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Review of: Ha-Joon Chang, Bad Samaritans:The Myth of Free Trade
Raymond Richman, 2/21/2010

Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History  of Capitalism (New York, Bloomsbury Press, 2008)

 If you are a skeptic and believe economics cannot be a science, or if you are a Marxist, or just hate America or capitalism, or you believe your country’s backwardness is all the fault of the Americans and Europeans, or all of the above, this is the book for you. The author attacks what he describes as neo-liberal economic beliefs, the principal belief being the advantages of “free trade”. He describes himself as an economist but not a “neo-liberal” economist. If he is not a neo-liberal economist, what kind of economist is he? Neo-liberal is not an economic term but a political one, like calling economists by the policies they recommend. You are a Keynesian or non-Keynesian, a Marxist, a neo-classicist, a free trader, or, God-forbid, a protectionist in a rich country. The author’s thesis is that it is all right to be a protectionist in a poor country.

When it suits his purpose, which is frequent, he cites historical examples to show that the western industrial countries never followed a policy of free trade until they had achieved a position of industrial dominance. As he writes, the British were not above using force in the opium wars to force China to open its market to Indian opium. We want to note however that today, under U.S. leadership, the Western industrial countries are pursuing the opposite policy, closing our market to imports of cocaine and of heroin, even using armed forces to eradicate poppies in foreign fields. How long ago it seems when we sang, In Flanders’ fields the poppies grow among the crosses row on row…

In Mr. Chang’s view nothing that the western countries have ever done was for the benefit of under-developed countries; everything was done to keep them from industrializing. He writes that the real history of the development of East Asia begins with Hong Kong becoming a British colony after the Treaty of Nanking in 1842 as a result of the opium war. The British Imports of tea from China had to be paid for so Britain started exporting opium from India to China. This “first episode of globalization” was made possible by military might, is the author’s insight.

Mr. Chang argues that economic development requires undeveloped countries to employ protective tariffs. This is nothing but an extension of the old economic infant-industry argument; an industry has to be protected until it is able to survive competition from abroad. Too often it never is able to get rid of the tariff. Unbelievably, Japan has tariffs on automobiles. Likewise, in the author’s beloved Korea in spite of the huge exports of Hyundai and Kia.

According to him, after WWII, the world economy was re-organized on a liberal line under American hegemony. Trade liberalization took place under the GATT (General Agreement on Tariffs and Trade) Agreements which resulted in 1995 in the creation of the World Trade Organization (WTO) .    

Had Japan followed the prescription of free market economic orthodoxy after WWII, there would have been no Lexus. “Toyota today would, at best, be a junior partner to some western car manufacturer, or worse, have been wiped out.”  

In his view, the role of the World Bank and the IMF has changed to include intervention in the domestic policies of the emerging countries. The WTO has become a tool to “pry open markets for transnational corporations.” Fortunately, in his view, Japan and other East Asian countries developed through nationalistic policies, using protection, subsidies, foreign ownership ceilings and local contents requirements. In our view, these are all mercantilistic practices and these countries developed primarily at the expense of U.S. industry. Chang does not mention the huge trade deficits that the U.S. has been experiencing during the past three decades with Japan, China, Korea, and other E. Asian countries, with Japan and Germany for five decades, deficits which reached $800 billion in 2008, the equivalent of 8 million industrial jobs, with resulting loss of industries, wage stagnation, and a worsening distribution of income in the U.S.  Too many American political leaders, advised by their “neo-liberal” American economists, believed in free trade, even unilateral free trade, so deeply that it blinded them to the horrendous consequences of free trade when it is not reciprocated. Our own book, Trading Away Our Future (Ideal Taxes Assn, 2008, warned of the negative consequences to us of the anti-free trade practices of our trading partners.

The author claims that the “ Bad Samaritans”, i.e., the U.S. and Europe,  are wrong in relation to other key areas of economic policy – international trade, foreign investment regulation, privatization, protections of intellectual property rights, like patents, and macroeconomic policy.

The author correctly points out that foreign financial investment, capital flows, go into and out of developing countries at precisely the wrong periods of the cycle. They were the principal cause of the real estate and stock bubbles of the 1990s that caused the Asian Tigers economies to collapse in the late 1990s. And the following Brazilian, Russian, Mexican, and Argentinian defaults on their international obligations. There is even a current danger of a collapse of the US dollar resulting from capital flows to the U.S. from China, Japan, and OPEC countries.   

Mr. Chang argues that democracy and economic progress are basically unrelated.  He calls Prof. John Kenneth Galbraith "one of the most profound economic thinkers" -- some of us do not regard him so highly – who was disappointed that Communism failed to build the egalitarian society it had promised. Communism was egalitarian; it was not efficient! Chang writes about state-owned success stories, Singapore airlines, Embraer of Brazil (run by an admiral), Petrobras of Brazil (so successful, it is mostly private now),  and successful government ownership of many firms. He writes, “ We do not hear much about their successes.”  We don’t hear much about their failures either which are often hidden in the budgets of governments.

He writes about the “pitfalls of privatization” like corruption, high prices, etc. He does not write about the successes of privatization. We, too, agree that privatization is often carried to extremes like privatization of highways which has no economic justification.  Our view is that governments should do only what the private sector cannot do, won’t do, or cannot do as well. These are almost entirely so-called “public goods” to which access cannot be denied or a charge levied

Chang objects to protecting patent rights. Patents, he says, are not always necessary to promote investment. They result in high prices that poor nations cannot afford.  The prices should be regulated and patent abuses should not be tolerated. We agree only that governments should not tolerate abuses that lengthen patent periods nor should patent monopolies be granted lightly.

Chang asks, “Can financial prudence go too far?” Neo-liberals (again!) see inflation as the number one problem; they call it a tax. As Chang sees it, inflation is not only not necessarily harmful, but a rate as high as forty percent may even be compatible with rapid growth and employment creation. But we believe not with stability. It appears to us that a country should err on the side of policies that stimulate the economy even if that means inflation of two or three percent or so but, when it exceeds that, the danger of losing control and of inflation zooming into hyperinflation is very great. In general, the answer is no; by definition  prudence should characterize monetary and fiscal policy.

Is democracy and a free market essential to economic progress? No, he says, citing  progress made by Chile under the Pinochet dictatorship. Neo-liberals(!!), he writes, believe democracy and free markets support one another and promote economic development. “Leaving aside for the moment the question as to whether the free market is the best vehicle for economic development (to which I have repeatedly said no throughout this book. can we at least say that democracy  and (free) markets are, indeed, natural partners and reinforce each other? The answer is no.”

Free markets require a system of property rights. Under authoritarianism and totalitarianism, property rights can be ignored. Germany under Hitler and Italy under Mussoline achieved some efficient enterprises but national socialism in neither country lasted long enough to prove the progress was sustainable. The USSR, which had the same system for seventy years, could be cited as evidence that such economies were not sustainable. Communist China, too, was teetering on the brink of failure but had the good sense before it collapsed to embrace a market system but not a free market system.  We’ll have to wait to see whether it is sustainable. The U.S. and England embraced democracy, a system of laws, and a largely market system for two centuries or more. Free markets are evidently sustainable.

Mr. Chang asks finally, “Are some cultures incapable of economic development?” As he points out, culture is hard to define. Even within countries, there can be more that one culture, more than one religion, each with different attitudes toward work, interest, profits, equality, and the law respecting property. As he points out, culture is not immutable. But changes in ideology have to be accompanied by changes in politics and institutions that can sustain desired behaviors over long periods. We agree.

We disagree with most of his non-neoliberal economics. But also disagree with the great majority of American economists who espouse free trade instead of balanced trade, especially when the free trade is not reciprocated. We believe in balanced trade over time. We are unhappy with the U.S. failure to insist on reasonably balanced trade with China, Japan, Germany, and the OPEC countries with which the U.S. has been experiencing huge trade deficits for decades.   

We disagree with the author’s argument that the playing field must be tilted in favor of the underdeveloped countries. At least so far as China, Japan, and Korea are concerned, we have leaned over backwards too far. We are in danger of falling ourselves. It is time to insist on reasonably balanced trade with all our principal trading partners.

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Comment by M Umar Zahid, 2/24/2010:

I need a help because I want to do research work on trade specially in the feild of trade liberallization and economic and industrial growth for the developing countries.

 

zaman@fpcci.com

 

Regards

Response to this comment by Howard Richman, 2/24/2010:
Maybe you would find our book Trading Away Our Future (2008) to be helpful.




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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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