far more strongly than the currently developing countries have done.

If this is the case, the currently recommended package of ‘good policies’, which emphasizes the benefits of free trade and other laissez-faire ITT policies, seems at odds with historical experience. With one or two exceptions (e.g., the Netherlands and Switzerland), the NDCs did not succeed on the basis of such a policy package. The policies they had used in order to get where they are now – that is, activist ITT policies – are precisely those that the NDCs say the developing countries should not use because of their negative effects on economic development.

The plain fact is that the Neo-Liberal ‘policy reforms’ have not been able to deliver their central promise – namely, economic growth.

Most of the institutions that are currently recommended to the developing countries as parts of the ‘good governance’ package were in fact the results, rather than the causes, of economic development of the NDCs. In this sense, it is not clear how many of them are indeed ‘necessary’ for today’s developing countries.

All the above figures suggest that improving the quality of their institutions is an important task for developing countries wanting to accelerate their economic growth and development. However, two significant qualifications need to be made.

First of all, in pushing for institutional improvement in developing countries, we should accept that it is a lengthy process and be more patient with it.

The second qualification I wish to make is that ‘good’ institutions produce growth only when they are combined with ‘good’ policies. As the reader can probably guess, when I say ‘good’ policies here, I mean the policies that most NDCs were using when they were developing, rather than the ones that they are now recommending to the developing countries.

In terms of policies, I would first of all argue for a radical change to the policy-related conditionalities attached to financial assistance from the IMF and the World Bank or from the developed country governments.

Second, the WTO rules and other multilateral trade agreements should be rewritten in such a way that a more active use of infant industry promotion tools (e.g., tariffs and subsidies) is allowed.

If you would like to learn more about how nations transform from poverty to wealth, read my book From Poverty to Progress.