Kicking Away the Ladder: Development Strategy in Historical Perspective

"Ha-Joon Chang is writing in 2002. By then we’ve had a decade of the Washington Consensus of free trade and liberalism going around the world. This is the world that Thomas Friedman would eventually dub The World is Flat . What Chang is really trying to do is say, not only is that not the right approach, it’s not even the approach that Britain and America took themselves to get rich. So he is taking a historical look—all the way from the 1600s to the present day—to show that, in fact, when we look at major developed countries, they actually used precisely the kinds of industrial policy techniques that countries in East Asia are doing today. For instance, he shows that Robert Walpole, the de facto first prime minister of Britain in the 1700s, actually developed import substitution policies. He put in place tariffs and blocked other countries from importing goods into Britain so that Britain’s nascent industries could develop, and didn’t have to be competitive with France and other countries at the same time. America in particular ignored intellectual property. One of the funny things about US-China dynamics today is that there’s this notion that China is stealing American technology and just indigenizing it. But America, at least in Chang’s argument, did the exact same thing to the British and Europeans in the 1800s. We would regularly ignore British patents, and just import products, learn from them, copy them, and steal them. The Industrial Revolution comes and starts in Britain, and we just pilfer! We take away the best techniques, the technologies, the machines, and we rebuild them here. So his argument is in the title, which is that America built itself up with industrial policy, and now we are putting in place these rules and thus we’re kicking away the ladder. We’re saying to other countries: ‘You can’t do these techniques. They don’t work. They’re not going to make you rich.’ He’s really focusing on the hypocrisy of that. One of the important things that comes up with industrial policy and really all of economics is around allocation. If you have scarce resources, how do you allocate them in the economy in the most effective way? When you’re rich and wealthy, you can oftentimes allocate to everything. That’s in some ways how modern American fiscal policy works; that’s why we take on so much debt every year. You can simultaneously fund a healthcare system, a university system, a large army, an immense amount of industry, etc. You can do all of the above. But when you look at Western nations back in the 1700s and 1800s, or look at the developing world today, you have to make choices. There are tradeoffs. You can’t do ‘all of the above.’ One of the arguments is that back in the 1800s, America was a poor, rural nation. It was a hinterland. Almost all people lived on farms and in the wilderness, and the nation did not have the resources to spend on intellectual property and following the rules of the Old World. Now that we do, those rules matter a lot more. I would take Chang’s argument, which is really excoriating the multinational development institutions—the International Monetary Fund, the World Bank, and others—and saying, ‘Look, a lot of the advice they give is actually correct for well-developed and advanced economies. But it’s absolutely horrendous for developing nations.’ In many cases, you could argue, the World Bank is stuffed with people who are just not sensitive to the needs of the countries that they’re supposedly serving. As a developing country, what you really have to ask yourself is, ‘What’s right for you? How do you actually go economically from point A to point B?’ Chang’s argument would be: you have to protect local industries; you have to industrialise; you have to build; you have to have factories. Let’s say you’re India. Outside of government duties, it’s probably cheaper to import a Chinese television than it is to manufacture a local television. The Indian television will have fewer features, it will be more expensive, and it’ll be more labor intensive. But you have to start there and actually work your way up the ladder, as opposed to just importing today and not having an industry at all."