Developmentalism: old wine in new bottles

Who would have thought that protectionism could be entertaining? Professor Ha-Joon Chang’s lecture at the LSE last Thursday, part of the university’s “Series on the Future of Global Capitalism”, proved that it can be. Whatever one makes of his views, as a speaker, Prof. Chang is an exceptionally witty and engaging.

In the main, Prof. Chang’s speech was a plea for a new “Developmentalism”, an economic policy strategy in which the state takes on the role of a development catalyst. Using tools like selective tariffs, subsidies and procurement laws favouring the domestic economy, governments in poor countries should nurture their own industries, and break out of dependency on foreign capital and foreign technology. They should create their own versions of Boeing and Volkswagen.

Judging from the chuckling responses and the remarks during the Q&A session, the audience seemed to interpret these proposals as highly unorthodox, bold critical thinking – a protectionist David challenging a neoliberal goliath. This is surprising. State-led development is old hat. It has been tried in a lot of places, creating highly politicised economies with stagnant productivity. Prof. Chang referred briefly to the Latin American experience and pointed out that when this model was at its height, the region experienced high growth rates. What he omits is that these rates were built on sand. They were based on an increase in the utilisation of labour and physical capital, while total factor productivity stagnated. They also depended on ever-increasing foreign debt, which led to the debt crises and economic meltdowns of the 1980s – ‘la decada perdida’ in local jargon.

So what’s new about Prof. Chang’s new developmentalism, which will enable it to avoid these past failures? Nothing much, really. He wants developmentalism to take environmentalism on board, and give more thought to political and institutional considerations. Old developmentalists, Prof. Chang argued, had simply assumed that governments were always competent and benevolent. New developmentalism should not take this for granted.

True: if you placed your hand on a hot cooktop, assuming it was cold, you would burn yourself badly. But the problem is, if you placed your hand on a hot cooktop without assuming that it was cold, you would get burnt just the same.

I was there too; and was amazed to see the popularity of such developmentalism amongst the students. My concern was that libertarian thinkers do not generally make popular and upright speakers such as Professor Chang. People (read voters!) tend to associate and perceive all inequalities with markets instead of state intervention. Somehow we have not been able to assert the morality of free markets and convince common people why markets should be preferred. See a very interesting debate on morality of markets at http://www.templeton.org/market/. Even when wrong, people perceptions about morality of markets count. Not least during the counting of ballot boxes!

I am not surprised that the LSE students bought into the Chang view. I teach sixthformers and they have clearly taken in with their mother’s milk the conviction that the problems of the world should and can be solved by Government. I don’t know why they think that way,but it never seems to enter their head that governments are other than wise and good, nor would it occur to them that individuals and associations of individuals might do a much better job. We need to change the culture!

And, of course, if many, many countries try to pick winners, some will apparently succeed by chance (even central planners can get things right by chance) and be lauded by the likes of Chang. Where losers are picked, people will say “we just need to pick better”. But, if the state picks winners those industries would have “won” in any case if the state had not intervened but their activities would not have been distorted by the state. It is easy to pick winners in retrospect.

That’s exactly the point he made, lauding South Korea, Taiwan and China for their ’succesful’ industrial policies.

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