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Eight years ago, in "The Next American Nation", Michael Lind terrified Americans with the threat of "ever-increasing low-wage, high-skill competition" from the third world, to which free-traders allegedly had "no answer." But after this menace failed to materialise, Lind changed his tune. Developing countries, far from being hypercompetitive are, in fact, unable to compete with rich countries, he now argues (Prospect, January 2003).

At least he is consistent about one thing. He pins the blame on free trade, which he dismisses as utterly "discredited." But in fact, it is Lind’s views that are-or should be-discredited.

Lind’s argument is this. Developing countries that adopt free trade are failing to prosper, let alone catch up with rich ones. Most enjoyed much faster economic growth in the more interventionist 1960s and 1970s than in the more liberal 1980s and 1990s. In order to catch up with the rich world, newly industrialising countries ought to protect their infant industries-as Britain, the US, Germany, Japan and others once did. More broadly, Lind is disdainful of mainstream economic analysis, appealing instead to the lessons of history. But his grasp of history is as shaky as his knowledge of economics.

Lind ascribes the rapid development of the US, Germany and others in the latter half of the 19th century and the first half of the 20th to protectionist policies inspired by Friedrich List’s ideas about economic nationalism. He quotes various statesmen who believed in protectionism and points to various protectionist measures countries employed, and deduces from this that those measures are responsible for their countries’ development.

But the true historical picture is different. The main reason why Britain, followed by the US and northern Europe, developed so fast in the 19th century was the rapid pace of technological innovation. Free trade (adopted by nearly all countries bar the US) provided an added boost during the long boom from 1850 to 1875. Free capital flows were important too: British savings financed the development of the new world. America’s openness to European workers was also crucial; around 35m Europeans set sail for the resource-rich and labour-scarce US in the century after 1820. Lind’s claim-that protectionism explains how America and others got rich in the 19th century-does not stand up.

Nor does his contention that the raising of trade barriers that began in the late 19th century, gathered pace in the early 20th and culminated in the full-blown protectionism of the 1930s was not as catastrophic as people think. The collapse in trade and investment in the 1930s, and the consequent slide into depression, suggest otherwise.

Lind argues that while developing countries are industrialising, they should protect their budding businesses and only adopt free trade later. For sure, there is a respectable theoretical case for limited, and temporary, government support to infant industries: that companies learn by doing, that the technical knowledge they acquire spills over to other local businesses, and that inefficient capital markets may fail to finance these young companies at competitive rates. But in practice, governments have a dismal record at picking winners. Typically, they favour powerful lobbies, not the dynamic upstarts that become world-beaters. Even those with unusual foresight rarely provide would-be winners with an incentive to become competitive, because their pledges to keep support temporary do not typically prove to be credible. Moreover, if the root of the problem is deficient capital markets, governments ought to target their policies at fixing financial flaws, rather than taxing consumers and setting companies the wrong price incentives by imposing import barriers.

In the real world, protectionism does not aid development. It is true that some developing countries grew faster in the 1960s and 1970s than in the generally more liberal 1980s and 1990s. But that is not an argument against liberal economics. In each and every decade, countries that pursued free trade grew faster than more protectionist ones. Whereas developing countries with open economies are catching up with rich ones, those with closed economies are falling further behind. A trip to Bangalore in India, the countryside around Ho Chi Minh City in Vietnam, China’s coastal regions or Ciudad Juárez on Mexico’s border with the US provides ample evidence of this. Statistics confirm it: whereas income per person rose by only 1.4 per cent a year on average in the 1990s in developing countries that are turning their backs on globalisation, it soared by 5 per cent a year in those that are embracing it. Rich-country incomes rose by 2.2 per cent a year.

Even so, Lind contends that it is right to support a high-tech manufacturing sector "in the interests of national security, economic independence and economic diversification." In essence, individual aspirations for a better life should be subjugated to the national interest, as defined by government elites. But is that what poor people in poor countries want? And if so, are governments capable of delivering it? The rusting hulks of abandoned state-sponsored steel factories in Ghana and elsewhere suggest not.

Lind concedes that import substitution failed in many countries, including Argentina and India, but argues that it succeeded in others, such as South Korea. Even by his logic then, protectionism is no panacea. More importantly, a closer look at South Korea’s record shows that most of its growth came from the industries where it had a comparative advantage, like shoes and electrical goods, rather than from government-directed heavy industries. Good government was crucial to South Korea’s development. But its vital contribution was in prioritising education, making it easy for companies to import the inputs and technologies they needed for export, encouraging people to save and helping companies to invest-not in pursuing import substitution. Crucially, where the South Korean government provided cheap loans to companies, it ensured that the money was invested productively by cutting off funds to companies that were not successful exporters. Indirectly, the market, not the government, picked winners.

Lind concludes by calling for developing countries to have a choice in selecting a development strategy. Quite right-and they do. It is true that IMF programmes may stipulate certain policies that, although often good for the economy, trample on a country’s right to decide for itself. But countries are not forced to sign up to these agreements. Nor are WTO rules foisted upon them: developing countries only make the policy commitments that they choose to and are, in any case, granted special and differential treatment. More to the point, it is simply untrue that developing countries are aching to pursue import-substitution polices but are prevented from doing so. Many, such as India, have mistakenly done so in the past and have now seen the error of their ways.

None of this is to deny that rich countries are hypocrites. They are often prone to an economic nationalism that protects lobbies-agro-industry, steelworkers, textile magnates-at the expense of the wider good. The global intellectual-property rules they support are self-serving. But that rich countries’ actions are not as liberal as their words is a tar on their governments, not liberal ideas themselves.

Posted 01 Feb 2003 in Published articles

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