Kicking Away the Ladder – Ha-Joon Chang – The Dangers of Modern Day Economic Imperialism towards Developing Nations

Ha-Joon Chang’s “Kicking Away The Ladder” is a damning retaliation against the Now-Developed-Countries (NDCs) imposition of apparently “disadvantageous” policy and institutional standards onto developing countries. Chang argues that the practice of recommending blanket Anglo-American “good policies” and “good governance” is indeed counterproductive to the developing countries growth opportunities, and hypocritical seeing that the NDCs developed under institutions and policies that would be considered “bad policies and governance” by international organisations today.

Kicking aay the ladder

In order to understand the fundamental hypocrisy of the NDC’s economic imperialism, it is first important to understand the climate and situation of the NDC’s own development. Chang focuses on this in the first half of the book, by analysing the growth patterns of the developed countries and concluding that growth was actually achieved in a climate of protectionism and technological espionage. The stealing of patents, tariff wars, and mercantilism provided the basis for infant industry protection, which allowed for the development of Industry, Trade and Technology (ITT). However, Chang then uses this basis as a platform to promote his own heterodox approach to development economics, by defying the notion that free trade which encourages the Law of Comparative advantage is indispensable to promoting economic growth within developing nations. He argues instead that because the NDCs were able to develop economically under protectionist policies, they should not encourage the same level of globalism to nations who are currently at the equivalent stages of development.

o-INCOME-INEQUALITY-facebook
social disparity: wealthy minority and the 99 per cent

The second section of the book focuses on the institutional development of NDCs from a historic perspective. He argues that the level of institutional development in developing countries is much more advanced than when the NDCs (now developing countries) were at the equivalent levels of development.  In terms of “per capita income band”, the UK in 1750 was at a similar level level of economic development as India in 1992. However, in the UK in 1750, there was no male suffrage (1918), established central bank, Income Tax (1842), Modern Patent Law (1852) or Child Labour Regulation (1802). Whereas India, at the same level of economic development, had established all of these institutions over the last century. Could it be that institutions within developing countries are too advanced for the respective levels of development? Chang supports this theory by arguing that the capital used to maintain expensive WTO laws could instead be used to support issues more appropriate to the developing country’s specific needs, such as training teachers or subsidising new agricultural technologies.

WTO

However, it is important to understand that the NDC’s delayed adoption of “modern” inclusive institutions occurred as these institutions were a result of development, rather than a cause of initial development. Indeed, the evolutionary process of finding the optimum level of central banking intervention in Britain occurred over generations of trial and error. This level of intervention is different to that of Japan, due to differing economic culture and circumstance. However, Britain and America seem intent on imposing the “Anglo-American” standard of institutions on developing countries, whether or not this is simultaneous with their growth situation. Therefore, surely it would be beneficial if these developing nations were to develop their own unique brand of institutions, that fits their idiosyncrasies, as a result of their style of economic growth, rather than being encouraged to adopt concrete Anglo-American systems that may be completely incompatible with that country’s situation.  

US Flag Around the Earth --- Image by © Images.com/Corbis
US Flag Around the Earth — Image by © Images.com/Corbis

In a dramatic conclusion, Chang concludes that developed countries are indeed “kicking away the ladder” in terms of preventing developing countries from developing, due to a toxic cocktail of “unequal treaties”, and aid given on the condition of crippling hypocritical policies, such as free trade for infant industries. The external imposition of these “Neo-Liberal Policies” have done little to encourage sustainable growth, and therefore the developed countries are preventing the developing countries from following in the same path that they themselves developed in. The stark contrast between the path of growth of the UK, and that of say Kenya is extremely clear. Britain developed under very lax institutional and social standards (development occurred without centralised bank, child labour laws, patent law  etc.) , whilst utilising asymmetrically beneficial trade policies such as mercantilism (1700s-1830s), in order to protect its infant industries until it was firmly the technological centre of the world. On the other hand, Kenya does not have the same opportunity to develop in this fashion, because international bodies expect “world standard” institutions within Kenya (that may or may not be beneficial to Kenya’s idiosyncrasies), whilst the WTO places Kenya in a myriad of Free Trade agreements, that turn out to be disparaging to infant industries development.

The comparison between NDC’s development 200 years ago, and modern development today, shows the hypocrisy of modern nations in their neo-colonial economic intervention towards developing countries. The modern push for “good policies” and “good governance” from NDCs is the equivalent of “do as I say, not as I do.” As such, the gap between the majority of developing nations and NDCs is growing at an alarming rate, which amounts to effectively “kicking away the ladder” of economic development.

Although I thoroughly enjoyed the book and would recommend it to anyone interested in development economics from a historical context, the heretical nature of Chang’s claims leaves the book more susceptible to criticism. The frequent use of sweeping statements such as “As a result to this switch to protectionism, the Swedish economy performed extremely well in the following decades,” suggests that the correlation must imply causation, which often can give way to oversimplifying complex relationships, for the sake of moulding evidence to fit an argument.

I would disagree with Chang on certain aspects of his argument also- yes, it makes sense that infant industries are protected with high import tariffs to encourage domestic consumption of said product, but an increase in tariffs across the board would only encourage economic nationalism, and would do nothing to help the long term growth of said industry. Indeed, Chang seems to disregard the fact that these policies are working to encourage prosperity. During Britain’s Industrial Revolution, a growth average of 1-1.5% was achieved, whereas currently developing nations such as Brazil have achieved an average growth rate of 2.6% in the last 35 years. These policies, even if they are hypocritical and seemingly selfish from the NDCs, are working to encourage prosperity and growth.

Indeed, it is a grim fact of international economics that currently, it is the NDCs that possess the bargaining power and hence “call the shots”. If a richer country demands that a poorer country change their policies against their will, then often they must abide by these demands to receive increased aid or win more preferential trade deals. I would say that this modern day institutional imperialism of developed countries towards poorer countries is not a far cry from the European colonialism of the 16th and 17th centuries, and may well act to further hinder the growth potential of these stagnating nations.

The Reason for Inequality – The Strongest Theory : “Inclusive Institutions” – ESSAY BLOG

Acemoglu’s institutional theory gives economists the best way of understanding why countries have developed in different ways to one another, and how we can encourage more balanced growth, even if we should not “solve” inequality.

Already, I have debunked three economic theories for the reason for wealth inequality between nations. To me, the most prominent theory is described in Acemoglu’s “Why Nations Fail”, and is known as the “institutional argument”. Put simply, the theory states that in order to increase the rate of economic growth and development within a country, it is necessary to design inclusive, pluralistic economic and political institutions, that incentivise growth and productivity. Acemoglu argues that from time to time, countries are faced with important events in the form of “critical junctures”, that allow the country to reform their political and economic institutions, and therefore allow for more inclusive institutions to develop.

Why Nations Fail

Acemoglu analyses numerous case studies to support his theory. I found the most thought provoking to be the comparison between Mexico and USA. Both countries are faced with similar geographic and cultural identities. However, South of the border, the murder rate and infant mortality rate is three times higher, whereas budget expenditure per capita and GDP per capita are respectively 12 and 4 times lower. This difference does not lie in cultural idiosyncrasies, or geographic niceties, but rather very simply, Mexico is subject to Mexican extractive institutions, whereas USA is subject to inclusive American institutions.

Inclusive institutions are institutions that allow many people to benefit from economic growth. America is inclusive. If an individual wants to set up a business in America, they can do so without facing any major barriers of entry. New technological breakthroughs are supported by government subsidies, so that productivity and enterprise can expand that country’s productive potential. This is a stark contrast to the economic and political institutional design of Mexico. Take Carlos Slim as an example of the extractive nature of the Mexican system, whereby only a few very wealthy individuals can benefit. Slim did not become the second richest man in the world through innovation (unlike the American richest man, Bill Gates), rather, in 1990, he purchased a 51% stake in Telmex, the Mexican nationalised telecommunications firm. Mexico’s telecommunications monopoly became Slim’s very own privatised monopoly. This clearly became hugely profitable. Had Slim been practising on American soil, the inclusive political institutions would not have allowed him to bid at an auction to control such a staple industry such as national telecommunications, and even had he been able to control the market share, the relaxed barriers to entry to American markets would have encouraged new firms to enter the market, and therefore prevent Slim from dominating the market share and establishing a monopoly. However, because Slim was based in Mexico, the extractive nature of institutions meant that a large proportion of Mexican GDP is focused only towards one individual, hence as the median income decreases and inequality steepens, innovation slows, and with it so does economic growth.

 

Rich vs Poor

However, countries are sometimes faced with an event known a “critical juncture” in which they can change the nature of their institutions, in the aftermath of a political event. For instance, the 14th Century Black Death swept through Europe, killing around 40% of the European population. Peasants were particularly susceptible to contracting the plague, due to the open sewers and lack of basic cleanliness etc. Previously across Europe, the Feudal system was adopted, in which the peasants worked for landowners, who worked under the dukes and barons, and then the monarch was at the top of the hierarchy. However, when faced with the black death, Western Europe and Eastern Europe reacted to the decline in labour population in two very different ways. In Western European England, the peasants realised their increased value after the Black Death, so demanded greater freedoms, as well as increased land ownership, so that they could personally benefit off of their own hard work, rather than paying their produce to the land owners. In 1381, they commenced the Peasants Revolt, and quickly captured London. Although the revolution was quickly quashed, it highlighted to the barons and dukes the importance of their labour supply, and consequently, over the next 100 years, peasants began to earn more money, as well as experiencing greater freedoms. On the other hand, in Eastern Europe, the opposite occurred. Due to the shortage of labour, landowners were even more incentivised to hold onto their workers, and hence reduced their freedoms in order to ensure that they

 would/could not leave. 90% of the population became serfs, as Eastern Europe descended into Serfdom. In Hungary, serfs would be forced to complete three days per week of unpaid labour for their landowners, which ultimately annihilated any incentive to work hard or innovate processes in order to encourage economic growth. As Eastern Europe became more extractive, Western Europe became more inclusive. Britain began to innovate politically, as a government gained more power, hence political institutions became more pluralistic, as voting rights became more accessible. This in turn created the framework for economic growth, by harbouring the climate necessary to encourage innovation and productivity.

 

Inequality CartoonUltimately, I believe that Acemoglu’s “Institutional” theory is far more reliable than the flawed ignorance, geographic and cultural theories. However, thats not to say that the theory is perfect, as I also believe that it is a “cop out”. Is it not too simple to say that “country A is more prosperous than country B, because its institutions allow for growth?” To me, that is as simple as saying that country A is more economically developed than B “just because it is”. To adopt this argument is to say that economic growth is exclusively a result of a country’s inclusive institutions, but this cannot be the case as countries such as Saudi Arabia have huge levels of wealth, but relatively low levels of access to markets and inclusive economic institutions. Conclusively, I do not believe that there is one single theory that can explain why certain countries are more prosperous than others. There are too many unique/singular countries that one can bring up, that do not abide by the theory, and hence weaken its reliability. To me, wealth inequality must always exist in order to encourage incentive. If every country and every person was of equal wealth, then there would be not drive to “keep up with the Jones’”, and we would see a USSR style of weak productivity and lack of work incentive. Certain countries are richer than others, but there is no blanket reason/formula for why every rich country is richer than its poorer equivalent. However, in my opinion, Acemoglu’s institutional theory gives economists the best way of understanding why countries have developed in different ways to one another, and how we can encourage more balanced growth ; and to me, this understanding is far more important than trying to understand why a country may be more prosperous than its neighbour.

The Reason for Inequality- Debunking Flawed Economic Theories – ESSAY BLOG

Inequality exists, but not because of these reasons…

There are numerous economic theories as to why certain countries are richer than others. At the forefront, there exists three predominant ideas. The “Geographical” Hypothesis, the “Cultural” Theory, and the “Ignorance” idea. To me, none of these seemed to provide the complete answer to why one country can have a greater economy than its neighbour. This short essay blog will describe each theory, and then systematically attempt to debunk each of them.

The “Geographical” hypothesis of the cause of inequality is the idea that one country is richer than another, because it may have a certain geographic advantage over another country. For instance, it may have more fertile soil for agriculture, and a climate more suited to encourage productive work. Economists such as Jeffrey Sachs argue that richer countries tend to have more “temperate latitudes” (such as Japan and USA), whereas poorer countries tend to be focused around the Tropics and Equator. Logistically, he argued that tropical climates tend to have greater susceptibility to labour-productivity curtailing diseases, such as malaria, as well as the fact that tropical soils are less adapted to productive agriculture, due to the daily nutrient rainfalls that wash away necessary nutrients. However, there is clear evidence to suggest the flaws in the Geographical Theory. For instance, the huge difference in wealth between North-Korea and South-Korea cannot be explained merely by rainfall. Rather, the two country have entirely different economic systems. Indeed, the productivity of a country may be enhanced if its population was able to grow without the threat of drought or disease, but this factor alone cannot explain how Australia faces similar geographical variables to Botswana, yet the GDP per capita is $7,000 vs $54,000. Therefore, the myth that a country is poor purely down to its geographic situation cannot be regarded as the true reason for the growing levels of international wealth inequality.

The “Cultural” theory, suggests that certain countries are wealthier than others due to their cultural strong work ethic, or certain religious ethos that encourages hard work. German Sociologist Max Weber argued that the 16th Century Protestant Reformation throughout Western European society contributed greatly to the encouraging of industrial evolution (productivity enhancing measures) to push for higher levels of economic growth in Europe. However, the culture hypothesis fails to account for large fluctuations in economic growth, despite the maintenance of a cultural identity. For instance, Chinese culture and individual identity did not change drastically from 1990-2010. However, before the reformation of China’s economy by Deng Xiaoping, Mao’s absolutist, non-incentivising policies had lead to crippling widespread poverty and famine. However, as China has transformed its political institutions to be more inclusive and capitalist, it has seen vast economic growth, averaging 12% per year from 1993-2008. This economic growth has not been the result of a shift in culture, but rather a shift in institutional power, from extractive to inclusive.

Finally, we must debunk the “Ignorance” theory. Favoured by many economists, this hypothesis states that certain economies are currently poorer than others, because the leaders of the poor countries are not skilled or able enough to lift their economies out of stagnation. However, in my opinion, it is too simple to state that a country is poor only because their leader is foolish, but rather their leader may be incentivised to make decisions that benefit them self or a close circle of political elite, rather than make decisions that benefit the welfare of their people. In other words, in modern democracies, seldomly is an economic policy passed which has not faced tough opposition and compromises from different political opinions, such that in theory, social welfare and consumer utility is maximised. Of course, there exists government failure through unintended consequences, but to ensure re-election, politicians will often draft policies that garner the most support and therefore maximise utility, so to encourage economic growth and prosperity. However, in autocratic societies, extractive policies can be passed unopposed, hence although the leader may seem “ignorant” through not promoting economic growth, in actual fact they may be working to promote their own best interests, even if it means preventing economic growth. Hence, political leaders may not be “ignorant”, but rather driven by self-interest to create extractive political and economic institutions that prevent their power being diluted into the public sphere, at the cost of curtailing economic growth.

Hence, in my opinion, the “Geographical”, “Cultural”, and “Ignorance” theories are not able to fully explain the reason for international inequality. There exists too many individual examples of countries that defy the hypotheses, as well as additional reasons why each theory may not be the sole reason for economic inequality. Daron Acemoglu and James A.Robinson’s book “Why Nations Fail,” is a compelling read that I would highly recommend to anyone interested in the root of historical economic inequality. The book argues that it is the design of a country’s economic and political institutions that determines productivity and incentive, and it is these factors that predominantly determine that country’s prosperity. In my next “essay-blog”, I will be outlining their argument, and discussing why I believe that this is the strongest theory for explaining why certain countries are richer than others.