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CHAPTER 8
Zaire vs Indonesia
Should we turn our backs on corrupt and undemocratic countries?
Zaire: In 1961, Zaire (now the Democratic Republic of the Congo) was a desperately poor country with a per capita annual income of $67. Mobutu Sese Seko came to power in a military coup in 1965 and ruled until 1997. He is estimated to have stolen $5 billion during his 32-year rule, or about 4.5 times the country’s national income in 1961 ($1.1 billion).
Indonesia: In that same year, with a per capita annual income of only $49, Indonesia was even poorer than Zaire. Mohamed Suharto came to power in a military coup in 1966 and ruled until 1998. He is estimated to have stolen at least $15 billion during his 32-year rule. Some suggest the figure may even have been as high as $35 billion.His children became some of the country’s richest business people. If we take the mid-point of these two estimates ($25 billion), Suharto has stolen the equivalent of 5.2 times his country’s national income in 1961 ($4.8 billion).
Zaire’s income per capita in purchasing power terms in 1997, when Mobutu was deposed, was one third of its level in 1965, when he came to power. In 1997, the country stood 141st among the 174 countries for which the UN calculated a ‘human development index’ (HDI). The HDI takes into account not only income but also ‘quality of life’ measured by life expectancy and literacy.
Considering the corruption statistics, Indonesia should have performed even worse than Zaire. Yet where Zaire’s living standards fell by three times during Mobutu’s rule, Indonesia’s rose by more than three times during Suharto’s rule. Its HDI ranking in 1997 was 105th – not the score of a ‘miracle’ economy, but creditable nonetheless, especially considering where it had started.
The Zaire-Indonesia contrast shows the limitations of the increasingly popular view propagated by the Bad Samaritans that corruption is one of the biggest, if not necessarily the biggest, obstacle to economic development. The argument goes that there is no point in helping poor countries with corrupt leaders, because they will ‘do a Mobutu’ and waste the money. This view is reflected in the World Bank’s recent anti-corruption drive, under the leadership of former US deputy defence secretary Paul Wolfowitz, who declared: ‘The fight against corruption is a part of the fight against poverty, not just because corruption is wrong and bad but because it really retards economic development’.1 After Wolfowitz assumed leadership in January 2005, the World Bank suspended loan disbursements to several developing countries on grounds of corruption.2 Wolfowitz resigned from the Bank in 2007, but its campaign against corruption continues.
Corruption is a big problem in many developing countries. But the Bad Samaritans are using it as a convenient justification for the reduction in their aid commitments, despite the fact that cutting aid will hurt the poor more than it will a country’s dishonest leaders, especially in the poorst countries (which tend to be more corrupt, for reasons I shall explain).3 Moreover, they are increasingly using corruption as an ‘explanation’ for the failures of the neo-liberal policies that they have promoted over the past two and a half decades. Those policies have failed because they were wrong, not because they have been overwhelmed by local anti-developmental factors, like corruption or ‘wrong’ culture (as I will discuss in the next chapter).
Does corruption hurt economic development?
Corruption is a violation of the trust vested by its ‘stakeholders’ in the holders of offices in any organization, be it a government, a corporation, a trade union or even an NGO (non-governmental organization). True, there can be instances of ‘noble cause corruption’; one such example being Oscar Schindler’s bribing of Nazi officials that saved the lives of hundreds of Jews, as immortalized in the Steven Spielberg movie, Schindler’s List.4 But they are the exceptions, and corruption is, in general, morally objectionable.
Life would be simpler if morally objectionable things like corruption also had unambiguously negative economic consequences. But the reality is a lot messier. Looking at just the last half a century, there are certainly countries, like Zaire under Mobutu or Haiti under Duvalier, whose economy was ruined by rampant corruption. At the other extreme, we have countries like Finland, Sweden and Singapore, which are known for their cleanliness and have also done very well economically. Then we have countries like Indonesia that were very corrupt but performed well economically. Some other countries – Italy, Japan, Korea, Taiwan and China come to mind – have done even better than Indonesia during this period, despite ingrained corruption on a widespread and often massive scale (though not as serious as in Indonesia).
And corruption is not just a 20th-century phenomenon. Most of today’s rich countries successfully industrialised despite the fact that their public life was spectacularly corrupt.* In Britain and France, the open sale of public offices (not to speak of honours) was a common practice at least until the 18th century.5 In Britain, until the early 19th century, it was considered perfectly normal for ministers to ‘borrow’ their departmental funds for personal profit.6 Until 1870, appointments of high-ranking civil servants in Britain were made on the basis of patronage, rather than merit. The government chief whip (equivalent to the majority leader in the US Congress) was then actually called the patronage secretary of the Treasury, because distributing patronage was his main job.7 In the USA, the ‘spoils’ system, where public offices were allocated to the loyalists of the ruling party regardless of their professional qualifications, became entrenched in the early 19th century and was particularly rampant for a few decades after the Civil War. Not a single US federal bureaucrat was appointed through an open, competitive process until the 1883 Pendleton Act.8 But this was a period when the US was one of the fastest growing economies in the world.
The electoral process was also spectacularly venal. In Britain, bribery, ‘treating’ (typically done by giving free drinks in party-affiliated public houses), promises of jobs and threats to voters were widespread in elections until the Corrupt and Illegal Practices Act of 1883. Even after the Act, electoral corruption persisted well into the 20th century in local elections. In the US, public officials were often used for party political campaigns (including being forced to donate to electoral campaign funds). Electoral fraud and vote-buying were widespread. Elections in the US, where there were a lot of immigrants, involved turning ineligible aliens into instant citizens who could vote, which was done ‘with no more solemnity than, and quite as much celerity as, is displayed in converting swine into pork in a Cincinnati packing house’, according to the New York Tribune in 1868.9 With expensive election campaigns, it was no big surprise that many elected officials actively sought bribes. In the late 19th century, legislative corruption in the US, especially in state assemblies, got so bad that the future US president Theodore Roosevelt lamented that the New York assemblymen, who engaged in the open selling of votes to lobbying groups, ‘had the same idea about Public Life and Civil Service that a vulture has of a dead sheep’.10
How is it possible that corruption has such different economic consequences in different economies? Many corrupt countries do disastrously (e.g., Zaire, Haiti), some others have done decently (e.g., Indonesia), while still others do very well (e.g., the US in the late 19th century and post-Second-World-War East Asian countries). In order to answer the question, we need to open the ‘black box’ called corruption and understand its inner workings.
A bribe is a transfer of wealth from one person to another. It does not necessarily have negative effects on economic efficiency and growth. If the minister (or some other public official) taking a bribe from a capitalist is investing that money in another project that is at least as productive as that which the capitalist would have otherwise invested in (had he not had to pay the bribe), the venality involved may have no effect on the economy in terms of efficiency or growth. The only difference is that the capitalist is poorer and the minister richer – i.e., it is a question of income distribution.
Of course, it is always possible that the money is not used by the minister as productively as by the capitalist. The minister may blow his ill-gotten gains in conspicuous consumption, while the capitalist might have invested the same money wisely. This is often the case. But it cannot be assumed to be so a priori. Historically, many bureaucrats and politicians have proved to be wily investors, while many capitalists squandered their fortunes. If the minister uses the money more effectively than the capitalist, corruption may even help economic growth.
A critical issue in this regard is whether the dirty money stays in the country. If the bribe is deposited in a Swiss bank, it cannot contribute to creating further income and jobs through investment – which is one way in which such odious money can partially ‘redeem’ itself. And, indeed, this is one of the main reasons for the difference between Zaire and Indonesia. In Indonesia, the money from corruption mostly stayed inside the country, creating jobs and incomes. In Zaire, much of the corrupt money was shipped out of the country. If you must have corrupt leaders, you at least want them to keep their loot at home.
Whether or not the income transfer due to corruption results in a more (or less) productive use of the money paid out as bribes, corruption can create a variety of economic problems by ‘distorting’ government decisions.
For example, if a bribe allows a less efficient producer to get the licence to build, say, a new steel mill, it will lower the economy’s efficiency. But, once again, such an outcome is not a foregone conclusion. It has been argued that the producer who is willing to pay the highest bribe is likely to be the most efficient producer – as the producer who expects to make more money out of the licence would be, by definition, willing to offer the bigger bribe to secure the licence. If that is the case, giving the licence to the producer paying the highest bribe is essentially the same as a government auctioning the licence off and is thus the best way to choose the most efficient producer – except that the potential auction income goes to the unscrupulous official, rather than to the state exchequer, as it would have done in a transparent auction. Of course, this ‘bribing as an unofficial (and efficient) auction’ argument falls apart if the more efficient producers are morally upright and refuse to pay bribes, in which case corruption will allow a less efficient producer to get the licence.
Corruption may also ‘distort’ government decisions by hampering regulation. If a water company supplying sub-standard water can continue the practice by bribing the relevant officials, there will be negative economic consequences – a higher incidence of water-borne diseases that will increase health care costs and, in turn, reduce labour productivity, for example.
But if the regulation was an ‘unnecessary’ one, corruption may increase economic efficiency. For example, before its legal reform in 2000, opening a factory in Vietnam required the submission of dozens of documents (including the applicant’s character references and medical certificates), including 20 or so issued by the government; it is said to have taken between six and twelve months to prepare all the paperwork and get all the necessary approvals.11 In such a situation, it may be better if the potential investor bribes the relevant government officials and gets the licence quickly. The investor wins by earning more money, it may be argued, the consumer gains by having his demand satisfied more quickly, and the government official gains by getting richer (though there is a breach of confidence and the government loses legitimate revenue). For this reason, it has often been argued that bribery may enhance the economic efficiency of an over-regulated economy by re-introducing market forces, if through illegal means. This is what the American veteran political scientist Samuel Huntington meant in his classic passage: ‘In terms of economic growth, the only thing worse than a society with a rigid, over-centralized dishonest bureaucracy is one with a rigid, over-centralized honest bureaucracy.’12 Once again, bribery that lets enterprises subvert regulations may or may not be economically beneficial (if still illegal and at best morally ambiguous), depending on the nature of the regulation.
So the economic consequences of corruption depend on which decisions the corrupt act affects, how the bribes are used by the recipients and what would have been done with the money had there been no corruption. I could have also talked about things like the predictability of corruption (e.g., is there a ‘fixed price’ for a certain kind of ‘service’ by the corrupt official?) or the degree of ‘monopoly’ in the bribery market (e.g., how many people do you have to bribe to get a licence?). But the point is that the combined result of all these factors is difficult to predict. This is why we observe such vast differences across countries in terms of the relationship between corruption and economic performance.
Prosperity and honesty
If the impact of corruption on economic development is ambiguous, how about the latter’s impact on the former? My answer is that economic development makes it easier to reduce corruption, but that there is no automatic relationship. Quite a lot depends on the conscious efforts made to reduce corruption.
As I discussed earlier, history shows that, at earlier stages of economic development, corruption is difficult to control. The fact that today no country that is very poor is very clean suggests that a country has to rise above absolute poverty before it can significantly reduce venality in the system. When people are poor, it is easy to buy their dignity – starving people find it difficult not to sell their votes for a bag of flour, while under-paid civil servants will often fail to resist the temptation to take a bribe. But it is not just a matter of personal dignity. There are also more structural causes.
Economic activities in developing countries are mostly dispersed across a large number of small units (e.g., small peasant farms, corner shops, hawkers’ stalls and backyard workshops). This provides a fertile ground for petty corruption, which may be too numerous to detect for under-resourced developing country governments. These small economic units also have very poor, if at all, accounts, making them ‘invisible’ for tax purposes. This invisibility combines with the lack of administrative resources within revenue services to produce low tax collection capacity. This inability to collect taxes limits the government budget, which, in turn, encourages corruption in a number of ways.
First of all, low government revenue makes it difficult to pay decent salaries to public officials, which makes them vulnerable to bribery. It is actually quite remarkable how so many developing country government officials live honestly despite being paid a pittance. But, the poorer the salaries are, the higher the chance that officials will succumb to the temptation. Also, a limited government budget leads to a weak (or even absent) welfare state. So the poor have to rely on patronage from politicians who give out loyalty-based welfare benefits in return for votes. In order to do this, the politicians need money, so they take bribes from corporations, national and international, that need their favour. Finally, a limited government budget makes it difficult for the government to spend resources on fighting corruption. In detecting and prosecuting dishonest officials, the government needs to hire (in-house or from outside) expensive accountants and lawyers. Fighting corruption is not cheap.
With better living conditions, people can achieve higher behavioural standards. Economic development also increases the capacity of the government to collect taxes – as economic activities become more ‘visible’ and as government administrative capacity rises. This, in turn, allows it to increase public salaries, expand the welfare state and spend more resources on detecting and punishing malfeasance among officials – all of which help reduce corruption.
Having said all this, it is important to point out that economic development does not automatically create a more honest society. For example, the US was more corrupt in the late 19th century than earlier in that century, as I mentioned earlier.Moreover, some rich countries are far more corrupt than poor ones. To illustrate this point, let’s look at the Corruption Perception Index published in 2005 by Transparency International, the influential anti-corruption watchdog.* According to the index, Japan (per capita income $37, 180 in 2004) was jointly ranked 21st with Chile ($4, 910), a country with barely 13% of its income. Italy ($26, 120) ranked joint 40th with Korea ($13, 980), with half its income level, and Hungary ($8, 270), with one-third its income level. Botswana ($4, 340) and Uruguay ($3, 950), despite having per capita incomes only about 15% that of Italy or 30% that of Korea, ranked well ahead of them, at joint 32nd. These examples suggest that economic development does not automatically reduce corruption. Deliberate actions need to be taken to achieve that goal.13
Too many market forces
Not only are the Bad Samaritans using corruption as an unwarranted ‘explanation’ for the failures of neo-liberal policies (for they believe that those policies cannot be wrong) but the solution to the corruption problem that they have been promoting has often worsened, rather than alleviated, it.
The Bad Samaritans, basing their argument on neo-liberal economics, say that the best way to tackle corruption is to introduce more market forces into both the private and the public sectors – a solution that neatly dovetails into their market-fundamentalist economic programme. They argue that freeing the market forces in the private sector – that is, deregulation – will not only increase economic efficiency but also reduce corruption by depriving politicians and bureaucrats of the very powers to allocate resources that give them the ability to extract bribes in the first place. In addition, the Bad Samaritans have implemented measures based on the so-called New Public Management (NPM), which tries to increase administrative efficiency and reduce corruption by introducing more market forces into the government itself – more frequent contracting out, a more active use of performance-related pay and short-term contracts and a more active exchange of personnel between the public and private sectors.
Unfortunately, NPM-inspired reforms have often increased, rather than reduced, corruption. Increased contracting out has meant more contracts with the private sector, creating new opportunities for bribes. The increased flow of people between the public and private sectors has had an even more insidious effect. Once lucrative private-sector employment becomes a possibility, public officials may be tempted to befriend future employers by bending, or even breaking, the rules for them. They may do this even without being paid for it right away.With no money changing hands, no law has been broken (and, therefore, no corruption has occurred) and, at most, the official can be accused of bad judgment. But the payoff is in the future. It may not even be made by the same corporations that benefited from the original decision. Having built up his reputation as a ‘pro-business’ person or, even more euphemistically, a ‘reformer’, he can later move to a plum job with a private law firm, a lobbying organization or even an international agency. He may even use his pro-business credentials to set up a private equity fund. The incentive to do favours for the private sector becomes all the greater if the careers of the civil servants are made insecure through short-term contracting in the name of increasing market discipline. If they know that they are not going to stay in the civil service very long, they will have all the more incentive to cultivate their future employment prospects.*
In addition to the impact of the introduction of New Public Management, neo-liberal policies have also indirectly, and unintentionally, increased corruption by promoting trade liberalization, which weakens government finances, which, in turn, makes corruption more likely and difficult to fight.14
Also, deregulation, another key component of the neo-liberal policy package, has increased corruption in the private sector. Private sector crookedness is often ignored in the economic literature because corruption is usually defined as the abuse of public office for personal gain.15 But dishonesty exists in the private sector too. Financial deregulation and relaxation of accounting standards have led to insider trading and false accounting even in rich nations – recall cases like the energy company Enron, and the telecommunications company WorldCom and their accountancy firm Arthur Andersen in the ‘Roaring Nineties’ in the US.16 Deregulation can also increase the power of private-sector monopolies, which expands the opportunities for their unscrupulous purchasing managers to take bribes from sub-contractors.
Corruption often exists because there are too many market forces, not too few. Corrupt countries have shadow markets in the wrong things, such as government contracts, jobs and licences. Indeed, it is only after they made the sale of things like government offices illegal that today’s rich countries could significantly reduce profiteering through the abuse of public office. Unleashing more market forces through deregulation, as the neo-liberal orthodoxy constantly pushes for, may worsen the situation. This is why corruption has often increased, rather than decreased, in many developing countries following liberalization pushed by the Bad Samaritans. The extreme racketeering seen in the process of liberalization and privatization in post-communist Russia has become notorious, but similar phenomena have been observed in many developing countries.17
Democracy and the free market
In addition to corruption, there is another political issue that occupies an important place in the neo-liberal policy agenda. It is democracy. But democracy, especially its relationship with economic development, is a complex and highly charged issue. So, unlike on issues like free trade, inflation or privatization, there is no united position on it among the Bad Samaritans.
Some suggest that democracy is essential for economic development, as it protects citizens from arbitrary expropriation by the rulers; without such protection, there will be no incentive to accumulate wealth; thus the USAID argues that ‘[e]xpanding democracy improves individual opportunity for prosperity and improved well-being’.18 Others think that democracy may be sacrificed if it becomes necessary in defence of a free market, as evidenced by the strong support offered by some neo-liberal economists to the Pinochet dictatorship in Chile. Still others think that democracy will naturally develop once the economy develops (which, of course, can be best achieved by free-trade, free-market policies), because it will produce an educated middle class that naturally wants democracy. Yet others sing the praises of democracy all the time but keep quiet when the undemocratic country in question is a ‘friend’ – in keeping with the realpolitik tradition represented by Franklin Roosevelt’s famous comment on the Nicaraguan dictator, Anastasio Somoza, that ‘he may be a son of a bitch, but he is our son of a bitch’.19
Despite this diversity of views, there is a strong consensus among neo-liberals that democracy and economic development reinforce each other. Of course, neo-liberals are not unique in holding such a view. But what distinguishes them is their belief that this relationship is mainly, if not exclusively, mediated by the (free) market. They argue that democracy promotes free markets, which, in turn, promote economic development, which then promotes democracy: ‘The market underpins democracy, just as democracy should normally strengthen the market’, writes Martin Wolf, the British financial journalist, in his renowned book, Why Globalisation Works.20
According to the neo-liberal view, democracy promotes free markets because a government that can be unseated without resorting to violent measures has to be restrained in its predatory behaviour. If they don’t have to worry about losing power, rulers can impose excessive taxes with impunity and even confiscate private property, as numerous autocrats have done throughout history.When this happens, incentives to invest and generate wealth are destroyed and market forces distorted, impeding economic development. By contrast, under democracy, the predatory behaviour of the government is restrained and thus free markets can flourish, promoting economic development. In turn, free markets promote democracy because they lead to economic development, which produces wealth-holders independent of the government, who will demand a mechanism through which they can counter the arbitrary actions of the politicians – democracy. This is what the former US president Bill Clinton had in mind when he said in support of China’s accession to the WTO: ‘as China’s people become more mobile, prosperous, and aware of alternative ways of life, they will seek greater say in the decisions that affect their lives’.21
Leaving aside for the moment the question as to whether the free market is the best vehicle for economic development (to which I have repeatedly said no throughout this book), can we at least say that democracy and (free) markets are, indeed, natural partners and reinforce each other?
The answer is no. Unlike what neo-liberals say, market and democracy clash at a fundamental level. Democracy runs on the principle of ‘one man (one person), one vote’. The market runs on the principle of ‘one dollar, one vote’. Naturally, the former gives equal weight to each person, regardless of the money she/he has. The latter gives greater weight to richer people. Therefore, democratic decisions usually subvert the logic of market. Indeed, most 19th-century liberals opposed democracy because they thought it was not compatible with a free market.22 They argued that democracy would allow the poor majority to introduce policies that would exploit the rich minority (e.g., a progressive income tax, nationalization of private property), thus destroying the incentive for wealth creation.
Influenced by such thinking, all of today’s rich countries initially gave voting rights only to those who owned more than a certain amount of property or earned enough income to pay more than a certain amount of tax. Some of them had qualifications related to literacy or even educational achievement (so, for example, in some German states, a university degree gave you one extra vote) – which were, of course, closely related to people’s economic status anyway and were usually used in conjunction with property/tax conditions. So, in England, the supposed birthplace of modern democracy, only 18% of men could vote, even after the famous 1832 Reform Act.23 In France, before the introduction of universal male suffrage in 1848 (the first in the world), only around 2% of the male population could vote due to restrictions regarding age (you had to be over 30) and, more importantly, payment of tax.24 In Italy, even after the lowering of the voting age to 21 in 1882, only around two million men (equivalent to about 15% of the male population) could vote, due to tax payment and literacy requirements.25 The economic qualification for suffrage was, then, the flip side of the famous colonial American slogan against the British, ‘no taxation without representation’ – there was also to be ‘no representation without taxation’.
By pointing out the contradiction between democracy and the market, I am not saying that market logic should be rejected. Under communism, total rejection of the ‘one dollar, one vote’ principle not only created economic inefficiency but also propagated inequities based on other criteria – political power, personal connections or ideological credentials. It should also be noted that money can be a greater leveller. It can work as a powerful solvent of undesirable prejudices against people of particular races, social castes or occupational groups. It is much easier to make people treat members of discriminated groups better if the latter have money (that is, when they are potential customers or investors). The fact that even the openly racist apartheid regime in South Africa gave the Japanese ‘honorary white’ status is a powerful testimony to the ‘liberating’ power of the market.
But, however positive market logic may be in some respects, we should not, and cannot, run society solely on the principle of ‘one dollar, one vote’. Leaving everything to the market means that the rich may be able to realize even the most frivolous element of their desires, while the poor may not be able even to survive – thus the world spends twenty times more research money on slimming drugs than on malaria, which claims more than a million lives and debilitates millions more in developing countries every year.Moreover, there are certain things that should simply not be bought and sold – even for the sake of having healthy markets. Judicial decisions, public offices, academic degrees and qualifications for certain professions (lawyers, medical doctors, teachers, driving instructors) are such examples. If these things can be bought, there will be serious problems not just with the legitimacy of the society in question but also with economic efficiency: sub-standard medical doctors or unqualified teachers can lower the quality of the labour forces; venal judicial decisions will undermine the efficacy of the contract law.
Democracy and markets are both fundamental building blocks for a decent society. But they clash at a fundamental level. We need to balance them. When we add the fact that free markets are not good at promoting economic development (as I have shown throughout the book), it is difficult to say that there is a virtuous circle linking democracy, the free market and economic development, contrary to what the Bad Samaritans argue.
When democracies undermine democracy
Free market policies promoted by the Bad Samaritans have brought more areas of our life under the ‘one dollar, one vote’ rule of market. In so far as there is a natural tension between free markets and democracy, this means that democracy is constrained by such policies, even if that was not the intention. But there is more. The Bad Samaritans have recommended policies that actively seek to undermine democracy in developing countries (although they would never put them in those terms).
The argument starts reasonably enough. Neo-liberal economists worry that politics opens the door for perversion of market rationality: inefficient firms or farmers may lobby the parliamentarians to get tariffs and subsidies, imposing costs on the rest of society that has to buy expensive domestic products; populist politicians may put pressure on the central bank to ‘print money’ in time for election campaign, which causes inflation and hurts people in the longer run. So far, so good.
The neo-liberals’ solution to this problem is to ‘depoliticize’ the economy. They argue that the very scope of government activity should be reduced – through privatization and liberalization – to a minimal state. In those few areas where it is still allowed to operate, the room for policy discretion should be minimized. It is argued that such restraints are particularly needed in developing nations where the leaders are less competent and more corrupt. Such restraints can be provided by rigid rules that constrain government choices – for example, a law requiring a balanced budget – or by the establishment of politically independent policy agencies – an independent central bank, independent regulatory agencies and even an independent tax office (known as ARA, or autonomous revenue authority, and tried in Uganda and Peru26). For developing countries, it is seen as particularly important to sign up to international agreements – for example, the WTO agreements, bilateral/regional free trade agreements or investment agreements – because their leaders are less responsible and thus more likely to stray from the righteous path of neo-liberal policy.
The first problem with this argument for de-politicization is the assumption that we can clearly know where economics should end and politics should begin. But that is not possible because markets – the domain of economics – are political constructs themselves. Markets are political constructs in so far as all property rights and other rights that underpin them have political origins. The political origins of economic rights can be seen in the fact that many of them that are seen as natural today were hotly contested politically in the past – examples include the right to own ideas (not accepted by many before the introduction of intellectual property rights in the 19th century) and the right not to have to work when young (denied to many poor children).27 When these rights were still politically contested, there were plenty of ‘economic’ arguments as to why honouring them was incompatible with the free market.28 Given this, when neo-liberals propose de-politicizing the economy, they are presuming that the particular demarcation between economics and politics that they want to draw is the correct one. This is unwarranted.
More importantly for our concern in this chapter, in pushing for the depoliticization of the economy, the Bad Samaritans are undermining democracy. Depoliticization of policy decisions in a democratic polity means – let’s not mince our words – weakening democracy. If all the really important decisions are taken away from democratically elected governments and put in the hands of un-elected technocrats in the ‘politically independent’ agencies, what is the point of having democracy? In other words, democracy is acceptable to neo-liberals only in so far as it does not contradict the free market; this is why some of them saw no contradiction between supporting the Pinochet dictatorship and praising democracy. To put it bluntly, they want democracy only if it is largely powerless – or as Ken Livingstone, the current left-wing mayor of London said in a 1987 book title, If Voting Changed Anything They’d Abolish It.29
Thus seen, like the old liberals, neo-liberals believe deep down that giving political power to those who ‘do not have a stake’ in the existing economic system will inevitably result in an ‘irrational’ modification of the status quo in terms of distribution of property (and other economic) rights. However, unlike their intellectual predecessors, neo-liberals live in an era when they cannot openly oppose democracy, so they try to do it by discrediting politics in general.30 By discrediting politics in general, they gain legitimacy for their actions that take away decision powers from the democratically elected representatives. In doing so, neo-liberals have succeeded in diminishing the scope of democratic control without ever openly criticizing democracy itself. The consequence has been particularly damaging in developing countries, where the Bad Samaritans have been able to push through ‘anti-democratic’ actions well beyond what would be acceptable in rich countries (such as political independence for the tax office).*
Democracy and economic development
Democracy and economic development obviously influence each other, but the relationship is much more complex than what is envisaged in the neo-liberal argument, where democracy promotes economic development by making private property more secure and markets freer.
To begin with, given the fundamental tension between democracy and market, it is unlikely that democracy will promote economic development through promoting the free market. Indeed, the old liberals feared that democracy may discourage investment and thus growth (e.g., excessive taxation, nationalization of enterprises).31 On the other hand, democracy may promote economic development through other channels. For example, democracy may re-direct government spending into more productive areas – e.g., away from military spending to education or infrastructure investment. This will help economic development. As another example, democracy may promote economic growth by creating the welfare state. Contrary to the popular perception, a well-designed welfare state, especially if combined with a good retraining programme, can reduce the cost of unemployment to the workers and thus make them less resistant to automation that raises productivity (it is not a coincidence that Sweden has the world’s highest number of industrial robots per worker). I could mention some more possible channels through which democracy may influence economic development, positively or negatively, but the point is that the relationship is very complex.
It is no wonder, then, that there is no systematic evidence either for or against the proposition that democracy helps economic development. Studies that have tried to identify statistical regularities across countries in terms of the relationship between democracy and economic growth have failed to come up with a systematic result either way.32 Even at the individual country level, we see a huge diversity of outcomes. Some developing countries did terribly in economic terms under dictatorships – the Philippines under Marcos, Zaire under Mobutu or Haiti under Duvalier are the best-known examples. But there are cases like Indonesia under Suharto or Uganda under Museveni, where dictatorship resulted in decent, if not spectacular, economic performance. Then there are cases like South Korea, Taiwan, Singapore and Brazil in the 1960s and the 1970s or today’s China that have done very well economically under dictatorship. By contrast, today’s rich countries notched up their best-ever economic record when they significantly extended democracy between the end of the Second World War and the 1970s – during this period, many of them adopted universal suffrage (Australia, Belgium, Canada, Finland, France, Germany, Italy, Japan, Switzerland and the US), strengthened minority rights and intensified the dreaded ‘exploitation’ of the rich by the poor (such as nationalization of enterprises or a rise in progressive income tax to finance, among other things, a welfare state).
Of course, we don’t need to show that democracy positively affects economic growth in order to be able to support it. As Amartya Sen, the Nobel Laureate economist, argues, democracy has an intrinsic value and should be a criterion in any reasonable definition of development.33 Democracy contributes to building a decent society by making certain things immune to the ‘one dollar, one vote’ rule of the market – public offices, judicial decisions, educational qualifications, as I discussed earlier. Participation in democratic political processes has intrinsic values that may not be easily translated into monetary value. And so on. Therefore, even if democracy negatively affected economic growth, we might still support it for its intrinsic values. Especially when there is no evidence that it does, we may support it even more strongly.
If the impact of democracy on development is ambiguous, the impact of economic development on democracy seems more straightforward. It seems fairly safe to say that, in the long run, economic development brings democracy. But this broad picture should not obscure the fact that some countries have sustained democracy even when they were fairly poor, while many others have not become democracies until they are very rich. Without people actually fighting for it, democracy does not automatically grow out of economic prosperity.34
Norway was the second true democracy in the world (it introduced universal suffrage in 1913, after New Zealand in 1907), despite the fact that it was one of the poorest economies in Europe at the time. By contrast, the US, Canada, Australia and Switzerland became democracies, even in the purely formal sense of giving everyone a vote, only in the 1960s and the 1970s, when they were already very rich. Canada gave native Americans voting rights only in 1960. Australia abandoned its ‘White Australia’ policy and allowed non-whites to vote as late as 1962. Only in 1965 did the Southern states in the US allow African Americans to vote, thanks to the civil rights movement led by people like Martin Luther King, Jr.35 Switzerland allowed women to vote as late as 1971 (even later if you count the two renegade cantons, Appenzell Ausser Rhoden and Appenzell Inner Rhoden, which refused to give women votes until 1989 and 1991 respectively). Similar observations may be made in relation to developing countries today. Despite being one of the world’s poorest countries until recently, India has maintained democracy well for the last six decades, while Korea and Taiwan were not democracies until the late-1980s, when they had become fairly prosperous.
Politics and economic development
Corruption and lack of democracy are big problems in many developing countries. But the relationships between them and economic development are far more complex than the Bad Samaritans suggest. The failure to think through the complexity of the corruption issue is, for example, why so many developing country politicians who come to power on an anti-corruption platform not only fail to clean up the system but often end up being ousted or even jailed for corruption themselves. Latin American presidents, like Brazil’s Fernando Collor de Mello and Peru’s Alberto Fujimori, come to mind.When it comes to democracy, the neo-liberal view that democracy promotes a free market, which, in turn, promotes economic development, is highly problematic. There is a strong tension between democracy and a free market, while a free market is unlikely to promote economic development. If democracy promotes economic development, it is usually through some other channel than the promotion of a free market, contrary to what the Bad Samaritans argue.
Moreover, what the Bad Samaritans have recommended in these areas have not solved the problems of corruption and lack of democracy. In fact, they have often made them worse. Deregulation of the economy in general, and the introduction of greater market forces in the management of the government more specifically, has often increased, rather than reduced, corruption. By forcing trade liberalization, the Bad Samaritans have also inadvertently encouraged corruption; the resulting fall in government revenue has depressed public salaries and thus encouraged petty corruption. While all the time paying lip service to democracy, the Bad Samaritans have promoted measures that have weakened democracy. Some of this happened through deregulation itself, which expanded the domain of the market and thus reduced the domain of democracy. But the rest of it happened through deliberate measures: binding governments to rigid domestic laws or international treaties, and giving political independence to the central bank and other government agencies.
Having once dismissed political factors as minor details that should not get in the way of good economics, neo-liberals have recently become very interested in them. The reason is obvious – their economic programme for developing countries as implemented by the Unholy Trinity of the IMF, World Bank and WTO has had spectacular failures (just think of Argentina in the 1990s) and very few successes. Because it is unthinkable to the Bad Samaritans that free trade, privatization and the rest of their policies could be wrong, the ‘explanation’ for policy failure is increasingly found in non-policy factors, such as politics and culture.
In this chapter, I have shown how the neo-liberal attempt to explain the failures of their policies with political problems such as corruption and lack of democracy is not convincing. I have also pointed out that their alleged solutions to these problems have often made things worse. In the next chapter, I will turn to another non-policy factor, culture, which is rapidly becoming a fashionable explanation for development failure, thanks to the recent popularity of the idea of a ‘clash of civilizations’.
* Their corruption was such that the very definition of corruption was different from what prevails today.When he was accused of corruption in Parliament in 1730, Robert Walpole freely admitted that he had great estates and asked: ‘having held some of the most lucrative offices for nearly 20 years, what could anyone expect, unless it was a crime to get estates by great office’. He turned the tables on his accusers by asking them, ‘how much greater a crime it must be to get an estate out of lesser offices.’ See Nield (2002), Public Corruption – The Dark Side of Social Evolution (Anthem Press, London), p. 62.
* The index should be taken with a grain of salt. As the name makes it clear, it is only measuring the ‘perception’ revealed in surveys of technical experts and businessmen, who have their own limited knowledge and biases. The problem with such a subjective measure is well illustrated by the fact that the perceptions of corruption in the Asian countries affected by the 1997 financial crisis suddenly rose significantly after the crisis, despite having almost constantly fallen in the preceding decade (see H-J. Chang [2000], ‘The Hazard of Moral Hazard – Untangling the Asian Crisis’, World Development, vol. 28, no. 4). Also, what is perceived as corruption depends on the country, thus affecting the expert perception too. For example, in a lot of countries, US-style spoils disbursement of government jobs will be considered corrupt, but it is not considered so in the US. Applying, say, the Finnish definition will make the US more corrupt than is captured by the index (the US was ranked the 17th). Also, a lot of corruption in developing countries involves firms (or sometimes even governments) from rich countries paying bribes, which is not captured in the perception of corruption in the rich countries themselves. So the rich countries may be more corrupt than they appear, once we include their overseas activities. The index can be downloaded from http://www.transparency.org/content/download/1516/7919.
* The marked increase in corruption in post-Thatcher Britain, the pioneer of NPM, is a salutary lesson regarding market-based anti-corruption campaigns. Commenting on the experience, Robert Nield, a retired Cambridge economics professor and a member of the famous 1968 Fulton civil service reform committee, laments that ‘I cannot think of another instance where a modern democracy has systematically undone the system by which incorrupt public services were brought into being’. See Nield (2002), Public Corruption (Anthem Press, London), p. 198.
* All this is, of course, not to deny that a certain degree of de-politicization of the resource allocation process may be necessary. For one thing, unless the resource allocation process is at least, to a degree, accepted as ‘objective’ by the members of the society, the political legitimacy of the economic system itself may be threatened. Moreover, high costs would be incurred in search and bargaining activities if every allocative decision is regarded as potentially contestable, as was the case in the ex-communist countries. However, this is not the same as arguing, as the neo-liberals do, that no market under any circumstance should be subject to political modifications, because, in the final analysis, there is no market that can be really free from politics.

CHAPTER 9
Lazy Japanese and thieving Germans
Are some cultures incapable of economic development?
Having toured lots of factories in a developing country, an Australian management consultant told the government officials who had invited him: ‘My impression as to your cheap labour was soon disillusioned when I saw your people at work. No doubt they are lowly paid, but the return is equally so; to see your men at work made me feel that you are a very satisfied easy-going race who reckon time is no object. When I spoke to some managers they informed me that it was impossible to change the habits of national heritage.’
This Australian consultant was understandably worried that the workers of the country he was visiting did not have the right work ethic. In fact, he was being quite polite. He could have been blunt and just called them lazy. No wonder the country was poor – not dirt poor, but with an income level that was less than a quarter of Australia’s.
For their part, the country’s managers agreed with the Australian, but were smart enough to understand that the ‘habits of national heritage’, or culture, cannot be changed easily, if at all. As the 19th-century German economist-cum-sociologist Max Weber opined in his seminal work, The Protestant Work Ethic and the Spirit of Capitalism, there are some cultures, like Protestantism, that are simply better suited to economic development than others.
The country in question, however, was Japan in 1915.1 It doesn’t feel quite right that someone from Australia (a nation known today for its ability to have a good time) could call the Japanese lazy. But this is how most westerners saw Japan a century ago.
In his 1903 book, Evolution of the Japanese, the American missionary Sidney Gulick observed that many Japanese ‘give an impression … of being lazy and utterly indifferent to the passage of time’.2 Gulick was no casual observer. He lived in Japan for 25 years (1888–1913), fully mastered the Japanese language and taught in Japanese universities. After his return to the US, he was known for his campaign for racial equality on behalf of Asian Americans. Nevertheless, he saw ample confirmation of the cultural stereotype of the Japanese as an ‘easygoing’ and ‘emotional’ people who possessed qualities like ‘lightness of heart, freedom from all anxiety for the future, living chiefly for the present’.3 The similarity between this observation and that of today’s Africa, in this case by an African himself – Daniel Etounga-Manguelle, a Cameroonian engineer and writer – is striking: ‘The African, anchored in his ancestral culture, is so convinced that the past can only repeat itself that he worries only superficially about the future. However, without a dynamic perception of the future, there is no planning, no foresight, no scenario building; in other words, no policy to affect the course of events’.4
After her tour of Asia in 1911–1912, Beatrice Webb, the famous leader of British Fabian socialism, described the Japanese as having ‘objectionable notions of leisure and a quite intolerable personal independence’.5She said that, in Japan, ‘there is evidently no desire to teach people to think’.6 She was even more scathing about my ancestors. She described the Koreans as ‘12 millions of dirty, degraded, sullen, lazy and religionless savages who slouch about in dirty white garments of the most inept kind and who live in filthy mudhuts’.7 No wonder she thought that ‘[i]f anyone can raise the Koreans out of their present state of barbarism I think the Japanese will’, despite her rather low opinion of the Japanese.8
This was not just a western prejudice against eastern peoples. The British used to say similar things about the Germans. Before their economic take-off in the mid-19th century, the Germans were typically described by the British as ‘a dull and heavy people’.9 ‘Indolence’ was a word that was frequently associated with the Germanic nature.10 Mary Shelley, the author of Frankenstein, wrote in exasperation after a particularly frustrating altercation with her German coach-driver: ‘the Germans never hurry’.11 It wasn’t just the British. A French manufacturer who employed German workers complained that they ‘work as and when they please’.12
The British also considered the Germans to be slow-witted. According to John Russell, a travel writer of the 1820s, the Germans were a ‘plodding, easily contented people … endowed neither with great acuteness of perception nor quickness of feeling’. In particular, according to Russell, they were not open to new ideas; ‘it is long before [a German] can be brought to comprehend the bearings of what is new to him, and it is difficult to rouse him to ardour in its pursuit.’13 No wonder that they were ‘not distinguished by enterprise or activity’, as another mid-19th century British traveller remarked.14
Germans were also deemed to be too individualistic and unable to co-operate with each other. The Germans’ inability to co-operate was, in the view of the British, most strongly manifested in the poor quality and maintenance of their public infrastructure, which was so bad that John McPherson, a viceroy of India (and, therefore, well used to treacherous road conditions), wrote, ‘I found the roads so bad in Germany that I directed my course to Italy’.15 Once again, compare this with a comment by the African observer that I quoted above: ‘African societies are like a football team in which, as a result of personal rivalries and a lack of team spirit, one player will not pass the ball to another out of fear that the latter might score a goal’.16
British travellers in the early 19th century also found the Germans dishonest – ‘the tradesman and the shopkeeper take advantage of you wherever they can, and to the smallest imaginable amount rather than not take advantage of you at all … This knavery is universal’, observed Sir Arthur Brooke Faulkner, a physician serving in the British army.17
Finally, the British thought the Germans to be overly emotional. Today many British seem to think that Germans have an almost genetic emotional deficiency. Yet talking about excessive German emotion, Sir Arthur observed that ‘some will laugh all sorrows away and others will always indulge in melancholy’.18 Sir Arthur was an Irishman, so his calling the Germans emotional would be akin to a Finn calling the Jamaicans a gloomy lot, according to the cultural stereotypes prevailing now.
So there you are. A century ago, the Japanese were lazy rather than hardworking; excessively independent-minded (even for a British socialist!) rather than loyal ‘worker ants’; emotional rather than inscrutable; light-hearted rather than serious; living for today instead of considering the future (as manifested in their sky-high savings rates). A century and half ago, the Germans were indolent rather than efficient; individualistic rather than co-operative; emotional rather than rational; stupid rather than clever; dishonest and thieving rather than law-abiding; easy-going rather than disciplined.
These characterizations are puzzling for two reasons. First, if the Japanese and the Germans had such ‘bad’ cultures, how have they become so rich? Second, why were the Japanese and the Germans then so different from their descendants today? How could they have so completely changed their ‘habits of national heritage’?
I will answer these questions in due course. But before I do, I need first to clear up some widespread misunderstandings about the relationship between culture and economic development.
Does culture influence economic development?
The view that cultural differences explain the variations in economic development across societies has been around for a long time. The underlying insight is obvious. Different cultures produce people with different values, which manifest themselves in different forms of behaviour. As some of these forms of behaviour are more helpful for economic development than others, those countries with a culture that produces more pro-developmental forms of behaviour will do better than others economically.
Samuel Huntington, the veteran American political scientist and author of the controversial book, The Clash of Civilizations, put this idea succinctly. In explaining the economic divergence between South Korea and Ghana, two countries that were at similar levels of economic development in the 1960s, he argued: ‘Undoubtedly, many factors played a role, but … culture had to be a large part of the explanation. South Koreans valued thrift, investment, hard work, education, organization, and discipline. Ghanaians had different values. In short, cultures count’.19
Few of us would dispute that people who display forms of behaviour like ‘thrift, investment, hard work, education, organization, and discipline’will be economically successful. Cultural theorists, however, say more than that. They argue that these forms of behaviour are largely, or even entirely, fixed because they are determined by culture. If economic success is really determined by ‘habits of national heritage’, some people are destined to be more successful than others, and there is not much that can be done about it. Some poor countries will just have to stay that way.
Culture-based explanations for economic development were popular right up to the 1960s. But in the era of civil rights and de-colonization, people began to feel that these explanations had cultural-supremacist (if not necessarily racist) overtones. They fell into disrepute as a result. Such explanations have, however, made a comeback in the past decade or so. They have come back into fashion just as the more dominant cultures (narrowly Anglo-American, more broadly European) have started to feel ‘threatened’ by other cultures – Confucianism in the economic sphere; Islam in the realm of politics and international relations.20 They also offered a very convenient excuse to the Bad Samaritans – neo-liberal policies have not worked very well, not because of some inherent problems but because the people practising them had ‘wrong’ values that diminished their effectiveness.
In the current renaissance of such views, some cultural theorists do not actually talk about culture per se. Recognising that culture is too broad and amorphous a concept, they try to isolate only those components that they think are most closely related to economic development. For example, in his 1995 book, Trust, Francis Fukuyama, the neo-con American political commentator, argues that the existence or otherwise of trust extending beyond family members critically affects economic development. He argues that the absence of such trust in the cultures of countries like China, France, Italy and (to some extent) Korea makes it difficult for them to run large firms effectively, which are key to modern economic development. This is, according to Fukuyama, why high-trust societies, such as Japan, Germany and the US, are economically more developed.
But whether or not the word ‘culture’ is used, the essence of the argument is the same – different cultures make people behave differently, with resulting differences in economic development across different societies.David Landes, the distinguished American economic historian and a leader in the renaissance of culturalist theories, claims that ‘culture makes all the difference.’21
Different cultures produce peoples with different attitudes towards work, saving, education, cooperation, trust, authority and countless other things that affect a society’s economic progress. But this proposition does not get us very far. As we shall see in a moment, it is very difficult to define cultures precisely. Even if we can, it is not possible to establish clearly whether a particular culture is inherently good or bad for economic development. Let me explain.
What is a culture?
Many westerners mistake me for a Chinese or Japanese. It is understandable. With ‘slanted’ eyes, straight black hair and prominent cheekbones, East Asians all ‘look the same’ – at least to a westerner who does not understand all the subtle differences in facial features, mannerisms and dress sense among people from different East Asian countries. To westerners who apologise for mistaking me for a Chinese or Japanese, I tell them it’s OK, because most Koreans call all westerners ‘Americans’ – a notion that some Europeans might find disagreeable. To the uninitiated Korean, I tell them, all westerners look the same, with their big noses, round eyes and excessive facial hair.
This experience warns against excessively broad categorization of people. Of course, what is ‘excessively broad’ depends on the purpose of the categorisation. If we are comparing the human brain with that of, say, the dolphin, even the over-arching category of Homo sapiens may be good enough. But if we are studying how culture makes a difference to economic development, even the relatively narrow category ‘Korean’ may be problematic. Broader categories, like ‘Christian’ or ‘Muslim’, obscure much more than they reveal.
In most culturalist arguments, however, cultures are defined very loosely.We are often offered incredibly coarse categories, such as East-West, which I am not even going to bother to criticize. Very often, we are offered broad ‘religious’ categories, like Christian (which from time to time is lumped together with Judaism into Judaeo-Christian, and which is regularly divided into Catholic and Protestant), Muslim, Jewish, Buddhist, Hindu and Confucian (this latter category is particularly controversial, because it is not a religion).*
Yet think for a minute about these categories.Within the ostensibly homogeneous group ‘Catholic’, we have both the ultra-conservative Opus Dei movement, which has become well-known through Dan Brown’s bestselling novel, The Da Vinci Code, and left-wing liberation theology, epitomized in the famous saying by the Brazilian archbishop of Olinda and Recife, Dom Hélder Câmara: ‘When I give food to the poor, they call me a saint. When I ask why the poor have no food, they call me a communist.’ These two ‘Catholic’ sub-cultures produce people with very different attitudes towards wealth accumulation, income redistribution and social obligations.
Or, to take another example, there are ultra-conservative Muslim societies that seriously limit women’s public participation. Yet more than half the professional staff at the Malaysian central bank are women – a much higher proportion than at any central bank in the supposedly more ‘feminist’ Christian countries. And here is another example: some people believe that Japan succeeded economically because of its unique variety of Confucianism, which emphasizes loyalty rather than the personal edification stressed in the Chinese and Korean varieties.22 Whether or not one agrees with this particular generalization (more on this later), it shows that there isn’t just one kind of Confucianism.
If categories like Confucian or Muslim are too broad, how about taking countries as cultural units? Unfortunately, this does not solve the problem. As the culturalists themselves would be prepared to acknowledge, a country often contains different cultural groups, especially in large and culturally diverse ones, like India and China. But even in a country like Korea, one of the most culturally homogeneous societies in the world, there are significant cultural differences between regions. In particular, people from the south-east (Kyungsang) think of those from the south-west (Cholla) as clever but totally untrustworthy double-dealers. South-westerners return the compliment by regarding the south-easterners as a crude and aggressive, albeit determined and well-organized, bunch of people. It wouldn’t be too far-fetched to say that the stereotypes of these two Korean regions are similar to the stereotypes the French and the Germans have of each other. The cultural animosity between the two regions of Korea is so intense that some families won’t even allow their children to marry into families from the other region. So is there a single ‘Korean’ culture or not? And, if things are as complicated as that for Korea, do we even need to talk about other countries?
I could go on, but I think I have made the point that broad categories, like ‘Catholic’ or ‘Chinese’, are simply too crude to be analytically meaningful, and that even a country is too big a cultural unit to generalize about. The culturalists may well retort that all we have to do is work with finer categories like Mormon or Japanese Confucian, rather than broader ones like Christian or Confucian. If only matters were that simple. There are more fundamental problems with cultur-alist theories, to which I turn now.
Dr Jekyll vs Mr Hyde
Ever since the East Asian economic ‘miracle’, it has become very popular to argue that it was Confucian culture that was responsible, at least partly, for the region’s economic successes. Confucian culture, it was pointed out, emphasizes hard work, education, frugality, co-operation and obedience to authority. It seemed obvious that a culture that encourages the accumulation of human capital (with its emphasis on education) and physical capital (with its emphasis on thrift), while encouraging co-operation and discipline, must be good for economic development.
But, before the East Asian economic ‘miracle’, people used to blame Confucianism for the region’s underdevelopment.And they were right. For Confucianism does have a lot of aspects that are inimical to economic development. Let me mention the most important ones.
Confucianism discourages people from taking up professions like business and engineering that are necessary for economic development. At the pinnacle of the traditional Confucian social system were scholar-bureaucrats. They formed the ruling class, together with the professional soldiers, who were second-class rulers. This ruling class presides over a hierarchy of commoners made up of peasants, artisans and merchants, in that order (below them were slaves). But there was a fundamental divide between the peasantry and the other subordinate classes. At least in theory, individual peasants could gain entry into the ruling class if they passed the competitive civil service examination (and they occasionally did). Artisans and merchants, however, were not even allowed to sit for the examination.
To make matters worse, the civil service examination only tested people for their scholastic knowledge of the Confucian classics, which made the ruling class scornful of practical knowledge. In the 18th century, Korean Confucian politicians slaughtered rival factions in a row over how long the king should wear mourning following his mother’s death (one year or three years?). Scholar-bureaucrats were supposed to live in ‘clean poverty’ (although the practice was often different) and thus they actively looked down upon money-making. In the modern setting, Confucian culture encourages talented people to study law or economics in order to become bureaucrats, rather than engineers (artisans) or businessmen (merchants) – occupations that contribute much more directly to economic development.
Confucianism also discourages creativity and entrepreneurship. It has a rigid social hierarchy and, as I have noted, prevents certain segments of society (artisans, merchants) from moving upwards. This rigid hierarchy is sustained by an emphasis on loyalty to superiors and deference to authority, which breeds conformism and stifles creativity. The cultural stereotype of East Asians being good at mechanical things that do not need much creativity has a basis in this aspect of Confucianism.
Confucianism, it can also be argued, hampers the rule of law.Many people, particularly neo-liberals, believe that the rule of law is crucial for economic development, because it is the ultimate guarantor against arbitrary expropriation of property by rulers.Without the rule of law, it is said, there can be no security of property rights, which, in turn, will make people reluctant to invest and create wealth. Confucianism may not encourage arbitrary rule, but it is true that it does not like the rule of law, which it regards as ineffectual, as seen in the following famous passage from Confucius: ‘If the people be led by laws, and uniformity sought to be given them by punishments, they will try to avoid the punishment, but have no sense of shame. If they be led by virtue, and uniformity sought to be given them by the rules of propriety, they will have the sense of shame, and moreover will become good.’ I agree.With strict legal sanctions, people will abide by the law out of fear of punishment, but too much emphasis on law can make them feel that they are not trusted as moral actors.Without that trust, people will not go that extra mile that makes their behaviour moral and not just law-abiding. Having said all this, however, it cannot be denied that Confucian denigration of the rule of law makes the system vulnerable to arbitrary rule – for what do you do when your ruler is not virtuous?
So which is an accurate portrait of Confucianism? A culture that values ‘thrift, investment, hard work, education, organization, and discipline’, as Huntington put it in relation to South Korea, or a culture that disparages practical pursuits, discourages entrepreneurship and retards the rule of law?
Both are right, except that the first singles out only those elements that are good for economic development and the second only the bad. In fact, creating a one-sided view of Confucianism does not even have to involve selecting different elements. The same cultural element can be interpreted as having positive or negative implications, depending on the result you seek. The best example is loyalty. As I mentioned above, some people think that the emphasis on loyalty is what makes the Japanese variety of Confucianism more suited to economic development than other varieties. Other people judge the emphasis on loyalty to be exactly what is wrong with Confucianism, since it stifles independent thinking and thus innovation.
It is not just Confucianism, however, that has a split personality like the protagonist in Robert Louis Stevenson’s Dr Jekyll and Mr Hyde. We can perform the same exercise with any culture’s belief system. Take the case of Islam.
Muslim culture is today considered by many to hold back economic development. Its intolerance of diversity discourages entrepreneurship and creativity. Its fixation on the afterlife makes believers less interested in worldly things, like wealth accumulation and productivity growth.23 The limits on what women are allowed to do not only wastes the talents of half the population but also lowers the likely quality of the future labour force; poorly educated mothers provide poor nutrition and little educational help to their children, thereby diminishing their achievements at school. The ‘militaristic’ tendency (exemplified by the concept of jihad, or holy war, against the infidels) glorifies making war, not money. In short, a perfect Mr Hyde.
Alternatively, we could say that, unlike many other cultures, Muslim culture does not have a fixed social hierarchy (which is why many low caste Hindus have converted to Islam in South Asia). Therefore, people who work hard and creatively are rewarded. Moreover, unlike in the Confucian hierarchy, there is no disdain for industrial or business activities. Muhammad, the Prophet, was a merchant himself. And being a merchant’s religion, Islam has a highly developed sense of contracts – even at wedding ceremonies, marriage contracts are signed. This orientation encourages the rule of law and justice24 – Muslim countries had trained judges hundreds of years before Christian countries. There is also an emphasis on rational thinking and learning – the Prophet notably said that ‘the ink of the scholar is more sacred than the blood of the martyr’. This is one of the reasons why the Arab world once led the world in mathematics, science and medicine. What is more, although there are conflicting interpretations of the Koran, there is no question that, in practice, most pre-modern Muslim societies were far more tolerant than Christian societies – after all, this is why many Iberian Jews escaped to the Ottoman Empire after the Christian reconquista of Spain in 1492.
Such are the roots of the Dr Jekyll picture of Muslim culture: it encourages social mobility and entrepreneurship, respects commerce, has a contractual frame of mind, emphasizes rational thinking, and is tolerant of diversity and thus creativity.
This Jekyll-and-Hyde exercise of ours shows that there is no culture that is either unequivocally good or bad for economic development. Everything depends on what people do with the ‘raw material’ of their culture. Positive elements may predominate, or negative ones. Two societies at different points in time or located in different geographical locations, and working with the same raw material (Islam, Confucianism or Christianity), can produce, and have produced, markedly different behavioural patterns.
Not being able to see this, culture-based explanations for economic development have usually been little more than ex post facto justifications based on a 20/20 hindsight vision. So, in the early days of capitalism, when most economically successful countries happened to be Protestant Christian, many people argued that Protestantism was uniquely suited to economic development. When Catholic France, Italy, Austria and southern Germany developed rapidly, particularly after the Second World War, Christianity, rather than Protestantism, became the magic culture. Until Japan became rich, many people thought East Asia had not developed because of Confucianism. But when Japan succeeded, this thesis was revised to say that Japan was developing so fast because its unique form of Confucianism emphasized co-operation over individual edification, which the Chinese and Korean versions allegedly valued more highly. And then Hong Kong, Singapore, Taiwan and Korea also started doing well, so this judgement about the different varieties of Confucianism was forgotten. Indeed, Confucianism as a whole suddenly became the best culture for development because it emphasized hard work, saving, education and submission to authority. Today, when we see Muslim Malaysia and Indonesia, Buddhist Thailand and even Hindu India doing well economically, we can soon expect to encounter new theories that will trumpet how uniquely all these cultures are suited for economic development (and how their authors have known about it all along).
Lazy Japanese and thieving Germans
So far, I have shown how difficult it is to define cultures and to understand their complexities, let alone finding some kind of ideal culture for economic development. But, if defining culture is difficult, trying to explain something else (say, economic development) in terms of it seems to be an exercise fraught with even greater problems.
All this is not to deny that how people behave makes a difference to economic development. But the point is that people’s behaviour is not determined by culture. Moreover, cultures change; so it is wrong to treat culture as destiny, as many culturalists are wont to do. To understand this, let’s go back for a moment to those puzzles of the lazy Japanese and the thieving Germans.
One reason why Japanese or German culture in the past looked so bad for economic development is that observers from richer countries tended to be prejudiced against foreigners (especially poor foreigners). But there was also an element of genuine ‘misinterpretation’ due to the fact that rich countries are very differently organized from poor countries.
Take laziness – the most frequently cited ‘cultural’ trait of people in poor countries. People from rich countries routinely believe that poor countries are poor because their people are lazy. But many people in poor countries actually work long hours in backbreaking conditions. What makes them appear lazy is often their lack of an ‘industrial’ sense of time. When you work with basic tools or simple machinery, you don’t have to keep time strictly. If you are working in an automated factory, it’s essential. People from rich countries often interpret this difference in sense of time as laziness.
Of course, it was not all prejudice or misinterpretation. Early-19th-century Germans and early-20th-century Japanese were, on average, not as organized, rational, disciplined, etc. as the citizens of the successful countries of the time or, for that matter, as people are in today’s Germany or Japan. But the question is whether we can really describe the origins of those ‘negative’ forms of behaviour as ‘cultural’ in the sense that they are rooted in beliefs, values and outlooks that have been passed on through generations and are, therefore, very difficult, if not necessarily impossible, to change.
My short answer is no. Let us consider ‘laziness’ again. It is true that there are a lot more people ‘lazing around’ in poor countries. But is it because those people culturally prefer lounging about to working hard? Usually not. It is mainly because poor countries have a lot of people who are unemployed or underemployed (i.e., people may have jobs but do not have enough work to occupy them fully). This is the result of economic conditions rather than culture. The fact that immigrants from poor countries with ‘lazy’ cultures work much harder than the locals when they move to rich countries proves the point.
As for the once much-vaunted ‘dishonesty’ of the Germans in the past, when a country is poor, people often resort to unethical, or even illegal, means to make a living. Poverty also means weak law enforcement, which lets people get away with illegal behaviour, and makes breaking the law more ‘culturally’ acceptable.
How about the ‘excessive emotions’ of the Japanese and the Germans? Rational thinking, whose absence is often manifested as excessive emotion, develops largely as a result of economic development. Modern economies require a rational organization of activity, which then changes people’s understanding of the world.
‘Living for today’ or being ‘easy-going’ – words that many people associate with Africa and Latin America nowadays – are also the consequences of economic conditions. In a slowly changing economy, there is not much need to plan for the future; people plan for the future only when they anticipate new opportunities (e.g., new careers) or unexpected shocks (e.g., a sudden inflow of new imports). Moreover, poor economies offer few devices with which people can plan for the future (e.g., credit, insurance, contracts).
In other words, many of the ‘negative’ forms of behaviour of the Japanese and Germans in the past were largely the outcomes of economic conditions common to all economically underdeveloped countries, rather than of their specific cultures. This is why the Germans and the Japanese in the past were ‘culturally’ far more similar to people in today’s developing countries than to the Germans and the Japanese of today.
Many of these apparently unchangeable ‘habits of national heritage’ can be, and have been, transformed quite quickly by changes in economic conditions. This is what some observers actually witnessed in late-19th-century Germany and early-20th-century Japan. Sidney Gulick, the American missionary whom I cited previously, observed that ‘the Japanese give the double impression of being industrious and diligent on the one hand and, on the other, of being lazy and utterly indifferent to the passage of time’.25 If you looked at the workers in the new factories, they looked very industrious. But if you looked at under-employed farmers and carpenters, they looked ‘lazy’. With economic development, people would also develop an ‘industrial’ sense of time very quickly.My country, Korea, offers an interesting example in this regard. Twenty, maybe even 15, years ago, we used to have the expression, ‘Korean time’. It described the widespread practice whereby people could be an hour or two late for an appointment and not even feel sorry about it. Nowadays, with the pace of life far more organized and faster, such behaviour has almost disappeared, and with it the expression itself.
In other words, culture changes with economic development.* That is why the Japanese and the German cultures of today are so different from those of their ancestors. Culture is the result, as well as the cause, of economic development. It would be far more accurate to say that countries become ‘hardworking’ and ‘disciplined’ (and acquire other ‘good’ cultural traits) because of economic development, rather than the other way around.
Many culturalists accept, in theory, that cultures change. But in practice most of them treat culture as pretty immutable. This is why, despite endless contemporary accounts to the contrary, culturalists today describe the Japanese on the cusp of economic development in the most flattering light. David Landes, a leading proponent of the cultural theory of economic development, says: ‘The Japanese went about modernization with characteristic intensity and system. They were ready for it by virtue of a tradition (recollection) of effective government, by their high levels of literacy, by their tight family structure, by their work ethic and self-discipline, by their sense of national intensity and inherent superiority’.26 Despite the frequent contemporary observation that the Japanese were lazy, Fukuyama claims in his book, Trust, that there was ‘the Japanese counterpart to the Protestant work ethic, formulated at around the same time’.27 When he classifies Germany as an inherently ‘high-trust’ society, he is also oblivious to the fact that, before they became rich, many foreigners thought the Germans were cheating others all the time and unable to co-operate with one another.
A good cultural argument should be able to admit that the Germans and the Japanese were a pretty hopeless bunch in the past and still be able to explain how they developed their economies.But most cultural-ists, blinded by their conviction that only countries with the ‘right’ value systems can develop, re-interpret German or Japanese histories so as to ‘explain’ their subsequent economic success.
The fact that culture changes far more quickly than the culturalists assume should give us hope. Negative behavioural traits, like laziness or lack of creativity, do hamper economic development. If these traits are fully, or even predominantly, culturally determined, we would need a ‘cultural revolution’ in order to get rid of them and start economic development.28 If we need a cultural revolution before we can develop the economy, economic development would be next to impossible, since cultural revolutions rarely, if ever, succeed. The failure of the Chinese Cultural Revolution, albeit launched for other reasons than economic development, should serve as a salutary warning.
Fortunately, we do not need a cultural revolution before economic development can happen. A lot of behavioural traits that are meant to be good for economic development will follow from, rather than be prerequisites for, economic development. Countries can get development going through means other than a cultural revolution, as I explained in the preceding chapters. Once economic development gets going, it will change people’s behaviour and even the beliefs underlying it (namely, culture) in ways that help economic development. A ‘virtuous circle’ of economic development and cultural values can be created.
This is, essentially, what happened in Japan and Germany. And it is what will happen in all future economic success stories. Given India’s recent economic success, I am sure we will soon see books that say how Hindu culture – once considered the source of sluggish growth in India (recall the once-popular expression, ‘Hindu rate of growth’29) – is helping India grow. If my Mozambique fantasy in the Prologue comes true in the 2060s, we will then be reading books discussing how Mozambique has had a culture uniquely suited to economic development all along.
Changing culture
So far, I have argued that culture is not immutable and changes as a result of economic development. However, this is not to say that we can change culture only through changing the underlying economic conditions. Culture can be changed deliberately through persuasion. This is a point rightly emphasized by those culturalists who are not fatalists (for the fatalists, culture is almost impossible to change, so it is destiny).
The problem is that those culturalists tend to believe that cultural changes require only ‘activities that promote progressive values and attitudes’, in the words of Lawrence Harrison, the author of Underdevelopment is a State of Mind.30But there is a limit to changes that can be made through ideological exhortation alone. In a society without enough jobs, preaching hard work will not be very effective in changing people’s work habits. In a society with little industry, telling people that disparaging the engineering profession is wrong will not make many young people choose to pursue it as a career. In societies where workers are treated badly, appealing for co-operation will fall upon deaf, if not cynical, ears. Changes in attitudes need to be supported by real changes – in economic activities, institutions and policies.
Take the fabled Japanese culture of company loyalty.Many observers believe it is the manifestation of an ingrained cultural trait rooted in the Japanese variety of Confucianism emphasizing loyalty. Now, if true, such an attitude should have been more pronounced as we go back further in time. Yet, a century ago, Beatrice Webb remarked that the Japanese have a ‘quite intolerable personal independence’.31 Indeed, Japanese workers used to be a pretty militant bunch until fairly recently. Between 1955 and 1964, Japan lost more days per worker in strikes than Britain or France, countries which were not exactly famous for co-operative industrial relations at the time.32 Co-operation and loyalty came about only because Japanese workers were given institutions such as lifetime employment and company welfare schemes. Ideological campaigns (and government bashing of militant communist trade unions) did play a role, but they would not have been enough on their own.
Similarly, despite its current reputation for peaceful industrial relations, Sweden used to have a terrible labour problem. In the 1920s, it lost more man-hours per worker due to strikes than any other country. But after the ‘corporatist’ compromise of the 1930s (the 1938 Saltjöbaden Agreement), it all changed. In return for workers restraining their wage demands and strike activities, the country’s capitalists delivered a generous welfare state combined with good retraining programmes. Ideological exhortation alone would not have been convincing.
When Korea started its industrialization drive in the 1960s, the government tried to persuade people to abandon the traditional Confucian disdain for industrial professions. The country needed more engineers and scientists. But with few decent engineering jobs, not many bright young people wanted to become engineers. So the government increased funding and the number of places in university for engineering and science departments, while doing the reverse (in relative terms) in humanities departments. In the 1960s there were only 0.6 engineering and science graduates for every humanities graduate, but the ratio became one-to-one by the early 1980s.33 Of course, the policy worked ultimately because the economy was industrializing fast and, as a result, there were more and more well-paid jobs for engineers and scientists. It was thanks to the combination of ideological exhortation, educational policy and industrialization – and not just promotion of ‘progressive values and attitudes’ – that Korea has come to boast one of the best-trained armies of engineers in the world.
The above examples show that ideological persuasion is important but not, by itself, enough in changing culture. It has to be accompanied by changes in policies and institutions that can sustain the desired forms of behaviour over an extended period of time so that that they turn into ‘cultural’ traits.
Reinventing culture
Culture influences a country’s economic performance.At a given point in time, a particular culture may produce people with particular behavioural traits that are more conducive to achieving certain social goals, including economic development, than other cultures. At this abstract level, the proposition seems uncontroversial.
But when we try to apply this general principle to actual cases, it proves elusive. It is very difficult to define what the culture of a nation is. Things are complicated further by the fact that very different cultural traditions may co-exist in a single country, even in allegedly ‘homogeneous’ ones like Korea. All cultures have multiple characteristics, some positive and others negative for economic development. Given all this, it is not possible, nor useful, to ‘explain’ a country’s economic success or failure in terms of its culture, as some Bad Samaritans have tried to do.
More importantly, even though having people with certain behavioural traits may be better for economic development, a country does not need a ‘cultural revolution’ before it can develop. Though culture and economic development influence each other, the causality is far stronger from the latter to the former; economic development to a large extent creates a culture that it needs. Changes in economic structure change the way people live and interact with one another, which, in turn, changes the way they understand the world and behave. As I have shown with the cases of Japan, Germany and Korea, many of the behavioural traits that are supposed to ‘explain’ economic development (e.g., hard work, time-keeping, frugality) are actually its consequences, rather than its causes.
Saying that culture changes largely as a result of economic development is not to say that culture cannot be changed by ideological persuasion. Actually, this is what some optimistic culturalists believe. ‘Underdevelopment is a state of mind’, they declare. For them, therefore, the obvious solution to underdevelopment is to change the way people think through ideological exhortation. I don’t deny that such an exercise may be helpful, or even important in certain cases, for changing culture. But a ‘cultural revolution’ will not take root unless there are complementary changes in the underlying economic structures and institutions.
So, in order to promote behavioural traits that are helpful for economic development, we need a combination of ideological exhortation, policy measures to promote economic development and the institutional changes that foster the desired cultural changes. It is not an easy job to get this mix right, but once you do, culture can be changed much more quickly than is normally assumed. Very often what seemed like an eternal national character can change within a couple of decades, if there are sufficient supporting changes in the underlying economic structure and institutions. The rather rapid disappearance of the Japanese ‘national heritage’ of laziness since the 1920s, the quick development of co-operative industrial relations in Sweden since the 1930s, and the end of ‘Korean time’ in the 1990s are some prominent examples.
The fact that culture can be deliberately changed – through economic policies, institution building and ideological campaigns – gives us hope.No country is condemned to underdevelopment because of its culture. But at the same time we must not forget that culture cannot be reinvented at will – the failure to create the ‘new man’ under communism is a good proof of that. The cultural ‘reformer’ still has to work with existing cultural attitudes and symbols.
We need to understand the role of culture in economic development in its true complexity and importance. Culture is complex and difficult to define. It does affect economic development, but economic development affects it more than the other way around. Culture is not immutable. It can be changed through a mutually reinforcing interaction with economic development; ideological persuasion; and complementary policies and institutions that encourage certain forms of behaviour, which over time turn into cultural traits. Only then can we free our imaginations both from the unwarranted pessimism of those who believe culture is destiny and from the naïve optimism of those who believe they can persuade people to think differently and bring about economic development that way.
* Confucianism is named after Confucius, the Latinized name of the great Chinese political philosopher, Kong Zi, who lived in the 6th century BC. Confucianism is not a religion, as it does not have gods or heaven and hell. It is mainly about politics and ethics, but it also has a bearing on the organization of family life, social ceremonies and etiquette. Although it has had its ups and downs, Confucianism has remained the basis of Chinese culture since it became the official state ideology during the Han Dynasty (206 BC to AD 220). It spread to other East Asian countries, like Korea, Japan and Vietnam, over the next several hundred years.
* Of course, culture, with economic stagnation, can also change for the worse (at least from the point of view of economic development). The Muslim world used to be rational and tolerant, but, following centuries of economic stagnation, many Muslim countries have turned ultra-religious and intolerant. These ‘negative’ elements have become stronger because of economic stagnation and lack of future prospects. The fact that such forms of behaviour are not an inevitable manifestation of Muslim culture is proven by the rational thinking and tolerance prevalent in many prosperous Muslim empires in the past. It is also corroborated by contemporary examples, like Malaysia, whose economic prosperity has made its Islam tolerant and rational, as all those female central bankers I wrote about earlier will tell you.

EPILOGUE
São Paulo, October 2037
Can things get better?
Luiz Soares is a worried man. His family engineering firm – Soares Tecnologia, S.A., which his grandfather, Jose Antonio, founded in 1997 – is on the brink of collapse.
The first years of Soares Tecnologia were difficult. The high interest rate policy, which lasted between 1994 and 2009, severely constrained its ability to borrow and expand. But, by 2013, it had grown into a solid middle-sized firm producing watch parts and other precision equipment, thanks to Jose Antonio’s skills and determination.
In 2015, Luiz’s father, Paulo, came back with a Ph.D. in nano-physics from Cambridge and persuaded Jose Antonio to set up a nano-technology division, which he headed. That proved a lucky escape. The Tallinn Round of the WTO concluded in 2017 abolished all industrial tariffs except for a handful of ‘reserved’ sectors for each country. As a result, most manufacturing industries, other than low-technology, low-wage ones, got wiped out in most developing countries, including Brazil. The Brazilian nano-technology industry survived the so-called Tallinn tsunami only because it was one of the ‘reserved’ industries.
Paulo’s foresight paid off. Soon after he took over the firm in 2023, after Jose Antonio’s yacht sank in a freak hurricane in the Caribbean (a result of global warming, they said), Soares Tecnologia launched a molecular machine which converted sea water into fresh water with greater efficiency than its American or Finnish rivals. It was a big hit in a country that was suffering from increasingly frequent droughts due to global warming – by that time, the Amazon forest was barely 40% of its 1970 size due to lack of rain (with a helping hand from pasture-hungry cattle ranchers). In 2028, Paulo was even selected as one of the world’s 500 leading technology entrepreneurs by the Shanghai-based Qiye (Enterprise), the world’s most influential business magazine.
Then disaster struck. In 2029, China was hit by a massive financial crisis. Back in 2021, commemorating the 100th anniversary of the foundation of its ruling Communist Party, China had decided to join the OECD (Organisation for Economic Co-operation and Development), the club of rich countries. Opening up its capital market was to be the price of its membership. China had already been resisting for some years the pressure from the rich countries to behave ‘responsibly’ as the world’s second biggest economy and to open up its financial market, but once it started negotiating the terms of OECD accession, there was no escape. Some urged caution, saying that China was still a relatively poor country, with an income level that was only 20% of that of the US, but most others were confident that China would do as well in finance as in manufacturing, where its ascendancy seemed unstoppable.Wang Xing-Guo, the pro-liberalization governor of the People’s Bank of China, the central bank (granted full independence in 2017), summed up this optimism perfectly: ‘What are we afraid of? The money game is in our genes – after all, paper money is a Chinese invention!’When it joined the organization in 2024, China revalued its currency, the renminbi, by four times and fully opened its capital market. For a while, the Chinese economy boomed as though the sky was the limit. But the resulting real estate and stock market bubbles burst in 2029, requiring the largest IMF rescue package in history.
Soaring unemployment and IMF-imposed cuts to government food subsidies led to riots and eventually to the rise of the Yuan-Gongchandang (Real Communist) movement, fuelled by the seething resentment of the ‘losers’ in a society that had moved from the near-absolute equality of Maoist communism to Brazilian-style inequality in the space of less than two generations. The Real Communists have been contained, at least for the moment, following the arrest of all their leaders in 2035, but the resulting political turmoil and social unrest marked the end of the Chinese economic miracle.
The Chinese economy being so big by then, it brought the whole world down with it. What came to be known as the Second Great Depression has been going on for several years now and there seems to be no end in sight.With its largest export market collapsing, Brazil has suffered greatly, although not as heavily as some other countries.
The other leading Asian economies – such as India, Japan and Vietnam – went belly up. Many African countries could not survive the collapse of what, by then, was the biggest buyer of their raw materials. The US economy suffered withdrawal symptoms from the massive flight of Chinese capital from its Treasury bill market. The ensuing deep recession in the US economy triggered an even deeper one in Mexico, leading to an armed uprising by the Nuevos Zapatistas, the left-wing guerrillas claiming to be the legitimate heirs of the legendary early-20th century revolutionary Emiliano Zapata. The Nuevos Zapatistas swore to take Mexico out of the IAIA (Inter-American Integration Agreement) – the high-octane version of NAFTA that was formed by the US, Canada, Mexico, Guatemala, Chile and Colombia in 2020. The guerrillas were narrowly defeated after a brutal military operation, aided by the US air force and the Colombian army.
The Second Great Depression was bad enough for Soares Tecnologia, but then came the coup de grace. In 2033, driven by his free trade convictions and using the dire economic situation as a means to bully the opposition, the maverick Korean-Brazilian president, Alfredo Kim, a former chief economist of the World Bank, took the country into the IAIA.
For the Brazilian nano-technology industry, it was a catastrophe. As a part of the terms of entry into the IAIA, all federal R&D subsidies and government procurement programmes – lifelines for the industry – were phased out within three years. Tariffs in nano-technology and a few other ‘reserved’ sectors that had survived the Tallinn Round were immediately scrapped vis-à-vis the IAIA member countries. With the overall level of technology still 20, perhaps even 30, years behind US firms, most Brazilian nano-technology companies collapsed.Even Soares Tecnologia, considered to be Brazil’s best, survived only by selling a 45% stake to a firm from – of all countries! – Ecuador. Ecuador had done surprisingly well after forming the Bolivarian Economic Union with Venezuela, Bolivia, Cuba, Nicaragua and Argentina in 2010 – the BEU members left the WTO in 2012 in protest at the Tallinn Round agenda.
But even survivors like Soares Tecnologia were devastated by the new patent law that had now come into force. The US had already extended its patent life from 28 years (instituted in 2018) to 40 years in 2030. By contrast, Brazil was one of the few countries still clinging on to the 20-year patent life allowed under the increasingly obsolete WTO TRIPS agreement of 1995 (most others having moved to 28 years or even 40 years, in the case of the IAIA countries). When Brazil joined the IAIA, the main concession it had to make – in return for the abolition of beef and cotton subsidies in the US (to be phased in over the next 25 years) – was the patent law, which the Americans insisted should be applied retrospectively. At one stroke, the Brazilian nano-technology firms became liable to patent suits, and American nano-technology corporations parachuted in their army of patent lawyers.
With no tariffs against American imports, disappearing subsidies and shrivelling government procurement programmes, compounded by a flood of lawsuits, Soares Tecnologia was in a dire state when Paulo – may his soul rest in peace – had a massive stroke and died in 2035. As a result, Luiz was forced to quit his MBA course at the Singapore campus of INSEAD, the French business school (which, by that time, was considered to be better than the original campus in Fontainebleau), break up with Miriam, his half-Xhosa/half-Uzbek girlfriend (a distant cousin of Nelson Mandela on her Xhosa side), and return to Brazil to take over the family firm at the age of 27.
Things have not improved much since Luiz took over. True, he has successfully fought off several patent suits. But if he loses even one of the three that are still pending (none of them is looking hopeful), he will face ruin. His Ecuadorian partner, Nanotecnologia Andina, is already threatening to sell off its share in the company.When his firm disappears with the rest of the Brazilian nano-technology industry, most of Brazil’s manufacturing industries – except for aerospace and alcohol fuel, in which Brazil had established a world class position in the late 20th century before the rise of neo-liberalism – will have disappeared. Brazil will be back to square one.
Unlikely? Yes – and I hope it stays that way. Brazil is far too smart and independent-minded to sign something like my IAIA, even if it had a former World Bank chief economist as its president. Mexico has enough wise people and vibrant popular movements to be able to mend its ways before it is thrown into a full-scale civil war. The Chinese leadership is fully aware of the threats posed by the country’s widening inequality. They also know the dangers of any premature opening of its capital market, thanks to the 1997 Asian crisis. Even the mighty US patent lobby would find it difficult to secure a retrospective application of 40-year patents in any international agreement. There is a growing consensus that something has to be done about global warming soon. The next round of the WTO talks is not likely to lead to a near-total abolition of industrial tariffs.
But what I have just sketched out is not an impossible scenario. Many of the things I have made up have been deliberately exaggerated, but they all have a strong basis in reality.
For example, the near-total abolition of industrial tariffs following my imaginary Tallinn Round may sound fanciful, but it is actually a little milder than what was proposed by the US at the WTO in 2002 – it called for a total abolition of industrial tariffs by 2015 – and is not far off from what other rich countries are proposing.1 My Inter-American Integration Agreement is really a (geographically) broader and stronger (content-wise) version of NAFTA (North American Free Trade Agreement). The countries mentioned as possible members of the Bolivarian Economic Union are already working together closely (I have deliberately omitted Brazil, a member of this group, in my story). Of these, Venezuela, Cuba and Bolivia have already formed ALBA (Alternativa Bolivariana para las Américas: Bolivarian Alternatives for the Americas).
Given the growing importance of the Chinese economy, it is not totally fanciful that a major economic crisis in China in the late 2020s could turn into a Second Great Depression, especially if there was political turmoil in the country. The chances of upheaval in such circumstances would be strongly influenced by the gravity of its inequality problem which, while not yet at the Brazilian level, as in my story, could reach that in another generation, if no counteraction is taken. As for a civil war in Mexico, this may sound like a fantasy, but, in today’s Mexico, we already have one state, Chiapas, which has been, in effect, ruled by an armed guerrilla group, the Zapatistas under Subcomandante Marcos, since 1994. It would not be impossible for the conflict to escalate if the country were thrown into a major economic crisis, especially if it had continued for another two decades with the neo-liberal policies that have so ill-served it in the past two decades.
My US patent scenario is certainly exaggerated, but US pharmaceutical patents can already be de facto extended up to 28 years through data protection and in consideration of the time needed for FDA (Food and Drugs Administration) approval. The US has made sure that these provisions are written into all its free trade agreements. And, as I discussed in the story of Mickey Mouse in chapter 6, in 1998, US copyright was retrospectively extended.
The reader may find it particularly implausible that China would prematurely open its capital market. But when your economy becomes the second biggest in the world, it is hard to resist the pressure to act ‘responsibly’. This is exactly what happened to Japan when it was made to revalue its currency by three times almost overnight in the 1985 Plaza Accord. That currency revaluation was an important cause of Japan’s huge asset bubble, whose bursting in the early 1990s (and the incompetent management of its aftermath) resulted in economic stagnation for a decade.As for my saying that China would join the OECD to celebrate the 100th birthday of its Communist Party, that was certainly said tongue-in-cheek. But countries can become over-confident when they are very successful, as the case of Korea shows. Until the late 1980s, Korea had skilfully used capital controls to great economic benefit. But, in the mid-1990s, it opened its capital market wide, and without careful planning. This was partly due to American pressure, but also because, after three decades of its economic ‘miracle’, the country had become too full of itself. It decided to join the OECD in 1996 and act like a rich country when it really wasn’t one. At the time, its per capita income was still only one-third that of most OECD member countries and one quarter that of the richest ones (or slightly above the level China is likely to reach by the mid-2020s). The outcome was the 1997 financial crisis. So my imaginary China story is really a combination of what actually happened in Japan in the 1980s and Korea in the 1990s.
Is it really plausible that Brazil would sign up to something like the IAIA? Absolutely not in today’s world, but I am talking about a world in the middle of the Second Great Depression and an economy ravaged by another quarter of a century of neo-liberalism. Also, we should not underestimate how political leaders driven by ideological convictions can do things which are so ‘out of character’ with their countries’ history, if they are there in the right place at the right time. For example, despite the famous British tradition of gradualism and pragmatism, Margaret Thatcher was radical and ideologically driven.Her government changed the character of British politics for the foreseeable future. Likewise, Brazil may have a history of independent-minded and pragmatic foreign policy, but that is not an absolute guarantee against someone like my Alfredo Kim driving it into the IAIA, especially when Brazil does not lack its own supply of free-market ideologues.
So, my ‘alternative history of the future’ is not a total fantasy. It is grounded in reality a lot more strongly than may appear at first. If I have been deliberately pessimistic in painting this scenario, it is to remind the reader how big the stakes are. I really hope that, 30 years from now, I will be proved completely wrong. But if the world continues with neo-liberal policies currently propagated by the Bad Samaritans, many of the events that I ‘document’ in the story, or something very like them, could happen.
Throughout this book, I have made many detailed proposals as to how policies, both nationally and globally, need to be changed in all sorts of areas in order to help poor countries develop and to avert the kind of disaster scenario that I have just described in my ‘history of the future’. In this concluding chapter, I will not repeat or summarize these suggestions, but rather discuss the key principles that lie behind them. In the process, I hope to show how national economic policies and the rules of international economic interactions need to be changed if we are to promote economic development in poor countries and make the world a better place.
Defying the market
As I have constantly stressed, markets have a strong tendency to reinforce the status quo. The free market dictates that countries stick to what they are already good at. Stated bluntly, this means that poor countries are supposed to continue with their current engagement in low-productivity activities. But their engagement in those activities is exactly what makes them poor. If they want to leave poverty behind, they have to defy the market and do the more difficult things that bring them higher incomes – there are no two ways about it.
‘Defying the market’ may sound radical – after all, have many countries not failed miserably because they have tried to go against the market? But it is something that is done by business managers all the time. Business managers, of course, get judged ultimately by the market, but they – especially the successful ones – do not accept market forces blindly. They have their long-term plans for their companies, and these sometimes demand that they buck market trends for considerable periods of time. They foster the growth of their subsidiaries in the new sectors they choose to move into and make up for the losses with profits from their subsidiaries in the existing sectors.Nokia subsidized its fledgling electronics business for 17 years with money from its businesses in logging, rubber boots and electric cable. Samsung subsidized its infant electronics subsidiaries for over a decade with money made in textiles and sugar refining. If they had faithfully followed market signals in the way developing countries are told to by the Bad Samaritans, Nokia would still be felling trees and Samsung refining imported sugar cane. Likewise, countries should defy the market and enter difficult and more advanced industries if they want to escape poverty.
The trouble is that there are good reasons why low-earning countries (or, for that matter, low-earning firms or individuals) are engaged in less productive activities – they lack the capabilities to do more productive ones. A backyard motor repair shop in Maputo simply cannot produce a Beetle, even if Volkswagen were to give it all the necessary drawings and instruction manuals, because it lacks the technological and organizational capacities that Volkswagen enjoys. This is why, free market economists would argue, Mozambicans should be realistic and not mess around with things like cars (let alone hydrogen fuel cells!); instead they should just concentrate on what they are already (at least ‘comparatively’) good at – growing cashew nuts.
The free market recommendation is correct – in the short run, when capabilities cannot be changed very much. But this does not mean that Mozambicans should not produce something like a Beetle – one day. In fact, they need to – if they are going to make progress. And they can – given enough determination and the right investment, both at the firm level and at the national level, in accumulating the necessary abilities. After all, a backyard auto repair shop is exactly how the famous Korean car maker, Hyundai, started in the 1940s.
Needless to say, investment in capability-building requires short-term sacrifices. But that is not a reason not to do it, contrary to what free-trade economists say. In fact, we often see individuals making short-term sacrifices for a long-term increase in their capacities, and heartily approve of them. Suppose a low-skilled worker quits his low-paying job and attends a training course to acquire new skills. If someone were to say the worker is making a big mistake because he is now not able to earn even the low wage he used to earn, most of us would criticize that person for being short-sighted; an increase in a person’s future earning power justifies such short-term sacrifice. Likewise, countries need to make short-term sacrifices if they are to build up their long-term productive capabilities. If tariff barriers or subsidies allow domestic firms to accumulate new abilities – by buying better machinery, improving their organization and training their workers – and become internationally competitive in the process, the temporary reduction in the country’s level of consumption (because it is refusing to buy higher-quality, lower-price foreign goods) may be totally justified.
This simple but powerful principle – sacrificing the present to improve the future – is why the Americans refused to practise free trade in the 19th century. It is why Finland did not want foreign investment until recently. It is why the Korean government set up steel mills in the late 1960s, despite the objections of the World Bank. It is why the Swiss did not issue patents and the Americans did not protect foreigners’ copyrights until the late 19th century. And it is, to cap it all, why I send my six-year-old son, Jin-Gyu, to school rather than making him work and earn his living.
Investment in capacity-building can take quite a long time to bear fruit. I may not go as far as Zhou Enlai, the long-time prime minister of China under Mao Zedong – when asked to comment on the impact of the French Revolution, he replied that ‘it is too early to tell’. But when I say long, I mean long. I have just mentioned that it took the electronics division of Nokia 17 years to make any profit, but that is just the beginning. It took Toyota more than 30 years of protection and subsidies to become competitive in the international car market, even at the lower end of it. It was a good 60 years before it became one of the world’s top car makers. It took nearly 100 years from the days of Henry VII for Britain to catch up with the Low Countries in woollen manufacturing. It took the US 130 years to develop its economy enough to feel confident about doing away with tariffs.Without such long time horizons, Japan might still be mainly exporting silk, Britain wool and the US cotton.
Unfortunately, these are time frames that are not compatible with the neo-liberal policies recommended by the Bad Samaritans. Free trade demands that poor countries compete immediately with more advanced foreign producers, leading to the demise of firms before they can acquire new capabilities. A liberal foreign investment policy, which allows superior foreign firms into a developing country, will, in the long run, restrict the range of capabilities accumulated in local firms, whether independent or owned by foreign companies. Free capital markets, with their pro-cyclical herd behaviour, make long-term projects vulnerable. A high interest rate policy raises the ‘price of future’, so to speak, making long-term investment unviable. No wonder neo-liberalism makes economic development difficult – it makes the acquisition of new productive capabilities difficult.
Like any other investment, of course, investment in capability-building does not guarantee success. Some countries (as well as firms or individuals) make it; some don’t. Some countries will be more successful than others. And even the most successful countries will bungle things in certain areas (but then, when we talk about ‘success’, we are talking about batting averages, rather than infallibility). But economic development without investment in enhancing productive capabilities is a near impossibility. History – recent and more distant – tells us that, as I have shown throughout this book.
Why manufacturing matters
Having accepted that increasing capabilities is important, where exactly should a country invest in order to increase them? Industry – or, more precisely, manufacturing industry* – is my answer. It is also the answer that would have been given by generations of successful engineers of economic development from Robert Walpole onwards, had they been asked the same question.
Of course, this is not to say that it is impossible to become rich by relying on natural resources: Argentina was rich in the early 20th century through the trans-Atlantic export of wheat and beef (it was once the fifth richest country in the world); today, a number of countries are rich mainly due to oil. But one has to have a huge stock of natural resources in order to be able to base high living standards solely on them. Few countries are so fortunate. Moreover, natural resources can run out – mineral deposits are finite, while over-exploitation of renewable resources whose supplies are, in principle, infinite (e.g., fish, forests) can make them disappear. Worse, wealth based on natural resources can be rapidly eroded, if technologically more advanced nations come up with synthetic alternatives – in the mid-19th century, Guatemala’s wealth, based on the highly prized crimson dye extracted from the insect, cochinilla (cochineal), was almost instantly wiped out when the Europeans invented artificial dye.
History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and, more importantly, where productivity tends to (although does not always) grow faster than in agriculture or services.Walpole knew this nearly 300 years ago, when he asked George I to say in the British Parliament: ‘nothing so much contributes to promote the public well-being as the exportation of manufactured goods and the importation of foreign raw material’, as I mentioned in chapter 2. In the US, Alexander Hamilton knew it when he defied the world’s then most famous economist, Adam Smith, and argued that his country should promote ‘infant industries’.Many developing countries pursued import substitution ‘industrialization’ in the mid-20th century precisely for this reason. Contrary to the advice of the Bad Samaritans, poor countries should deliberately promote manufacturing industries.
Of course, today there are those who challenge this view on the grounds that we are now living in a post-industrial era and that selling services is therefore the way to go. Some of them even argue that developing countries can, and really should, skip industrialization and move directly to the service economy. In particular, many people in India, encouraged by that country’s recent success in service outsourcing, seem to be quite taken by this idea.
There are certainly some services that have high productivity and considerable scope for further productivity growth – banking and other financial services, management consulting, technical consulting and IT support come to mind. But most other services have low productivity and, more importantly, have little scope for productivity growth due to their very nature (how much more ‘efficient’ can a hairdresser, a nurse or a call centre telephonist become without diluting the quality of their services?). Moreover, the most important sources of demand for those high-productivity services are manufacturing firms. So, without a strong manufacturing sector, it is impossible to develop high-productivity services. This is why no country has become rich solely on the basis of its service sector.
If I say this, some of you may wonder: what about a country like Switzerland, which has become rich thanks to service industries like banking and tourism? It is tempting to take the rather condescending but popular view of Switzerland summed up brilliantly in the movie, The Third Man. ‘In Italy for thirty years under the Borgias, ’ he said, ‘they had warfare, terror, murder, bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love – they had five hundred years of democracy and peace, and what did that produce? The cuckoo clock.2 This view of the Swiss economy, however, is a total misconception.
Switzerland is not a country living off black money deposited in its secretive banks and gullible tourists buying tacky souvenirs like cow bells and cuckoo clocks. It is, in fact, literally the most industrialized country in the world. As of 2002, it had the highest per capita manufacturing output in the world by far – 24% more than that of Japan, the second highest; 2.2 times that of the US; 34 times that of China, today’s ‘workshop of the world’; and 156 times that of India.3 Similarly, Singapore, commonly considered to be a city state that has succeeded as a financial centre and trading port, is a highly industrialized country, producing 35% more manufacturing output per head of population than the ‘industrial powerhouse’ Korea and 18% more than the US.4
Despite what the free trade economists recommend (concentrating on agriculture) or the prophets of post-industrial economy tout (developing services), manufacturing is the most important, though not the only, route to prosperity. There are good theoretical reasons for this, and an abundance of historical examples to prove the point.We must not look at spectacular contemporary examples of manufacturing-based success, like Switzerland and Singapore, and mistakenly think that they prove the opposite. It may be that the Swiss and the Singaporeans are playing us along because they don’t want other people to find out the real secret of their success!
Don’t try this at home
So far, I have shown that it is important for developing countries to defy the market and deliberately promote economic activities that will raise their productivity in the long run – mainly, though not exclusively, manufacturing industries. I have argued that this involves capability-building, which, in turn, requires sacrificing certain short-term gains for the sake of raising long-term productivity (and thus standards of living) – possibly for decades.
But neo-liberal economists may respond by asking: what about the low capacities of developing country governments that are supposed to orchestrate all this? If these countries are to defy the logic of the market, someone has to choose which industries to promote and what capabilities to invest in. But capable government officials are the last thing that developing countries have. If those making these important choices are incompetent, their intervention can only make things worse.
This was the argument used by the World Bank in its famous East Asian Miracle report, published in 1993. Advising other developing countries against emulating interventionist Japanese and Korean trade and industrial policies, it argued that such policies cannot work in countries without ‘the competence, insulation, and relative lack of corruptibility of the public administrations in Japan and Korea’5 – that is, practically all developing countries. Alan Winters, a professor of economics at the University of Sussex and the director of the Development Research Group at the World Bank, was even more blunt. He argued that ‘the application of second-best economics [economics that allows for imperfect markets and therefore potentially beneficial government intervention – my note] needs first-best economists, not its usual complement of third- and fourth-raters’.6 The message is clear – ‘Do not try this at home’, as TV captions say when showing people doing dangerous stunts.
There can be no dispute that, in many developing countries, government officials are not highly trained. But it is also not true that countries like Japan, Korea and Taiwan succeeded with interventionist policies because their bureaucracies were manned by exceptionally well-trained government officials. They were not – at least in the beginning.
Korea used to send its bureaucrats for extra training to – of all places – Pakistan and the Philippines until the late 1960s. Pakistan was then a ‘star pupil’ of the World Bank, while the Philippines was the second-richest country in Asia after Japan. Years ago, as a graduate student, I had a chance to compare the early economic planning documents of Korea and India. The early Indian plans were cutting-edge stuff for their time. They were based on a sophisticated economic model developed by the world-famous statistician Prasanta Chandra Mahalanobis. The Korean ones, I am embarrassed to say, were definitely written by Professor Winters’s ‘usual complement of third- and fourth-raters’. But the Korean economy did far better than the Indian one. Perhaps we don’t need ‘first-best economists’ to run good economic policy.
Indeed, Professor Winters’s first-best economists are one thing that the East Asian economies did not have. Japanese economic officials may have been ‘first-best’, but they were certainly not economists – they were mostly lawyers by training. Until the 1980s, what little economics they knew were mostly of the ‘wrong’ kind – the economies of Karl Marx and Friedrich List, rather than of Adam Smith and Milton Friedman. In Taiwan, most key economic bureaucrats were engineers and scientists, rather than economists, as is the case in China today.7 Korea also had a high proportion of lawyers in its economic bureaucracy until the 1970s.8 The brains behind President Park’s Heavy and Chemical Industrialisation (HCI) programme in the 1970s, Oh Won-Chul, was an engineer by training.
It is entirely reasonable to say that we need smart people to run good economic policy. But those ‘smart people’ do not have to be Professor Winters’s ‘first-best economists’. Actually, the ‘first best economists’ may not be very good for economic development, if they are trained in neo-liberal economics.Moreover, the quality of the bureaucracy can be improved as we go along. Such improvement, of course, requires investment in bureaucratic capabilities. But it also needs some experiments with ‘difficult’policies. If the bureaucrats stick to (allegedly) ‘easy’ policies, like free trade, they will never develop the abilities to run ‘difficult’ policies. You need some ‘trying at home’, if you aspire to become good enough to appear on TV with your own stunt act.
Tilting the playing field
Knowing what policies are right for your particular circumstances is not enough. A country must be able to implement them. Over the past quarter of a century, the Bad Samaritans have made it increasingly difficult for developing countries to pursue the ‘right’ policies for their development. They have used the Unholy Trinity of the IMF, the World Bank and the WTO, the regional multilateral financial institutions, their aid budgets and bilateral and regional free-trade or investment agreements in order to block them from doing so. They argue that nationalist policies (like trade protection and discrimination against foreign investors) should be banned, or severely curtailed, not only because they are supposed to be bad for the practising countries themselves but also because they lead to ‘unfair’ competition. In arguing this, the Bad Samaritans constantly invoke the notion of the ‘level playing field’.
The Bad Samaritans demand that developing countries should not be allowed to use extra policy tools for protection, subsidies and regulation, as these constitute unfair competition. If they were allowed to do so, developing countries would be like a football team, the Bad Samaritans argue, attacking from uphill, while the other team (the rich countries) are struggling to climb the un-level playing field. Get rid of all protective barriers and make everyone compete on an equal footing; after all, the benefits of the market can only be reaped when the underlying competition is fair.9 Who can disagree with such a reasonable-sounding notion as ‘the level playing field’?
I do – when it comes to competition between unequal players. And we all should – if we are to build an international system that promotes economic development. A level playing field leads to unfair competition when the players are unequal.When one team in a football game is, say, the Brazilian national team and the other team is made up of my 11-year-old daughter Yuna’s friends, it is only fair that the girls are allowed to attack downhill. In this case, a tilted, rather than a level, playing field is the way to ensure fair competition.
We don’t see this kind of tilted playing field only because the Brazilian national team is never going to be allowed to compete with a team of 11-year-old girls, and not because the idea of a tilted playing field is wrong in itself. In fact, in most sports, unequal players are not simply allowed to compete against each other – tilted playing field or not – for the obvious reason that it would be unfair.
Football and most other sports have age groups and gender separation, while boxing, wrestling, weightlifting and many other sports have weight classes – the heavyweight, Muhammad Ali, was simply not allowed to box Roberto Duran, the legendary Panamanian with four titles in lighter weight classes. And the classes are divided really finely. For example, in boxing, the lighter weight classes are literally within two-or-three-pound (1–1.5-kilo) bands. How is it that we think a boxing match between people with more than a couple of kilos’ difference in weights is unfair, and yet we accept that the US and Honduras should compete on equal terms? In golf, to take another example, we even have an explicit system of ‘handicaps’ that give players advantages in inverse proportion to their playing skills.
Global economic competition is a game of unequal players. It pits against each other countries that range from, as we development economists like to say, Switzerland to Swaziland. Consequently, it is only fair that we ‘tilt the playing field’ in favour of the weaker countries. In practice, this means allowing them to protect and subsidize their producers more vigorously and to put stricter regulations on foreign investment.* These countries should also be allowed to protect intellectual property rights less stringently so that they can more actively ‘borrow’ ideas from more advanced countries. Rich countries can further help by transferring their technologies on favourable terms; this will have the added benefit of making economic growth in poor countries more compatible with the need to fight global warming, as rich country technologies tend to be far more energy efficient.10
The Bad Samaritan rich countries may protest that all this is ‘special treatment’ for developing countries.But to call something special treatment is to say that the person receiving it is also obtaining an unfair advantage.Yet we wouldn’t call stair-lifts for wheelchair users or Braille text for the blind ‘special treatment’. In the same way, we should not call the higher tariffs and other means of protection additionally made available for the developing countries ‘special treatment’. They are just differential – and fair – treatment for countries with differential capabilities and needs.
Last but not least, tilting the playing field in favour of developing nations is not just a matter of fair treatment now. It is also about providing the economically less advanced countries with the tools to acquire new capabilities by sacrificing short-term gains. Indeed, allowing the poor countries to raise their capabilities more easily brings forward the day when the gap between the players is small and thus it becomes no longer necessary to tilt the playing field.
What is right and what is easy
Suppose I am right and that the playing field should be tilted in favour of the developing countries. The reader can still ask: what is the chance of the Bad Samaritans accepting my proposal and changing their ways?
It may seem pointless to try to convert those Bad Samaritans who are acting out of self-interest. But we can still appeal to their enlightened self-interest. Since neo-liberal policies are making developing countries grow more slowly than they would otherwise do, the Bad Samaritans themselves might be better off in the long run if they allowed alternative policies that would let developing countries grow faster. If per capita income grows at only 1% a year, as it has in Latin America over the past two decades of neo-liberalism, it will take seven decades to double the income. But if it grows at 3%, as it did in Latin America during the period of import substitution industrialization, income would increase by eight times during the same period of time, providing the Bad Samaritan rich countries with a vastly bigger market to exploit. So it is actually in the long-term interest of even the most selfish Bad Samaritan countries to accept those ‘heretical’ policies that would generate faster growth in developing countries.
The people who are much harder to persuade are the ideologues – those who believe in Bad Samaritan policies because they think those policies are ‘right’, not because they personally benefit from them much, if at all. As I said earlier, self-righteousness is often more stubborn than self-interest. But even here there is hope. Once accused of inconsistency, John Maynard Keynes famously responded: ‘When the facts change, I change my mind – what do you do, sir?’Many, although, unfortunately, not all, of these ideologues are like Keynes. They can change, and have changed, their minds, if they are confronted with new turns in real world events and new arguments, provided that these are compelling enough to make them overcome their previous convictions. The Harvard economist Martin Feldstein is a good example. He was once the brains behind Reagan’s neo-liberal policies, but when the Asian crisis happened, his criticism of the IMF (cited in chapter 1) was more trenchant than those by some ‘left-wing’ commentators.
What should give us real hope is that the majority of Bad Samaritans are neither greedy nor bigoted. Most of us, including myself, do bad things not because we derive great material benefit from them or strongly believe in them, but because they are the easiest thing to do. Many Bad Samaritans go along with wrong policies for the simple reason that it’s easier to be a conformist. Why go around looking for ‘inconvenient truths’ when you can just accept what most politicians and newspapers say? Why bother to find out what is really going on in poor countries when you can easily blame it on corruption, laziness or the profligacy of their people? Why go out of your way to check up on your own country’s history when the ‘official’ version suggests that it has always been the home of all virtues? – free trade, creativity, democracy, prudence, you name it.
It is exactly because most Bad Samaritans are like this that I have hope. They are people who may be willing to change their ways, if they are given a more balanced picture, which I hope this book has provided. This is not just wishful thinking.There was a period, between the Marshall Plan (announced sixty years ago, in June 1947) and the rise of neo-liberalism in the 1970s, when the rich countries, led by the US, did not behave as Bad Samaritans, as I discussed in chapter 2.11
The fact that rich countries did not behave as Bad Samaritans on at least one occasion in the past gives us hope. The fact that that historical episode produced an excellent outcome economically – for the developing world has never done better, either before or since – gives us the moral duty to learn from that experience.
* In some definitions, industry includes activities like mining or the generation and distribution of electricity or gas.
* Quite a few developing countries have chosen not to use these tools. Some neo-liberal economists have used this as ‘evidence’ that these countries do not want policy freedom – which means that the WTO rules are not, in fact, restricting the options for these countries. However, what may look like a voluntary choice is likely to have been shaped by past conditionalities attached to foreign aid and IMF-World Bank programmes, as well as the fear of future punishment by the rich countries. But, even ignoring this problem, it is not right for rich countries to make the choice for developing countries. It is actually quite curious how free-market economists who are so much in favour of choice and autonomy do not hesitate to oppose it when it is by developing countries.