Kicking Away the Ladder -SummaryPaper

8/14/2019 Kicking Away the Ladder -SummaryPaper

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Kicking Away the Ladder

Good Policies and Good Institutions in Historical Perspective1

Ha-Joon Chang, Faculty of Economics and Politics, University of Cambridge

1. Introduction

There is currently great ressure on develoing countries from the develoed

countries, and the international develoment olicy establishment !"#PE$ that they

control, to adot a set of %good olicies& and %good institutions& to foster their

economic develoment'

(s )e are all familiar )ith, the %good olicies& that they )ant are basically

conservative macroeconomic olicy, liberalisation of international trade and

investment, rivatisation, and deregulation' The emhasis on %good institutions& is

more recent' This has come about because of the recognition on the art of the "#PE

that )hat they see as %good olicies& have failed to roduce good economic results in

most develoing countries because of the absence of suorting institutions' *o, fore+amle, it is said that, if rivate roerty rights are not )ell rotected, rice

deregulation )ill not lead to greater investment and higher gro)th, because the

otential investors cannot be sure of reaing the gains from their investments' (s a

result of this ne) thining, increasingly, the "F"s and many donor governments are

attaching %governance-related conditionalities& to their loans and grants' The ey

institutions they recommend include democracy, %good& bureaucracy, an indeendent

udiciary, strongly rotected rivate roerty rights !including intellectual roerty

rights$, transarent and maret-oriented cororate governance and financial

institutions !including a olitically indeendent central ban$'

(s )e all no), there have been heated debates on )hether these

recommended olicies and institutions are aroriate for develoing countries'

1This aer is a summary of my ne) boo,Kicking Away the Ladder Development

Strategy in Historical Perspective!(nthem Press, .ondon, /00/$' eference in this

aer is et to the minimum' Further details, including bibliograhical sources, can

be found in the boo'

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Ho)ever, curiously, even many of those )ho are scetical of the alicability of these

olicies and institutions to the develoing countries tae it for granted that these )ere

the olicies and the institutions that )ere used by the develoed countries )hen they

themselves )ere develoing countries'

Ho)ever, this cannot be further from the truth' (s )e shall sho) later in the

aer, )hen they )ere develoing countries themselves, the develoed countries used

virtually none of the olicies and institutions that they are recommending to

develoing countries'

. History o! "cono#ic Policy

.1. $!!icial History o! %apitalis#

(ccording to )hat " call the %official history of caitalism& that informs our

debate on develoment and globalisation, the )orld has develoed in the follo)ing

)ay over the last fe) centuries'

From the 12thcentury, the industrial success of laissez faire3ritain roved the

sueriority of free maret and free trade olicies by beating interventionist France, its

main cometitor at the time, and establishing itself as the sureme )orld economic

o)er' Esecially once it had abandoned its delorable agricultural rotection !the

Corn .a)$ and other remnants of old mercantilist rotectionist measures in 1245, it

)as able to lay the role of the architect and hegemon of a ne) %.iberal& )orld

economic order' This .iberal )orld order, erfected around 1260, )as based on7

laissez faireindustrial olicies at home8 lo) barriers to the international flo)s of

goods, caital, and labour8 and macroeconomic stability, both nationally and

internationally, guaranteed by the 9old *tandard and the rincile of balanced

budgets' ( eriod of unrecedented roserity follo)ed'

Unfortunately, according to this story, things started to go )rong )ith the First

:orld :ar' "n resonse to the ensuing instability of the )orld economic and olitical

system, countries started to erect trade barriers again' "n 1;


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instability in the )orld economy and then finally the *econd :orld :ar destroyed the

last remnants of the first .iberal )orld order'

(fter the *econd :orld :ar, so the story goes, some significant rogress )as

made in trade liberalisation through the early 9(TT !9eneral (greement on Trade

and Tariffs$ tals' Ho)ever, unfortunately, dirigistearoaches to economic

management dominated the olicy-maing scene until the 1;60s in the develoed

)orld, and until the early 1;20s in the develoing )orld !and the Communist )orld

until its collase in 1;2;$' (ccording to *achs > :arner !1;;=$, a number of factors

contributed to the ursuit of rotectionism and interventionism in develoing

countries !' 11-/1$' There )ere %)rong& theories, such as the infant industry

argument, the %big ush& theory, and .atin (merican structuralism, not to sea of

various ?ar+ian theories' There )ere also olitical dividends to rotectionist olicies

such as the need for nation building and the need to %buy off& certain interest grous'

(nd there )ere legacies of )artime control that ersisted into eacetime'

Fortunately, it is said, interventionist olicies have been largely abandoned

across the )orld since the 1;20s )ith the rise of @eo-.iberalism, )hich emhasised

the virtues of small government, laissez faireolicies, and international oenness'

Esecially in the develoing )orld, by the late 1;60s economic gro)th had begun to

falter in most countries outside East and *outheast (sia, )hich )ere already ursuing

%good& olicies !of free maret and free trade$' This gro)th failure, )hich often

manifested itself in economic crises of the early 1;20s, e+osed the limitations of old-

style interventionism and rotectionism' (s a result, most develoing countries have

come to embrace %olicy reform& in a @eo-.iberal direction'

:hen combined )ith the establishment of ne) global governance institutions

reresented by the :TA, these olicy changes at the national level have created a

ne) global economic system, comarable in its !at least otential$ roserity only to

the earlier %golden age& of .iberalism !1260-1;14$' enato uggiero, the first

#irector-9eneral of the :TA, argues that thans to this ne) )orld order )e no)

have %the otential for eradicating global overty in the early art of the ne+t B/1 st

century D a utoian notion even a fe) decades ago, but a real ossibility today& !1;;2,

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Table 1. Average Tariff Rates on Manufactured Products for Selected Developed

Countries in Their Early Stages of Development

(weighted average; in percentages of value)1

18202 18752 1913 1925 1931 1950

Austria3 R 15-20 18 16 24 18Belgium4 6-8 9-10 9 15 14 11

Denmark 25-35 15-20 14 10 n.a. 3

France R 12-15 20 21 30 18

Germany5 8-12 4-6 13 20 21 26

Italy n.a. 8-10 18 22 46 25

Japan6 R 5 30 n.a. n.a. n.a.

Netherlands4 6-8 3-5 4 6 n.a. 11

Russia R 15-20 84 R R R

Spain R 15-20 41 41 63 n.a.

Sweden R 3-5 20 16 21 9

Switzerland 8-12 4-6 9 14 19 n.a.United Kingdom 45-55 0 0 5 n.a. 23

United States 35-45 40-50 44 37 48 14

Source: Bairoch (1993), p. 40, table 3.3.

Notes:

R= Numerous and important restrictions on manufactured imports existed and therefore

average tariff rates are not meaningful.

1. World Bank (1991, p. 97, Box table 5.2) provides a similar table, partly drawing on

Bairochs own studies that form the basis of the above table. However, the World Bank

figures, although in most cases very similar to Bairochs figures, are unweightedaverages,

which are obviously less preferable to weightedaverage figures that Bairoch provides.2. These are very approximate rates, and give range of average rates, not extremes.

3. Austria-Hungary before 1925.

4. In 1820, Belgium was united with the Netherlands.

5. The 1820 figure is for Prussia only.

6. Before 1911, Japan was obliged to keep low tariff rates (up to 5%) through a series of

"unequal treaties" with the European countries and the USA. The World Bank table cited in

note 1 above gives Japans unweighted average tariff rate for all goods (and not just

manufactured goods) for the years 1925, 1930, 1950 as 13%, 19%, 4%.

(s )e shall see later, this story aints a fundamentally misleading icture, but

no less a o)erful one for it' (nd it should be acceted that there are also some senses

in )hich the late 1;thcentury can indeed be described as an era of laissez faire'

To begin )ith, there )as a eriod in the late-1; thcentury, albeit a brief one,

)hen liberal trade regimes revailed in large arts of the )orld economy' 3et)een

1250 and 1220, many Euroean countries reduced tariff rotection substantially !see

table 1$' (t the same time, most of the rest of the )orld )as forced to ractice free

trade through colonialism and through uneual treaties in the cases of a fe) nominally

%indeendent& countries !such as the .atin (merican countries, China, Thailand Bthen

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*iam, "ran Bthen Persia, and Turey Bthen the Attoman Emire, and even Jaan

until 1;11$' Af course, the obvious e+cetion to this )as the U*(, )hich maintained

a very high tariff barrier even during this eriod' Ho)ever, given that the U*( )as

still a relatively small art of the )orld economy, it may not be totally unreasonable to

say that this is as close to free trade as the )orld has ever got !or robably ever )ill$'

?ore imortantly, the scoe of state intervention before the *econd :orld

:ar !or at least before the First :orld :ar$ )as uite limited by modern standards'

*tates at the time had limited budgetary olicy caability because there )as no

income ta+ and the balanced budget doctrine dominated' They also had limited

monetary olicy caability because many countries did not have a central ban, and

the 9old *tandard restricted their olicy freedom' They also had limited command

over investment resources, as they o)ned or controlled fe) financial institutions and

industrial enterrises' Ane some)hat arado+ical conseuence of all these limitations

)as that tariff rotection )as far more imortant as a olicy tool in the 1; thcentury

than it is in our time'

#esite these limitations, as )e shall soon see, virtually all no)-develoed

countries !@#Cs$ actively used interventionist industrial, trade, and technology !"TT$

olicies that are aimed at romoting infant industries during their catch-u eriods'

?oreover, )hen they reached the frontier, the @#Cs used a range of olicies in order

to hel themselves %ull a)ay& from their e+isting and otential cometitors' They

used measures to control transfer of technology to its otential cometitors !e'g',

controls on silled )orer migration or machinery e+ort$ and made the less

develoed countries to oen u their marets by uneual treaties and colonisation'

Ho)ever, the catch-u economies that )ere not !formal or informal$ colonies did not

simly sit do)n and accet these restrictive measures' They mobilised all inds of

different %legal& and %illegal& means to overcome the obstacles created by these

restrictions, such as industrial esionage, %illegal& oaching of )orers, and

smuggling of contraband machinery'

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"n chater / of the boo, " e+amine the historical e+eriences of a range of

no)-develoed countries !@#Cs$ in relation to their %catching-u& and %ulling-

a)ay& e+erience and see )hat inds of industrial, trade, and technology !henceforth

"TT$ olicies they had used at the time' The countries " loo at are 3ritain, the U*(,

9ermany, France, *)eden, 3elgium, the @etherlands, *)iterland, Jaan, Gorea, and

Tai)an' This e+amination reveals a lot of myths that misinform todays olicy debate,

but there are articularly many myths about the economic olicies of 3ritain and the

U*( D the t)o suosed homes of free maret D free trade caitalism'

.. &ritain

Contrary to the oular myth that deicts it as a country that develoed on the

basis of free maret and free trade, 3ritain had been an aggressive user, and in certain

areas a ioneer, of activist olicies intended to romote infant industries'

*uch olicies, although limited in scoe, date bac from the 14 thcentury

!Ed)ard """$ and the 1=thcentury !Henry I""$ in relation to )oollen manufacturing,

the leading industry of the time' (t the time, England )as an e+orter of ra) )ool to

the .o) Countries, and Henry I"" tried to change this by, among other things, ta+ing

ra) )ool e+orts and oaching silled )orers from the .o) Countries'

(nd bet)een the 16/1 trade olicy reform of obert :alole, 3ritains first

Prime ?inister, and the reeal of the Corn .a) in 1245, 3ritain imlemented a most

aggressive "TT olicies' #uring this eriod, it actively used infant industry rotection,

e+ort subsidies, imort tariff rebates on inuts used for e+orting, e+ort uality

control by the state D all olicies )hich are tyically associated )ith Jaan and other

East (sian countries' (s )e can see from table 1, 3ritain had very high tariffs on

manufacturing roducts even as late as the 12/0s, some t)o generations after the start

of its "ndustrial evolution, and )hen it )as significantly ahead of its cometitor

nations in technological terms'

3ritain moved significantly, although not comletely, to free trade )ith the

reeal of the Corn .a) in 1245' The reeal of the Corn .a) is these days commonly

regarded as the ultimate victory of the Classical liberal economic doctrine over

)rong-headed mercantilism !e'g', see 3hag)ati, 1;2=$, but many historians see it as

an act of %free trade imerialism& intended to %halt the move to industrialisation on

the Continent by enlarging the maret for agricultural roduce and rimary materials&

!Gindleberger, 1;62, ' 1;5$' "ndeed, this is e+actly ho) many ey leaders of the

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camaign to reeal the Corn .a), such as the olitician ichard Cobden and John

3o)ring of the 3oard of Trade, sa) their camaign'/

"n short, contrary to the oular belief, 3ritains technological lead that

enabled this shift to a free trade regime had been achieved %behind high and long-

lasting tariff barriers&, as the eminent economic historian Paul 3airoch once ut it

!3airoch, 1;;


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called it %the mother country and bastion of modern rotectionism& !3airoch, 1;;


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metahor' The follo)ing uote from Ulysses 9rant, the Civil :ar hero and the

President of the U*( during 1252-1265 clearly sho)s ho) the (mericans had no

illusions about ladder-icing on the 3ritish side and their side'

%For centuries England has relied on rotection, has carried it to

e+tremes and has obtained satisfactory results from it' There is no doubt

that it is to this system that it o)es its resent strength' (fter t)o

centuries, England has found it convenient to adot free trade because it

thins that rotection can no longer offer it anything' Iery )ell then,

9entlemen, my no)ledge of our country leads me to believe that

)ithin /00 years, )hen (merica has gotten out of rotection all that it

can offer, it too )ill adot free trade'& !Ulysses *' 9rant, the President

of the U*(, 1252-65, cited in ('9' Fran, "apitalism and

%nderdevelopment in Latin America, @e) Kor, ?onthly evie)

Press, 1;56, ' 154$'=

.*. $ther %ountries

.eaving the interested reader to find out about other countries in the boo

itself, )e may say that the follo)ing oints emerge from our historical e+amination'

First of all, almost all @#Cs had used some form of infant industry romotion

strategy )hen they )ere in catching-u ositions' The e+cetions to this historical

attern are *)iterland and the @etherlands' Ho)ever, these )ere countries that stood

very close from !or even at$ the )orlds technological frontier and therefore did not

needmuch infant industry rotection' (lso, even these countries do not conform to

modern day @eo-.iberal ideal, as they did not have atent la)s until the early /0 th

century and allo)ed their firms to freely %steal& technology from abroad'

*econd, it )as the UG and the U*( D the suosed homes of free trade olicy

D and not countries lie 9ermany, France, or Jaan D countries )hich are usually

associated )ith state activism D that used tariff rotection most aggressively' Tariff

rotection )as relatively lo) in 9ermany !see table 1$, and Jaans tariff )as bound

=" am grateful to #uncan 9reen for dra)ing my attention to this uote' Unfortuantely,

this haened only after the boo )ent to the rinters, so this uote does not aear in

the boo'

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belo) =L until 1;11 due to a series of uneual treaties that it )as forced to sign uon

oening in 12=


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authorities )ere banned or, if they )ere considered necessary for revenue reasons,

countered in a number of )ays' For e+amle, )hen in 12=; the 3ritish colonial

government in "ndia imosed small imort duties on te+tile goods !


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This argument sounds reasonable enough, but is actually highly misleading in

one imortant sense' The roblem )ith it is that the roductivity ga bet)een todays

develoed countries and the develoing countries is much greater than )hat e+isted

bet)een the more develoed @#Cs and the less develoed @#Cs in earlier times'

This means that the currently develoing countries need to imose much higher rates

of tariff than those used by the @#Cs in earlier times, if they are to rovide the same

degree of actual rotection to their industries as the ones accorded to the @#C

industries in the ast'

For e+amle, )hen the U*( accorded over 40L average tariff rotection to its

industries in the late 1;thcentury, its er caita income in PPP terms )as already

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'. Institutional evelop#ent in Historical Perspective

(s mentioned at the beginning, there is a great ressure on develoing

countries to imrove the uality of their institutions to conform to the %global

standards&'

@aturally, there is a lot of unease about this attemt' Ane obvious reason is

that the "F"s and the donor governments do not have the mandate to intervene in many

of these areas !democracy, cororate governance, etc'$' Taen to the e+treme, the

ush for the adotion of institutional global standards amounts to neo-imerialism'

(nother is that the standards demanded from develoing country institutions seem to

be too high D many develoing countries, often ustly, say that they simly cannot

%afford& the high-uality institutions that are demanded of them' They have an

imortant oint to mae, but in the absence of some idea as to )hich institutions are

necessary andor viable under )hat conditions, they are in danger of ustifying

)hatever institutionalstat&s '&othat e+ists in develoing countries' Then )hat is the

alternativeN

Ane obvious alternative is for us to find out directly )hich of the %best

ractice& institutions are suitable for articular develoing countries by translanting

them and seeing ho) they fare' Ho)ever, as the failures of %structural adustment& in

many develoing countries and of %transition& in many former Communist economies

sho), this usually does not )or and can be very costly' (nother alternative is for the

develoing countries to )ait for sontaneous institutional evolution' "t may be argued

that the best )ay to get the institutions that suit the local conditions is to let them

evolve naturally' Ho)ever, such sontaneous evolution may tae a long time, and

there is no guarantee that the outcome )ill be otimal, even from the local oint of

vie)' The third, and my referred alternative, is to learn from history by looing at

institutional develoment in the develoed countries )hen they )ere %develoing

countries& themselves' Therefore, in the belo) " try to dra) lessons from the history,

as oosed to the c&rrentstate, of the develoed countries in terms of institutional

develoment'

'.1. /he History o! Institutional evelop#ent in the eveloped %ountries

"n this section, " discuss the evolution of 5 categories institutions that are

)idely regarded as essential comonents of a %good governance& structure in the

develoed countries during the eriod bet)een the early 1;thcentury and the early /0th

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century' They are7 democracy8 bureaucracy !including the udiciary$8 roerty rights8

cororate governance institutions8 financial institutions !including ublic finance

institutions$8 and )elfare and labour institutions' .et us summarise the main findings'

'.1.1. e#ocracy

There is currently a lively debate on )hether democracy is good for economic

develoment' :hatever ones osition is in this regard, it is clear that the @#Cs did

@AT develo under democracy'

"t )as not until the 1;/0s that most no)-develoed countries had adoted

even universal male suffrage for the maority )hite oulation !see table /$' 9enuine

universal suffrage )as adoted in all @#Cs only during the late /0 thcentury !*ain

restoring democracy only in the 1;60s8 votes to ethnic minorities in (ustralia and the

U*( in 1;5/ and 1;5= resectively8 votes to )omen in many countries after the

second )orld )ar and in *)iterland as late as 1;61$' ?oreover, until the *econd

:orld :ar, even )hen democracy formally e+ited, its uality )as e+tremely oor'

*ecret balloting )as introduced only in the early /0 thcentury even in France and

9ermany, and corrut electoral ractices !such as vote buying, electoral fraud,

legislative corrution$ lasted in most countries )ell into the /0 thcentury'

'.1.. &ureaucracy and 2udiciary

*ales of offices, soils system, and neotism abounded in early bureaucracies

!some countries even had official rice list for government obs$' ?odern rofessional

bureaucracies first emerged in Prussia in the early 1;thcentury, but much later in other

countries' Even 3ritain got a modern bureaucracy only in the mid-1;thcentury' Until

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/a3le . Introduction o! e#ocracy in the 4%s

Country Universal ?ale

*uffrage

Universal *uffrage

(ustralia 1;0

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Kicking Away the Ladder -SummaryPaper