Economist Ha-Joon Chang challenges almost every belief sacred to open-market proponents
The Myth of Free Trade and
the Secret History of Capitalism
By Ha-Joon Chang
Bloomsbury Press; 276pp; $26.95
Imagine a country where regulation of foreign investment is so strict that noncitizens can't own voting shares of financial institutions. Overseas banks are barred from opening branches. Foreigners can't own the most desirable land. Mining and logging are largely restricted to citizens. Foreign companies are taxed more heavily than domestic ones, and in some jurisdictions they're stripped of all legal protection. China? Some despotic state in Africa? Nope, says Cambridge University economist Ha-Joon Chang, it was the U.S.—in the late 19th and early 20th century.
Those are just the kinds of policies that drive advocates of free trade batty. But in Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Chang argues that the policy recommendations of the "unholy trinity" of the World Bank, International Monetary Fund, and World Trade Organization would have been unacceptable to the U.S., Britain, Japan, and the European powers when they were industrializing. Instead of helping emerging economies, the free traders—Chang's "Bad Samaritans"—actually do more harm than good.
Chang challenges virtually every tenet free traders hold dear: Patent and copyright protection, privatization, and balanced budgets aren't unalloyed positives, he writes. Tariff barriers, restrictions on foreign investment, inflation, deficit spending, and even corruption, meanwhile, aren't necessarily evil. The material isn't exactly light, and at times Chang gets bogged down in details. But the book presents a well-researched and readable case against free-trade orthodoxy.
Chang stumbles in not adequately acknowledging that one reason Japan, Korea, and China have been so successful in recent years is that the U.S. has largely dropped its tariff barriers. He doesn't seem to recognize that free trade advocates speak to two audiences: They aim to convince both emerging economies and the developed world that open markets are beneficial. That's important because the West's commitment to free trade is a fragile thing, and without it, developing countries could suffer.
Chang nonetheless provides plenty of historical evidence to support his argument. Even today's most ardent proponents of free trade, he writes, long practiced the policies they now oppose. In the 15th century, Britain exported virtually all of its wool to the Continent, where it was spun into textiles. While the British did reasonably well selling their wool, Europe's textile mills reaped the bulk of the profits. So Henry VII imposed export taxes on wool and wooed workers who understood spinning and weaving technology across the English Channel—which simultaneously kept the wool in Britain, giving domestic mills a chance to develop, and starved competitors abroad of raw material.
In both the U.S. and Britain, industrial policies that favored domestic manufacturers continued well into the 20th century. Chang quotes German economist Friedrich List, who in 1841 accused the British of "kicking away the ladder that they had climbed to reach the world's top economic position." Today's Bad Samaritans, Chang argues, are doing much the same to developing countries.
Does this make sense from a Korean-born economist? Chang, a former researcher at the World Bank and acolyte of Nobel laureate and free-trade critic Joseph Stiglitz, acknowledges that his home country has benefited mightily from falling trade barriers. Samsung, Hyundai, and steelmaker Posco have all grown into global powerhouses by selling their wares around the world. But Chang argues that their success was built on a foundation of protectionist policies and dirigiste guidance from Seoul that allowed Korean industry to grow strong at home before taking on the likes of Sony and Toyota (which, by the way, had received similar protection from Tokyo a generation earlier).
Chang doesn't oppose free trade altogether. He acknowledges that it has plenty of benefits for countries and companies that are ready for global competition. But he argues that not every country should follow the prescriptions of the free traders. Nurturing industries in development (which may take decades), running a deficit to spur investment, and tolerating a measure of inflation to fuel growth, he insists, all have their place—even in a world committed to free trade.