Bad Samaritans: How Rich Country “Help” Hurts the Developing World

Source: Multinational Monitor

Ha-Joon Chang is a professor of economics at the University of Cambridge and the author of Bad Samaritans: Rich Nations, Poor Policies and the Threat to the Developing World (2007). He has consulted for various international agencies, including the United Nations, the World Bank and the Asian Development Bank. Chang is also a fellow at the Washington, D.C.-based Center for Economic and Policy Research. He is also the author of Kicking Away the Ladder: Development Strategy in Historical Perspective (2003), which won the 2003 Gunnar Myrdal Prize.

Multinational Monitor: What is a Bad Samaritan?

Ha-Joon Chang: By Bad Samaritan I mean the rich countries and the international organizations, like the IMF [International Monetary Fund], World Bank and the WTO [World Trade Organization], that are controlled by these rich countries, which collectively recommend or sometimes even impose policies that are supposed to help developing countries. These policies have never been used by the rich countries themselves, nor have they produced satisfactory results in other developing countries. The Bad Samaritans think that they are helping the developing countries, but they are actually harming them.

MM: What is a thumbnail sketch of the Bad Samaritans’ recommendations?

Chang: They have a very strong belief in the market. They say the government should minimize its involvement in the economy and adopt a free trade, free market policy. The government should impose the basic rules of the game and protect the value of the currency by keeping inflation low; the rest will basically be done by the market and the private sector. So they recommend free trade; they recommend that the government not impose any restrictions on foreign investment; they recommend privatization of state-owned enterprises; they recommend very strong anti-inflation macroeconomic policy. These are known as neoliberal or Washington Consensus policies. They are based on a strong belief that the market, if left to itself, will produce the best economic outcome.

MM: In July, WTO Members met in Geneva to negotiate something called the Doha Development Round. The core of the deal under discussion was that rich countries would open up their markets for agriculture in exchange for developing countries opening up their manufacturing markets. What’s your take on that kind of exchange?

Chang: First of all, the rich countries have repeatedly broken their promises when it comes to opening up their agriculture markets. Even if this agreement had come together, I would have wanted to see whether they actually delivered.

Second, the winners in the deal would have been producers in rich countries that export agriculture, like the United States, Australia, New Zealand and Canada, and only a few developing countries that export so-called temperate products like wheat and beef, countries like Brazil, Argentina and Uruguay. Most of the other developing countries would either not have benefited very much or may even have been hurt somewhat in this process. For example, some developing countries are net food importers and import subsidized European and American food stuffs. In the long run it might be good for Americans and Europeans not to subsidize their food, but during the transition period, it means that all of these countries are going to get access to less or more expensive food.

Third, the deal suggested that the poor countries should remain agricultural forever. The deal was that in order to receive agricultural concessions, the developing countries basically would have to abolish their industrial tariffs and other means to promote industrialization. That means the current division of labor would be frozen and the poor countries would not be able to industrialize. Unless they are extremely lucky countries with oil or some kind of rich soil condition enabling them to live comfortably on agriculture, it means that they would remain poor forever.

MM: A core theme of Bad Samaritans is the central importance of industry and manufacture in development. Why do you put such emphasis on manufacturing capacity?

Chang: This is based on observations of long-term historical trends. I’m not a religious believer in manufacturing. I recognize that there are certain agriculture and service activities that can bring high productivity. But throughout history, very few countries have built their prosperity on agriculture and services. The only cases I can think of are Argentina and New Zealand, and Argentina didn’t maintain that momentum so it isn’t a rich country anymore.

The Netherlands, despite having the third highest population density after Bangladesh and South Korea, is the third largest agricultural exporter in the world. But Dutch agriculture is basically industrial agriculture in the sense that it relies on hydroponics, very high quality fertilizer, computer-controlled feeding and so on. Without industrial development, it is very difficult to obtain high productivity agriculture.

When it comes to services, everyone from the shoe-shine boy to the investment banker is in the service sector. Excepting those few high tech services, services have very low productivity and productivity growth is very low. And even the high-value services basically live off the manufacturing sector. What do the investment bankers do? They get their fees by helping people buy and sell companies which are mostly manufacturing companies. Who do software engineers serve? They mainly serve the manufacturing companies.

It’s not because I somehow have an affinity to making things – after all, my own profession doesn’t make things – that I support the manufacturing industry. But empirically speaking, that has been the sector that has shown the highest productivity and also shown the fastest rate of technological progress and productivity growth, and the biggest spill-over impact into other sectors. It is on those grounds that I see the future of developing countries in manufacturing.

MM: There’s a general view that the closed economic systems in Latin American and Africa led to economic stagnation and failure, and the open systems in Asia led to great success. The conclusion to draw for development policy is therefore that countries should have more open economies. Why do you reject this story?

Chang: It is a myth that Latin America and Africa are necessarily more closed than Asia. For example, when it comes to investment by multinational companies, many Asian countries, such as Japan, Korea and Thailand, were very closed to such investment until very recently. They might welcome some investment in export processing zones, but in general, they will not be linked to multinational companies in what they consider to be strategic industries. Latin American countries are actually much more open when it comes to foreign direct investment. So the picture is not that simple.

It is probably true that, in terms of trade, Asia has been on the whole more open than Latin America. But when you look at this more closely, you see that what made the more successful Asian economies like Korea and Taiwan successful is not the generally lower average rate of tariffs, but their ability to vary openness greatly according to sector and according to the point in their development trajectory. So instead of being uniformly open, these countries in some sectors have free trade or moderate levels of tariffs; in some sectors they gave subsidies to exports; in some sectors they completely banned imports. These policies have changed according to the evolution of the industry and the evolution of the overall national economy.

That’s where you find the real cause of success: this ability to think strategically; this ability to remain selectively open and selectively closed; this ability to change policies according to changing conditions.

MM: In Bad Samaritans you reference what New York Times columnist Tom Friedman calls a "golden straightjacket" – what he says are the difficult but necessary policies that all the rich countries followed to become rich. These policies are the neoliberal policies that you argue are harmful.

Chang: The extent of this mythical history when it comes to the development trajectory of today’s rich countries is quite staggering. For example, the United States is the country that actually invented the infant industry argument. They made the argument that governments in relatively backward economies need to protect and nurture their young industries so they can grow up and compete with producers from more economically advanced nations. That theory was invented by someone most Americans see almost on a daily basis in their wallets – Alexander Hamilton, the guy whose face is on the $10 bill and who was the first Treasury Secretary. Through Hamilton’s influence, basically for about 120 years, up until the Second World War, the United States remained the most protectionist country in the world.

The same with Britain. When you read the Economist magazine, you might think that free trade was invented by Britain and protectionism was invented by France. But if anything, the picture is the reverse. For about a century, until it opened up its borders the mid-1800s, Britain was one of the most protective nations in the world. I can go on and on with this story, as I do in Bad Samaritans. But basically the point is, in every policy area – international trade, foreign investment or intellectual property rights – what the rich countries think their ancestors did, and what the rich countries tell the developing countries to do today, is almost diametrically opposed to what their ancestors really did. Hardly any country succeeded with even one or two elements of the policies recommended to developing countries today.

For example, when it comes to trade policy, only the Netherlands and Switzerland – and in that case only up to the First World War – can reasonably claim to have practiced free trade. All the other countries have practiced protectionism for substantial periods of various lengths. In all areas, you have that same kind of picture.

The book tries to demolish the mythical history so we can put it together again and provide the basis for more informed and realistic policy alternatives to what the Bad Samaritans are recommending today.

MM: Perhaps the core piece of policy prescription that you offer as an alternative is the idea of protecting local firms. What is the rationale for protectionism? And if a country limits competition, how can it prevent inefficiency and exert democratic control over protected firms?

Chang: To explain this idea in the book I use the example of my young son. This little guy is perfectly capable of making a living. He’s already eight now, but when I wrote the book he was six. Millions of children work in developing countries from the age of four or five, as did millions of children in rich countries in the 19th and early 20th century. Maybe I should send my son to the labor market and make him get a job. If he can earn his own living, that’s a lot of money saved for me. But more importantly, this will expose him to competition and make him a very productive person.

Well, of course I don’t do this. He is quite a clever kid and maybe if I support him for another 12 or 15 years, he could become a software engineer or brain surgeon or nuclear physicist. Of course, there’s a danger that he might turn out to be a total waste of time, but that’s a risk I’m willing to take. I know for sure that if I kick him into the labor market now, he will become a shoe shine boy, and will maybe grow up to be a street hawker, but he will never be a brain surgeon or a nuclear physicist.

The analogy is: When you are trying to get into a more difficult and thereby higher return activity, developing countries have to invest in it. The investment comes in the form of protection, which makes, for the moment, your local consumer use expensive and inferior domestic products. But unless you do that, these industries are not going to grow. You accept that you will use inferior products from inefficient producers for the time being. In the meantime, you do certain things to make sure that these firms grow up, i.e. they increase their productivity and eventually give you cheaper domestic goods, create jobs and stimulate other activities. In the end, you are better off that way.

So, inefficiency is part of the deal. Only you are deliberately creating these inefficiencies with the view of becoming even more efficient than otherwise possible.

The issue of corruption and democratic control, yes, that is a real challenge. But these things can be controlled, and have been controlled. In countries like Japan and Korea, there was some corruption in government-protected industries, but they have been controlled and on the whole this didn’t damage the overall performance. So instead of saying that we shouldn’t protect industries because of these dangers, it is more productive to think of ways to overcome or minimize these dangers.

There are very, very few countries which have obtained high standards of living without going through at least some period of infant industry protection. And by that I don’t just mean tariff protection. Hamilton himself talked about a whole range of things, including provision of infrastructure, development of a banking system, operating the government bond market, and promoting research and development.

MM: You make a point at the end of Bad Samaritans that the protection has to go on for a long time. How long?

Chang: It depends on the industry. The Japanese first set up their car industry in the 1930s, protected through very high tariffs. Foreign investors were kicked out in the late 1930s. The government injected public money into Toyota in 1949 because it was about to go bankrupt, and subsequently provided massive amounts of direct and indirect support. Even with all this, it was only in the 1970s that the Japanese companies became internationally competitive – and at that only in small car markets. In the early 1980s, the Japanese car companies announced they wanted to move into the luxury market, and other people said, "Isn’t that an oxymoron, a Japanese luxury car?" and they laughed it off. But another 20 years and they were there.

This is the kind of time frame we need to think in terms of. Probably by the early 20th century, a lot of U.S. protection and tariffs were unnecessary, but even so, it took almost a century of protectionism to move the country from a second-rate, semi-agrarian power to the world’s top position.

The Finnish phone company Nokia’s electronics division was cross-subsidized by other members of the Nokia group for a staggering 17 years before it made any profit. So we are talking 20, 40, even 100 years. I think it is a bit unfair for opponents of protectionism, for example, to point out some scheme that has been running for 10 years and say it is not working and thus indict protectionism. Because the timeframe necessary for thinking about these issues could be as long as 100 years.

MM: From a development perspective, what would you recommend as a relative balance between private and state enterprises?

Chang: Basically, on the issue of public enterprises, I take what I call the Deng Xiao Ping position, following the former Chinese leader, who famously said that it doesn’t matter whether the cat is black or white as long as it catches mice. On the question of public or private ownership, I don’t think we should be too dogmatic.

For example, when South Korea first tried to set up a steel mill in the late 1960s and went to the World Bank, the World Bank said, "Are you out of your mind?" I probably would have agreed with the World Bank if I were there, because at the time South Korea’s main exports were fish and wigs made with human hair. And they didn’t even produce any of the raw materials for steel, like iron ore or coking coal.

The government said, "We have to run it as a state-owned monopoly because there is no private investor willing to take the risk." In that situation, the World Bank said, "Sorry we are not giving you money." The Korean government managed to get loans from a few Japanese banks, built a steel mill, which started production in 1973, and eventually became the most efficient steel producer in the world. So you can have situations where the government is the only agent that can do certain things.

In that case, public enterprises will be quite appropriate. But the government only has limited capabilities. If it tries to do too much, it will probably hit some kind of barrier. Therefore, if there are things that don’t have to be done publicly, then it is probably better to leave it to the private sector. So on this I take a quite a flexible position.

MM: You raise the issue of developing country corruption and culture in Bad Samaritans. Why do you think so much attention has been devoted to these two issues in the last 10 years?

Chang: That’s an interesting thing. There was a time, say in the 1980s, when people criticized the World Bank, the IMF and all the Bad Samaritans, for adopting a so-called one-size-fits-all approach to economic policy. They basically told countries that there is only one right set of policies and everyone should adopt it. When some people criticized it on the ground that different countries have different political systems, different institutions, different cultures and so on, they laughed it off. They said, "Look, do you think there should be one kind of physics for Ghana and another kind for the United States?"

Over the years, these people have had to backtrack, because they realized their policies were not working. Instead of admitting that there was something wrong with their policies, and therefore the underlying theories, they are now blaming the victims, so to speak. They say, "Our theories and the policies derived from them were and are correct. What is wrong is the country. These policies don’t work because the countries don’t have the right institutions like good private property rights. These policies don’t work because their politicians are corrupt. These policies don’t work because their people are lazy." And so on.

MM: You also suggest that culture is not fixed, and that the relationship between culture and the economy is dynamic and that they both influence each other.

Chang: In the chapter in Bad Samaritans on culture, provocatively titled, "Lazy Japanese and Thieving Germans," I provide historical accounts where an Australian goes to Japan and says that people are lazy, and where the British go to Germany and say these people are too emotional, these people are lazy, they are mentally backward, and all kinds of things. It’s really shocking to see these kinds of remarks because people from more economically advanced nations saw the Japanese and the Germans in the 19th century, when they were not so economically advanced, as very similar to what people from economically advanced countries typically think developing countries are like. They are lazy, they are inefficient, they don’t want to work hard.

By showing those examples, I first argue that cultures change, but then I say that cultures cannot be changed through simple moral exhortation.

There is a group of American political scientists and anthropologists that thinks that by going to the slums of Mexico City and proselytizing people to send their kids to school and save money, they can make Mexico develop. I think these moral campaigns can have some effect.

But I try to show that unless the underlying economic structure changes, unless the supporting institutions change, unless the relevant government policies change, culture cannot be changed in that kind of way.

When a country like South Africa has a 28 percent unemployment rate, telling people to work harder just sounds hollow. In countries with no engineering jobs, telling people that they shouldn’t despise practical pursuits like engineering doesn’t wash.

What I’m trying to say is that a lot of cultural changes come from changes in the underlying institutions and government policies, which means that culture is not fixed.

This should dispel the notion that Latin America doesn’t develop because those people want to party and aren’t serious about work, or the argument that Africans do not develop because they live in hot countries where everything grows fast and if they get hungry they can just lie beneath a coconut tree and wait for a coconut to fall.

This chapter of the book is an attempt to dispel this kind of racist thinking that is surprisingly widespread in people’s minds when it comes to thinking about developing countries.

MM: Over the last dozen years, the world has seen the Asian financial crisis, Enron and related scandals, the dot-com bubble collapse, and now the U.S. housing bubble collapse and the following financial crisis. Why has there not been more of a shift away from the free market Bad Samaritan ideas that contributed to those problems, or is a shift now underway?

Chang: Just looking at the record, you would think these policies should have already been abandoned. One obvious reason they have not is that people don’t know how bad things have actually been. You hear all kinds of distorted information and selective truths. For example, very few people know that the world economy has actually grown more slowly since we adopted neoliberal policies in the 1980s than in the so-called bad-old-days of state intervention in the 1950s, 1960s and 1970s.

Secondly, you have a very powerful financial-intellectual complex that defends this free market ideology.

Despite all this, cracks are appearing on the face of the building. It is becoming more and more evident that these policies have not worked very well.

In Latin America, countries like Venezuela, Argentina and Uruguay have at least partially rebelled against this neoliberal orthodoxy. Countries like Brazil and Chile are still largely following this orthodoxy, but in certain areas are defying it.

I think with the looming crisis in the United States and other rich countries, we’ll see more and more resistance to the ideological free market policies that have basically benefited the top 5 or 10 percent in each country.

I think that things will change, but these big changes are quite difficult to predict.