ha joon chang prologue
PROLOGUE
Mozambique’s economic miracle
How to escape poverty
Mozambique Takes on the Big Boys
Nuts and volts
June 28th 2061 | MAPUTO
From The Economist print edition
Tres Estrelas announces a new breakthrough in fuel cell technology
In a carefully staged event to coincide with the country’s independence day on June 25th, Maputo-based Tres Estrelas, the largest African business group outside South Africa, unveiled a breakthrough technology for mass production of hydrogen fuel cells. ‘When our new plant goes into production in the autumn of 2063, ’ Mr Armando Nhumaio, the ebullient chairman of the company announced, ‘we will be able to take on the big boys from Japan and the USA by offering consumers much better value for money.’ Analysts agree that the new technology from Tres Estrelas means hydrogen fuel is set to replace alcohol as the main source of power for automobiles. ‘This is bound to pose a serious challenge to the leading alcohol fuel producers, like Petrobras of Brazil and Alconas of Malaysia, ’ says Nelson Mbeki-Malan, the head of the prestigious Energy Economics Research Institute at the University of Western Cape, South Africa.
Tres Estrelas has made its own rocket-fuelled journey from humble beginnings. The company started out exporting cashew nuts in 1968, seven years before Mozambique’s independence from the Portuguese. It then did well by diversifying into textiles and sugar refining. Subsequently, it made a bolder move into electronics, first as a subcontractor for the Korean electronics giant, Samsung, and later as an independent producer. But an announcement in 2030 that hydrogen fuel cell production was to be its next venture generated considerable scepticism. ‘Everyone thought we were crazy, ’ says Mr Nhumaio. ‘The fuel cell division bled money for 17 years. Luckily, in those days, we did not have many outside shareholders requiring instant results.We persisted in our belief that building a world-class firm requires a long period of preparation.’
The company’s rise symbolizes the economic miracle that is modern Mozambique. In 1995, three years after the end of its bloody 16-year civil war, Mozambique had a per capita income of only $80 and was literally the poorest economy in the world. With deep political divisions, rampant corruption and a sorry 33% literacy rate, its prospects ranged from dire to grim. In 2000, eight years after the end of the civil war, the average Mozambican still earned only $210 a year, just over half that of the average Ghanaian, who was earning $350. However, since then, Mozambique’s economic miracle has transformed it into one of the richest economies in Africa and a solid upper-middle-income country. With a bit of luck and sweat, it may even be able to join the ranks of the advanced economies in the next two or three decades.
‘We will not rest on our laurels, ’ says Mr Nhumaio, whose roguish grin is reported to hide a steely determination.‘This is a tough industry where technology changes fast. Product life-cycles are short and no one can expect to last long as the market leader based on only one innovation. Competitors may appear on the horizon out of nowhere any day.’ After all, his company has just sprung a nasty surprise on the Americans and the Japanese. Might a relatively unknown fuel cell manufacturer somewhere in Nigeria decide that, if Tres Estrelas was able to move from the darkest shadows to the top of the tree, then perhaps it could too?
Mozambique may or may not succeed in living up to my fantasy. But what would your reaction have been, had you been told in 1961, a century before the Mozambican dream, that South Korea would, in 40 years’ time, be one of the world’s leading exporters of mobile phones, a strictly science-fiction product at that time? Hydrogen fuel cells do at least exist today.
In 1961, eight years after the end of its fratricidal war with North Korea, South Korea’s yearly income stood at $82 per person. The average Korean earned less than half the average Ghanaian citizen ($179).1 The Korean War – which, incidentally, started on June 25, Mozambique’s independence day – was one of the bloodiest in human history, claiming four million lives in just over three years (1950–3). Half of South Korea’s manufacturing base and more than 75% of its railways were destroyed in the conflict. The country had shown some organizational ability by managing to raise its literacy ratio to 71% by 1961 from the paltry 22% level it had inherited in 1945 from its Japanese colonial masters, who had ruled Korea since 1910. But it was widely considered a basket case of developmental failure. A 1950s internal report from USAID – the main US government aid agency then, as now – called Korea a ‘bottomless pit’. At the time, the country’s main exports were tungsten, fish and other primary commodities.
As for Samsung, * now one of the world’s leading exporters of mobile phones, semiconductors and computers, the company started out as an exporter of fish, vegetables and fruit in 1938, seven years before Korea’s independence from Japanese colonial rule. Until the 1970s, its main lines of business were sugar refining and textiles that it had set up in the mid-1950s.2 When it moved into the semiconductor industry by acquiring a 50% stake in Korea Semiconductor in 1974, no one took it seriously. After all, Samsung did not even manufacture colour TV sets until 1977. When it declared its intention, in 1983, to take on the big boys of the semiconductor industry from the US and Japan by designing its own chips, few were convinced.
Korea, one of the poorest places in the world, was the sorry country I was born into on October 7 1963. Today I am a citizen of one of the wealthier, if not wealthiest, countries in the world. During my lifetime, per capita income in Korea has grown something like 14 times, in purchasing power terms. It took the UK over two centuries (between the late 18th century and today) and the US around one and half centuries (the 1860s to the present day) to achieve the same result.3 The material progress I have seen in my 40-odd years is as though I had started life as a British pensioner born when George III was on the throne or as an American grandfather born while Abraham Lincoln was president.
The house I was born and lived in until I was six was in what was then the north-western edge of Seoul, Korea’s capital city. It was one of the small (two-bedroom) but modern homes that the government built with foreign aid in a programme to upgrade the country’s dilapidated housing stock. It was made with cement bricks and was poorly heated, so it was rather cold in winter – the temperature in Korea’s winter can sink to 15 or even 20 degrees below zero. There was no flushing toilet, of course: that was only for the very rich.
Yet my family had some great luxuries that many others lacked, thanks to my father, an elite civil servant in the Finance Ministry who had diligently saved his scholarship money while studying at Harvard for a year. We owned a black-and-white TV set, which exerted a magnetic pull on our neighbours. One family friend, an up-and-coming young dentist at St Mary’s, one of the biggest hospitals in the country, somehow used to find the time to visit us whenever there was a big sports match on TV – ostensibly for reasons totally unrelated to the match. In today’s Korea, he would be contemplating upgrading the second family TV in the bedroom to a plasma screen. A cousin of mine who had just moved from my father’s native city of Kwangju to Seoul came to visit on one occasion and quizzed my mother about the strange white cabinet in the living room. It was our refrigerator (the kitchen being too small to accommodate it).My wife, Hee-Jeong, born in Kwangju in 1966, tells me that her neighbours would regularly ‘deposit’ their precious meat in the refrigerator of her mother, the wife of a prosperous doctor, as if she were the manager of an exclusive Swiss private bank.
A small cement-brick house with a black-and-white TV and a refrigerator may not sound much, but it was a dream come true for my parents’ generation, who had lived through the most turbulent and deprived times: Japanese colonial rule (1910–45), the Second World War, the division of the country into North and South Korea (1948) and the Korean War. Whenever I and my sister, Yonhee, and brother, Hasok, complained about food, my mother would tell us how spoilt we were. She would remind us that, when they were our age, people of her generation would count themselves lucky if they had an egg. Many families could not afford them; even those who could reserved them for fathers and working older brothers. She used to recall her heartbreak when her little brother, starving during the Korean War at the age of five, said that he would feel better if he could only hold a rice bowl in his hands, even if it was empty. For his part, my father, a man with a healthy appetite who loves his beef, had to survive as a secondary school student during the Korean War on little more than rice, black-market margarine from the US army, soy sauce and chilli paste. At the age of ten, he had to watch helplessly as his seven-year-old younger brother died of dysentery, a killer disease then that is all but unknown in Korea today.
Years later, in 2003, when I was on leave from Cambridge and staying in Korea, I was showing my friend and mentor, Joseph Stiglitz, the Nobel Laureate economist, around the National Museum in Seoul. We came across an exhibition of beautiful black-and-white photographs showing people going about their business in Seoul’s middle-class neighbourhoods during the late 1950s and the early 1960s. It was exactly how I remembered my childhood. Standing behind me and Joe were two young women in their early twenties. One screamed, ‘How can that be Korea? It looks like Vietnam!’ There was less than 20 years’ age gap between us, but scenes that were familiar to me were totally alien to her. I turned to Joe and told him how ‘privileged’ I was as a development economist to have lived through such a change. I felt like an historian of mediaeval England who has actually witnessed the Battle of Hastings or an astronomer who has voyaged back in time to the Big Bang.
Our next family house, where I lived between 1969 and 1981, at the height of Korean economic miracle, not only had a flushing toilet but also boasted a central heating system. The boiler, unfortunately, caught fire soon after we moved in and almost burned the house down. I don’t tell you this in complaint; we were lucky to have one – most houses were heated with coal briquettes, which killed thousands of people every winter with carbon monoxide poisoning. But the story does offer an insight into the state of Korean technology in that far-off, yet really so recent, era.
In 1970 I started primary school. It was a second-rate private school that had 65 children in each class. We were very proud because the state school next door had 90 children per class.Years later, in a seminar at Cambridge, a speaker said that because of budget cuts imposed by the International Monetary Fund (more on this later), the average number of pupils per classroom in several African countries rose from 30-something to 40-something in the 1980s. Then it hit me just how bad things had been in the Korean schools of my childhood.When I was in primary school, the poshest school in the country had 40 children in a class, and everyone wondered, ‘how do they do that?’ State schools in some rapidly expanding urban areas were stretched to the limit, with up to 100 pupils per class and teachers running double, sometimes triple, shifts. Given the conditions, it was little wonder that education involved beating the children liberally and teaching everything by rote. The method has obvious drawbacks, but at least Korea has managed to provide at least six years’ education to virtually every child since the 1960s.
In 1972, when I was in Year 3 (US third grade), my school playground suddenly became a campsite for soldiers. They were there to pre-empt any student demonstrations against the martial law being imposed by the president of the country, (former) General Park Chung-Hee. Thankfully, they were not there to take on me and my friends. We Korean kids may be known for our academic precocity, but constitutional politics were frankly a little bit beyond us nine-year-olds.My primary school was attached to a university, whose rebellious students were the soldiers’ target. Indeed, Korean university students were the nation’s conscience throughout the political dark age of the military dictatorship and they also played the leading role in putting an end to it in 1987.
After he had come to power in a military coup in 1961, General Park turned ‘civilian’ and won three successive elections. His electoral victories were propelled by his success in launching the country’s economic ‘miracle’ through his Five Year Plans for Economic Development. But the victories were also ensured by election rigging and political dirty tricks. His third and supposedly final term as president was due to end in 1974, but Park just could not let go.Halfway through his third term, he staged what Latin Americans call an ‘auto-coup’. This involved dissolving the parliament and establishing a rigged electoral system to guarantee him the presidency for life. His excuse was that the country could ill afford the chaos of democracy. It had to defend itself against North Korean communism, the people were told, and accelerate its economic development. His proclaimed goal of raising the country’s per capita income to 1, 000 US dollars by 1981 was considered overly ambitious, bordering on delusional.
President Park launched the ambitious Heavy and Chemical Industrialization (HCI) programme in 1973. The first steel mill and the first modern shipyard went into production, and the first locally designed cars (made mostly from imported parts) rolled off the production lines. New firms were set up in electronics, machinery, chemicals and other advanced industries. During this period, the country’s per capita income grew phenomenally by more than five times, in US dollar terms, between 1972 and 1979. Park’s apparently delusional goal of $1, 000 per capita income by 1981 was actually achieved four years ahead of schedule. Exports grew even faster, increasing nine times, in US dollar terms, between 1972 and 1979.4
The country’s obsession with economic development was fully reflected in our education. We learned that it was our patriotic duty to report anyone seen smoking foreign cigarettes. The country needed to use every bit of the foreign exchange earned from its exports in order to import machines and other inputs to develop better industries. Valuable foreign currencies were really the blood and sweat of our ‘industrial soldiers’ fighting the export war in the country’s factories. Those squandering them on frivolous things, like illegal foreign cigarettes, were ‘traitors’. I don’t believe any of my friends actually went as far as reporting such ‘acts of treason’. But it did feed the gossip mill when kids saw foreign cigarettes in a friend’s house. The friend’s father – it was almost invariably men who smoked – would be darkly commented on as an unpatriotic and therefore immoral, if not exactly criminal, individual.
Spending foreign exchange on anything not essential for industrial development was prohibited or strongly discouraged through import bans, high tariffs and excise taxes (which were called luxury consumption taxes). ‘Luxury’ items included even relatively simple things, like small cars, whisky or cookies. I remember the minor national euphoria when a consignment of Danish cookies was imported under special government permission in the late 1970s. For the same reason, foreign travel was banned unless you had explicit government permission to do business or study abroad. As a result, despite having quite a few relatives living in the US, I had never been outside Korea until I travelled to Cambridge at the age of 23 to start as a graduate student there in 1986.
This is not to say that no one smoked foreign cigarettes or ate illicit cookies. A considerable quantity of illegal and semi-legal foreign goods was in circulation. There was some smuggling, especially from Japan, but most of the goods involved were things brought in – illegally or semi-legally – from the numerous American army bases in the country. Those American soldiers who fought in the Korean War may still remember malnourished Korean children running after them begging for chewing gum or chocolates.Even in the Korea of the 1970s, American army goods were still considered luxuries. Increasingly affluent middle class families could afford to buy M&M chocolates and Tang juice powders from shops and itinerant pedlars. Less affluent people might go to restaurants that served boodae chige, literally ‘army base stew’. This was a cheaper version of the classic Korean stew, kimchee chige, using kimchee (cabbages pickled in garlic and chilli) but substituting the other key ingredient, pork belly, with cheaper meats, like surplus bacon, sausages and spam smuggled out of American army bases.
I longed for the chance to sample the tins of spam, corned beef, chocolates, biscuits and countless other things whose names I did not even know, from the boxes of the American Army’s ‘C Ration’ (the canned and dried food ration for the battlefield). A maternal uncle, who was a general in the Korean army, used to accumulate supplies during joint field exercises with his American colleagues and gave them to me as an occasional treat. American soldiers cursed the wretched quality of their field rations. For me they were like a Fortnum & Mason picnic hamper. But, then, I was living in a country where vanilla ice cream had so little vanilla in it that I thought vanilla meant ‘no flavour’, until I learnt English in secondary school. If that was the case with a well-fed upper-middle-class child like me, you can imagine what it must have been like for the rest.
When I went to secondary school, my father gave me a Casio electronic calculator, a gift beyond my wildest dreams. Then it was probably worth half a month’s wages for a garment factory worker, and was a huge expense even for my father, who spared nothing on our education. Some 20 years later, a combination of rapid development in electronics technologies and the rise in Korea’s living standards meant that electronic calculators were so abundant that they were given out as free gifts in department stores. Many of them ended up as toys for toddlers (no, I don’t believe this is why Korean kids are good at maths!).
Korea’s economic ‘miracle’ was not, of course, without its dark sides. Many girls from poor families in the countryside were forced to find a job as soon as they left primary school at the age of 12 – to ‘get rid of an extra mouth’ and to earn money so that at least one brother could receive higher education.Many ended up as housemaids in urban middle-class families, working for room and board and, if they were lucky, a tiny amount of pocket money. The other girls, and the less fortunate boys, were exploited in factories where conditions were reminiscent of 19th-century ‘dark satanic mills’ or today’s sweatshops in China. In the textile and garment industries, which were the main export industries, workers often worked 12 hours or more in very hazardous and unhealthy conditions for low pay. Some factories refused to serve soup in the canteen, lest the workers should require an extra toilet break that might wipe out their wafer-thin profit margins. Conditions were better in the newly emerging heavy industries – cars, steel, chemicals, machinery and so on – but, overall, Korean workers, with their average 53–4 hour working week, put in longer hours than just about anyone else in the world at the time.
Urban slums emerged. Because they were usually up in the low mountains that comprise a great deal of the Korean landscape, they were nicknamed ‘Moon Neighbourhoods’, after a popular TV sitcom series of the 1970s. Families of five or six would be squashed into a tiny room and hundreds of people would share one toilet and a single standpipe for running water. Many of these slums would ultimately be cleared forcefully by the police and the residents dumped in far-flung neighbourhoods, with even worse sanitation and poorer road access, to make way for new apartment blocks for the ever-growing middle class. If the poor could not get out of the new slums fast enough (though getting out of the slums was at least possible, given the rapid growth of the economy and the creation of new jobs), the urban sprawl would catch up with them and see them rounded up once again and dumped in an even more remote place. Some people ended up scavenging in the city’s main rubbish dump, Nanji Island. Few people outside Korea were aware that the beautiful public parks surrounding the impressive Seoul Football Stadium they saw during the 2002 World Cup were built literally on top of the old rubbish dump on the island (which nowadays has an ultra-modern eco-friendly methane-burning power station, which taps into the organic material dumped there).
In October 1979, when I was still a secondary school student, President Park was unexpectedly assassinated by the chief of his own Intelligence Service, amid mounting popular discontent with his dictatorship and the economic turmoil following the Second Oil Shock. A brief ‘Spring of Seoul’ followed, with hopes of democracy welling up. But it was brutally ended by the next military government of General Chun Doo-Hwan, which seized power after the two-week armed popular uprising that was crushed in the Kwangju Massacre of May 1980.
Despite this grave political setback, by the early 1980s, Korea had become a solid middle-income country, on a par with Ecuador, Mauritius and Costa Rica. But it was still far removed from the prosperous nation we know today. One of the slang expressions common among us high-school students was ‘I’ve been to Hong Kong’, which meant ‘I have had an experience out of this world’. Even today, Hong Kong is still considerably richer than Korea, but the expression reflects the fact that, in the 1960s or the 1970s, Hong Kong’s per capita income was three to four times greater than my country’s.
When I went to university in 1982, I became interested in the issue of intellectual property rights, something that is even more hotly debated today. By that time, Korea had become competent enough to copy advanced products and rich enough to want the finer things in life (music, fashion goods, books). But it was still not sophisticated enough to come up with original ideas and to develop and own international patents, copyrights and trademarks.
Today, Korea is one of the most ‘inventive’ nations in the world – it ranks among the top five nations in terms of the number of patents granted annually by the US Patent Office. But until the mid-1980s it lived on ‘reverse engineering’. My friends would buy ‘copy’ computers that were made by small workshops, which would take apart IBM machines, copy the parts, and put them together. It was the same with trademarks. At the time, the country was one of the ‘pirate capitals’ of the world, churning out fake Nike shoes and Louis Vuitton bags in huge quantities. Those who had more delicate consciences would settle for near-counterfeits. There were shoes that looked like Nike but were called Nice, or shoes that had the Nike swoosh but with an extra prong. Counterfeit goods were rarely sold as the genuine article. Those who bought them were perfectly aware that they were buying fakes; the point was to make a fashion statement, rather than to mislead. Copyrighted items were treated in the same way. Today, Korea exports a large and increasing quantity of copyrighted materials (movies, TV soaps, popular songs), but at the time imported music (LP records) or films (videos) were so expensive that few people could afford the real thing.We grew up listening to pirate rock’n’ roll records, which we called ‘tempura shop records’, because their sound quality was so bad it sounded as if someone was deep-frying in the background. As for foreign books, they were still beyond the means of most students. Coming from a well-off family that was willing to invest in education, I did have some imported books. But most of my books in English were pirated. I could never have entered and survived Cambridge without those illegal books.
By the time I was finishing my graduate studies at Cambridge in the late 1980s, Korea had become a solid upper-middle-income country. The surest proof of this was that European countries stopped demanding that Koreans get an entry visa. Most of us by then had no reason to want to emigrate illegally anyway. In 1996, the country even joined the OECD (Organisation for Economic Co-operation and Development) – the club of the rich countries – and declared itself to have ‘arrived’, although that euphoria was badly deflated by the financial crisis that engulfed Korea in 1997. Since that financial crisis, the country has not been doing as well by its own high standards, mainly because it has over-enthusiastically embraced the ‘free market rules’ model. But that is a story for later.
Whatever its recent problems have been, Korea’s economic growth and the resulting social transformation over the last four and a half decades have been truly spectacular. It has gone from being one of the poorest countries in the world to a country on a par with Portugal and Slovenia in terms of per capita income.5 A country whose main exports included tungsten ore, fish and wigs made with human hair has become a high-tech powerhouse, exporting stylish mobile phones and flat-screen TVs coveted all over the world. Better nutrition and health care mean that a child born in Korea today can expect to live 24 years longer than someone born in the early 1960s (77 years instead of 53 years). Instead of 78 babies out of 1, 000, only five babies will die within a year of birth, breaking far fewer parents’ hearts. In terms of these life-chance indicators, Korea’s progress is as if Haiti had turned into Switzerland.6 How has this ‘miracle’ been possible?
For most economists, the answer is a very simple one. Korea has succeeded because it has followed the dictates of the free market. It has embraced the principles of sound money (low inflation), small government, private enterprise, free trade and friendliness towards foreign investment. The view is known as neo-liberal economics.
Neo-liberal economics is an updated version of the liberal economics of the 18th-century economist Adam Smith and his followers. It first emerged in the 1960s and has been the dominant economic view since the 1980s. Liberal economists of the 18th and the 19th centuries believed that unlimited competition in the free market was the best way to organise an economy, because it forces everyone to perform with maximum efficiency. Government intervention was judged harmful because it reduces competitive pressure by restricting the entry of the potential competitors, whether through import controls or the creation of monopolies.Neo-liberal economists support certain things that the old liberals did not – most notably certain forms of monopoly (such as patents or the central bank’s monopoly over the issue of bank notes) and political democracy. But in general they share the old liberals’ enthusiasm for the free market.And despite a few ‘tweaks’ in the wake of a whole series of disappointing results of neo-liberal policies applied to developing nations during the past quarter of a century, the core neo-liberal agenda of deregulation, privatization and opening up of international trade and investment has remained the same since the 1980s.
In relation to the developing countries, the neo-liberal agenda has been pushed by an alliance of rich country governments led by the US and mediated by the ‘Unholy Trinity’ of international economic organizations that they largely control – the International Monetary Fund (IMF), the World Bank and the World Trade Organisation (WTO). The rich governments use their aid budgets and access to their home markets as carrots to induce the developing countries to adopt neo-liberal policies. This is sometimes to benefit specific firms that lobby, but usually to create an environment in the developing country concerned that is friendly to foreign goods and investment in general. The IMF and the World Bank play their part by attaching to their loans the condition that the recipient countries adopt neo-liberal policies. The WTO contributes by making trading rules that favour free trade in areas where the rich countries are stronger but not where they are weak (e.g., agriculture or textiles). These governments and international organizations are supported by an army of ideologues. Some of these people are highly trained academics who should know the limits of their free-market economics but tend to ignore them when it comes to giving policy advice (as happened especially when they advised the former communist economies in the 1990s). Together, these various bodies and individuals form a powerful propaganda machine, a financial-intellectual complex backed by money and power.
This neo-liberal establishment would have us believe that, during its miracle years between the 1960s and the 1980s, Korea pursued a neo-liberal economic development strategy.7 The reality, however, was very different indeed. What Korea actually did during these decades was to nurture certain new industries, selected by the government in consultation with the private sector, through tariff protection, subsidies and other forms of government support (e.g., overseas marketing information services provided by the state export agency) until they ‘grew up’ enough to withstand international competition. The government owned all the banks, so it could direct the life blood of business – credit. Some big projects were undertaken directly by state-owned enterprises – the steel maker, POSCO, being the best example – although the country had a pragmatic, rather than ideological, attitude to the issue of state ownership. If private enterprises worked well, that was fine; if they did not invest in important areas, the government had no qualms about setting up state-owned enterprises (SOEs); and if some private enterprises were mismanaged, the government often took them over, restructured them, and usually (but not always) sold them off again.
The Korean government also had absolute control over scarce foreign exchange (violation of foreign exchange controls could be punished with the death penalty). When combined with a carefully designed list of priorities in the use of foreign exchange, it ensured that hard-earned foreign currencies were used for importing vital machinery and industrial inputs. The Korean government heavily controlled foreign investment as well, welcoming it with open arms in certain sectors while shutting it out completely in others, according to the evolving national development plan. It also had a lax attitude towards foreign patents, encouraging ‘reverse engineering’ and overlooking ‘pirating’ of patented products.
The popular impression of Korea as a free-trade economy was created by its export success. But export success does not require free trade, as Japan and China have also shown. Korean exports in the earlier period – things like simple garments and cheap electronics – were all means to earn the hard currencies needed to pay for the advanced technologies and expensive machines that were necessary for the new, more difficult industries, which were protected through tariffs and subsidies. At the same time, tariff protection and subsidies were not there to shield industries from international competition forever, but to give them the time to absorb new technologies and establish new organizational capabilities until they could compete in the world market.
The Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state direction. The Korean government did not vanquish the market as the communist states did. However, it did not have blind faith in the free market either. While it took markets seriously, the Korean strategy recognized that they often need to be corrected through policy intervention.
Now, if it was only Korea that became rich through such ‘heretical’ policies, the free-market gurus might be able to dismiss it as merely the exception that proves the rule. However, Korea is no exception. As I shall show later, practically all of today’s developed countries, including Britain and the US, the supposed homes of the free market and free trade, have become rich on the basis of policy recipes that go against the orthodoxy of neo-liberal economics.
Today’s rich countries used protection and subsidies, while discriminating against foreign investors – all anathema to today’s economic orthodoxy and now severely restricted by multilateral treaties, like the WTO Agreements, and proscribed by aid donors and international financial organizations (notably the IMF and the World Bank). There are a few countries that did not use much protection, such as the Netherlands and (until the First World War) Switzerland. But they deviated from the orthodoxy in other ways, such as their refusal to protect patents. The records of today’s rich countries on policies regarding foreign investment, state-owned enterprises, macroeconomic management and political institutions also show significant deviations from today’s orthodoxy regarding these matters.
Why then don’t the rich countries recommend to today’s developing countries the strategies that served them so well? Why do they instead hand out a fiction about the history of capitalism, and a bad one at that?
In 1841, a German economist, Friedrich List, criticized Britain for preaching free trade to other countries, while having achieved its economic supremacy through high tariffs and extensive subsidies. He accused the British of ‘kicking away the ladder’ that they had climbed to reach the world’s top economic position: ‘[i]t is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him [italics added]’.8
Today, there are certainly some people in the rich countries who preach free market and free trade to the poor countries in order to capture larger shares of the latter’s markets and to pre-empt the emergence of possible competitors. They are saying ‘do as we say, not as we did’ and act as ‘Bad Samaritans’, taking advantage of others who are in trouble.* But what is more worrying is that many of today’s Bad Samaritans do not even realize that they are hurting the developing countries with their policies. The history of capitalism has been so totally re-written that many people in the rich world do not perceive the historical double standards involved in recommending free trade and free market to developing countries.
I am not suggesting that there is a sinister secret committee somewhere that systematically air-brushes undesirable people out of photographs and re-writes historical accounts. However, history is written by the victors and it is human nature to re-interpret the past from the point of view of the present. As a result, the rich countries have, over time, gradually, if often sub-consciously, re-written their own histories to make them more consistent with how they see themselves today, rather than as they really were – in much the same way that today people write about Renaissance ‘Italy’ (a country that did not exist until 1871) or include the French-speaking Scandinavians (Norman conqueror kings) in the list of ‘English’ kings and queens.
The result is that many Bad Samaritans are recommending free-trade, free-market policies to the poor countries in the honest but mistaken belief that those are the routes their own countries took in the past to become rich. But they are in fact making the lives of those whom they are trying to help more difficult. Sometimes these Bad Samaritans may be more of a problem than those knowingly engaged in ‘kicking away the ladder’, because self-righteousness is often more stubborn than self-interest.
So how do we dissuade the Bad Samaritans from hurting the poor countries, whatever their intentions are? What else should they do instead? This book offers some answers through a mix of history, analysis of the world today, some future predictions and suggestions for change.
The place to start is with a true history of capitalism and globalization, which I examine in the next two chapters (chapters 1 and 2). In these chapters, I will show how many things that the reader may have accepted as ‘historical facts’ are either wrong or partial truths. Britain and the US are not the homes of free trade; in fact, for a long time they were the most protectionist countries in the world. Not all countries have succeeded through protection and subsidies, but few have done so without them. For developing countries, free trade has rarely been a matter of choice; it was often an imposition from outside, sometimes even through military power. Most of them did very poorly under free trade; they did much better when they used protection and subsidies. The best-performing economies have been those that opened up their economies selectively and gradually. Neo-liberal free-trade free-market policy claims to sacrifice equity for growth, but in fact it achieves neither; growth has slowed down in the past two and a half decades when markets were freed and borders opened.
In the main chapters of the book that follow the historical chapters (chapters 3 to 9), I deploy a mixture of economic theory, history and contemporary evidence to turn much of the conventional wisdom about development on its head.
• Free trade reduces freedom of choice for poor countries.
• Keeping foreign companies out may be good for them in the long run.
• Investing in a company that is going to make a loss for 17 years may be an excellent proposition.
• Some of the world’s best firms are owned and run by the state.
• ‘Borrowing’ ideas from more productive foreigners is essential for economic development.
• Low inflation and government prudence may be harmful for economic development.
• Corruption exists because there is too much, not too little, market.
• Free market and democracy are not natural partners.
• Countries are poor not because their people are lazy; their people are ‘lazy’ because they are poor.
Like this opening chapter, the closing chapter of the book opens with an alternative ‘future history’ – but this time a very bleak one. The scenario is deliberately pessimistic, but it is firmly rooted in reality, showing how close we are to such a future, should we continue with the neo-liberal policies propagated by the Bad Samaritans. In the rest of the chapter, I present some key principles, distilled from the detailed policy alternatives that I discuss throughout the book, which should guide our action if we are to enable developing countries to advance their economies. Despite its bleak scenario, the chapter – and therefore the book – closes with a note of optimism, explaining why I believe most Bad Samaritans can be changed and really made to help developing countries improve their economic situations.
* Samsung in Korean means Three Stars, as does my fictitious Mozambican firm, Tres Estrelas. The last sentence in my imaginary 2061 Economist piece is based on a real Economist article about Samsung, ‘As good as it gets?’ (January 13 2005), whose final sentence reads: ‘Might a relatively unknown electronics manufacturer somewhere in China decide that, if Samsung was able to move from the darkest shadows to the top of the tree, then perhaps it could too?’ The 17 years during which the fuel cell division of my fictitious Mozambican firm lost money is the same investment period during which the electronics division of Nokia, founded in 1960, lost money.
* The original story is that of the ‘Good Samaritan’ from the Bible. In that parable, a man who was robbed by highwaymen was helped by a ‘Good Samaritan’, despite the fact that the Samaritans were stereotyped as being callous and not above taking advantage of the others in trouble.
Mozambique’s economic miracle
How to escape poverty
Mozambique Takes on the Big Boys
Nuts and volts
June 28th 2061 | MAPUTO
From The Economist print edition
Tres Estrelas announces a new breakthrough in fuel cell technology
In a carefully staged event to coincide with the country’s independence day on June 25th, Maputo-based Tres Estrelas, the largest African business group outside South Africa, unveiled a breakthrough technology for mass production of hydrogen fuel cells. ‘When our new plant goes into production in the autumn of 2063, ’ Mr Armando Nhumaio, the ebullient chairman of the company announced, ‘we will be able to take on the big boys from Japan and the USA by offering consumers much better value for money.’ Analysts agree that the new technology from Tres Estrelas means hydrogen fuel is set to replace alcohol as the main source of power for automobiles. ‘This is bound to pose a serious challenge to the leading alcohol fuel producers, like Petrobras of Brazil and Alconas of Malaysia, ’ says Nelson Mbeki-Malan, the head of the prestigious Energy Economics Research Institute at the University of Western Cape, South Africa.
Tres Estrelas has made its own rocket-fuelled journey from humble beginnings. The company started out exporting cashew nuts in 1968, seven years before Mozambique’s independence from the Portuguese. It then did well by diversifying into textiles and sugar refining. Subsequently, it made a bolder move into electronics, first as a subcontractor for the Korean electronics giant, Samsung, and later as an independent producer. But an announcement in 2030 that hydrogen fuel cell production was to be its next venture generated considerable scepticism. ‘Everyone thought we were crazy, ’ says Mr Nhumaio. ‘The fuel cell division bled money for 17 years. Luckily, in those days, we did not have many outside shareholders requiring instant results.We persisted in our belief that building a world-class firm requires a long period of preparation.’
The company’s rise symbolizes the economic miracle that is modern Mozambique. In 1995, three years after the end of its bloody 16-year civil war, Mozambique had a per capita income of only $80 and was literally the poorest economy in the world. With deep political divisions, rampant corruption and a sorry 33% literacy rate, its prospects ranged from dire to grim. In 2000, eight years after the end of the civil war, the average Mozambican still earned only $210 a year, just over half that of the average Ghanaian, who was earning $350. However, since then, Mozambique’s economic miracle has transformed it into one of the richest economies in Africa and a solid upper-middle-income country. With a bit of luck and sweat, it may even be able to join the ranks of the advanced economies in the next two or three decades.
‘We will not rest on our laurels, ’ says Mr Nhumaio, whose roguish grin is reported to hide a steely determination.‘This is a tough industry where technology changes fast. Product life-cycles are short and no one can expect to last long as the market leader based on only one innovation. Competitors may appear on the horizon out of nowhere any day.’ After all, his company has just sprung a nasty surprise on the Americans and the Japanese. Might a relatively unknown fuel cell manufacturer somewhere in Nigeria decide that, if Tres Estrelas was able to move from the darkest shadows to the top of the tree, then perhaps it could too?
Mozambique may or may not succeed in living up to my fantasy. But what would your reaction have been, had you been told in 1961, a century before the Mozambican dream, that South Korea would, in 40 years’ time, be one of the world’s leading exporters of mobile phones, a strictly science-fiction product at that time? Hydrogen fuel cells do at least exist today.
In 1961, eight years after the end of its fratricidal war with North Korea, South Korea’s yearly income stood at $82 per person. The average Korean earned less than half the average Ghanaian citizen ($179).1 The Korean War – which, incidentally, started on June 25, Mozambique’s independence day – was one of the bloodiest in human history, claiming four million lives in just over three years (1950–3). Half of South Korea’s manufacturing base and more than 75% of its railways were destroyed in the conflict. The country had shown some organizational ability by managing to raise its literacy ratio to 71% by 1961 from the paltry 22% level it had inherited in 1945 from its Japanese colonial masters, who had ruled Korea since 1910. But it was widely considered a basket case of developmental failure. A 1950s internal report from USAID – the main US government aid agency then, as now – called Korea a ‘bottomless pit’. At the time, the country’s main exports were tungsten, fish and other primary commodities.
As for Samsung, * now one of the world’s leading exporters of mobile phones, semiconductors and computers, the company started out as an exporter of fish, vegetables and fruit in 1938, seven years before Korea’s independence from Japanese colonial rule. Until the 1970s, its main lines of business were sugar refining and textiles that it had set up in the mid-1950s.2 When it moved into the semiconductor industry by acquiring a 50% stake in Korea Semiconductor in 1974, no one took it seriously. After all, Samsung did not even manufacture colour TV sets until 1977. When it declared its intention, in 1983, to take on the big boys of the semiconductor industry from the US and Japan by designing its own chips, few were convinced.
Korea, one of the poorest places in the world, was the sorry country I was born into on October 7 1963. Today I am a citizen of one of the wealthier, if not wealthiest, countries in the world. During my lifetime, per capita income in Korea has grown something like 14 times, in purchasing power terms. It took the UK over two centuries (between the late 18th century and today) and the US around one and half centuries (the 1860s to the present day) to achieve the same result.3 The material progress I have seen in my 40-odd years is as though I had started life as a British pensioner born when George III was on the throne or as an American grandfather born while Abraham Lincoln was president.
The house I was born and lived in until I was six was in what was then the north-western edge of Seoul, Korea’s capital city. It was one of the small (two-bedroom) but modern homes that the government built with foreign aid in a programme to upgrade the country’s dilapidated housing stock. It was made with cement bricks and was poorly heated, so it was rather cold in winter – the temperature in Korea’s winter can sink to 15 or even 20 degrees below zero. There was no flushing toilet, of course: that was only for the very rich.
Yet my family had some great luxuries that many others lacked, thanks to my father, an elite civil servant in the Finance Ministry who had diligently saved his scholarship money while studying at Harvard for a year. We owned a black-and-white TV set, which exerted a magnetic pull on our neighbours. One family friend, an up-and-coming young dentist at St Mary’s, one of the biggest hospitals in the country, somehow used to find the time to visit us whenever there was a big sports match on TV – ostensibly for reasons totally unrelated to the match. In today’s Korea, he would be contemplating upgrading the second family TV in the bedroom to a plasma screen. A cousin of mine who had just moved from my father’s native city of Kwangju to Seoul came to visit on one occasion and quizzed my mother about the strange white cabinet in the living room. It was our refrigerator (the kitchen being too small to accommodate it).My wife, Hee-Jeong, born in Kwangju in 1966, tells me that her neighbours would regularly ‘deposit’ their precious meat in the refrigerator of her mother, the wife of a prosperous doctor, as if she were the manager of an exclusive Swiss private bank.
A small cement-brick house with a black-and-white TV and a refrigerator may not sound much, but it was a dream come true for my parents’ generation, who had lived through the most turbulent and deprived times: Japanese colonial rule (1910–45), the Second World War, the division of the country into North and South Korea (1948) and the Korean War. Whenever I and my sister, Yonhee, and brother, Hasok, complained about food, my mother would tell us how spoilt we were. She would remind us that, when they were our age, people of her generation would count themselves lucky if they had an egg. Many families could not afford them; even those who could reserved them for fathers and working older brothers. She used to recall her heartbreak when her little brother, starving during the Korean War at the age of five, said that he would feel better if he could only hold a rice bowl in his hands, even if it was empty. For his part, my father, a man with a healthy appetite who loves his beef, had to survive as a secondary school student during the Korean War on little more than rice, black-market margarine from the US army, soy sauce and chilli paste. At the age of ten, he had to watch helplessly as his seven-year-old younger brother died of dysentery, a killer disease then that is all but unknown in Korea today.
Years later, in 2003, when I was on leave from Cambridge and staying in Korea, I was showing my friend and mentor, Joseph Stiglitz, the Nobel Laureate economist, around the National Museum in Seoul. We came across an exhibition of beautiful black-and-white photographs showing people going about their business in Seoul’s middle-class neighbourhoods during the late 1950s and the early 1960s. It was exactly how I remembered my childhood. Standing behind me and Joe were two young women in their early twenties. One screamed, ‘How can that be Korea? It looks like Vietnam!’ There was less than 20 years’ age gap between us, but scenes that were familiar to me were totally alien to her. I turned to Joe and told him how ‘privileged’ I was as a development economist to have lived through such a change. I felt like an historian of mediaeval England who has actually witnessed the Battle of Hastings or an astronomer who has voyaged back in time to the Big Bang.
Our next family house, where I lived between 1969 and 1981, at the height of Korean economic miracle, not only had a flushing toilet but also boasted a central heating system. The boiler, unfortunately, caught fire soon after we moved in and almost burned the house down. I don’t tell you this in complaint; we were lucky to have one – most houses were heated with coal briquettes, which killed thousands of people every winter with carbon monoxide poisoning. But the story does offer an insight into the state of Korean technology in that far-off, yet really so recent, era.
In 1970 I started primary school. It was a second-rate private school that had 65 children in each class. We were very proud because the state school next door had 90 children per class.Years later, in a seminar at Cambridge, a speaker said that because of budget cuts imposed by the International Monetary Fund (more on this later), the average number of pupils per classroom in several African countries rose from 30-something to 40-something in the 1980s. Then it hit me just how bad things had been in the Korean schools of my childhood.When I was in primary school, the poshest school in the country had 40 children in a class, and everyone wondered, ‘how do they do that?’ State schools in some rapidly expanding urban areas were stretched to the limit, with up to 100 pupils per class and teachers running double, sometimes triple, shifts. Given the conditions, it was little wonder that education involved beating the children liberally and teaching everything by rote. The method has obvious drawbacks, but at least Korea has managed to provide at least six years’ education to virtually every child since the 1960s.
In 1972, when I was in Year 3 (US third grade), my school playground suddenly became a campsite for soldiers. They were there to pre-empt any student demonstrations against the martial law being imposed by the president of the country, (former) General Park Chung-Hee. Thankfully, they were not there to take on me and my friends. We Korean kids may be known for our academic precocity, but constitutional politics were frankly a little bit beyond us nine-year-olds.My primary school was attached to a university, whose rebellious students were the soldiers’ target. Indeed, Korean university students were the nation’s conscience throughout the political dark age of the military dictatorship and they also played the leading role in putting an end to it in 1987.
After he had come to power in a military coup in 1961, General Park turned ‘civilian’ and won three successive elections. His electoral victories were propelled by his success in launching the country’s economic ‘miracle’ through his Five Year Plans for Economic Development. But the victories were also ensured by election rigging and political dirty tricks. His third and supposedly final term as president was due to end in 1974, but Park just could not let go.Halfway through his third term, he staged what Latin Americans call an ‘auto-coup’. This involved dissolving the parliament and establishing a rigged electoral system to guarantee him the presidency for life. His excuse was that the country could ill afford the chaos of democracy. It had to defend itself against North Korean communism, the people were told, and accelerate its economic development. His proclaimed goal of raising the country’s per capita income to 1, 000 US dollars by 1981 was considered overly ambitious, bordering on delusional.
President Park launched the ambitious Heavy and Chemical Industrialization (HCI) programme in 1973. The first steel mill and the first modern shipyard went into production, and the first locally designed cars (made mostly from imported parts) rolled off the production lines. New firms were set up in electronics, machinery, chemicals and other advanced industries. During this period, the country’s per capita income grew phenomenally by more than five times, in US dollar terms, between 1972 and 1979. Park’s apparently delusional goal of $1, 000 per capita income by 1981 was actually achieved four years ahead of schedule. Exports grew even faster, increasing nine times, in US dollar terms, between 1972 and 1979.4
The country’s obsession with economic development was fully reflected in our education. We learned that it was our patriotic duty to report anyone seen smoking foreign cigarettes. The country needed to use every bit of the foreign exchange earned from its exports in order to import machines and other inputs to develop better industries. Valuable foreign currencies were really the blood and sweat of our ‘industrial soldiers’ fighting the export war in the country’s factories. Those squandering them on frivolous things, like illegal foreign cigarettes, were ‘traitors’. I don’t believe any of my friends actually went as far as reporting such ‘acts of treason’. But it did feed the gossip mill when kids saw foreign cigarettes in a friend’s house. The friend’s father – it was almost invariably men who smoked – would be darkly commented on as an unpatriotic and therefore immoral, if not exactly criminal, individual.
Spending foreign exchange on anything not essential for industrial development was prohibited or strongly discouraged through import bans, high tariffs and excise taxes (which were called luxury consumption taxes). ‘Luxury’ items included even relatively simple things, like small cars, whisky or cookies. I remember the minor national euphoria when a consignment of Danish cookies was imported under special government permission in the late 1970s. For the same reason, foreign travel was banned unless you had explicit government permission to do business or study abroad. As a result, despite having quite a few relatives living in the US, I had never been outside Korea until I travelled to Cambridge at the age of 23 to start as a graduate student there in 1986.
This is not to say that no one smoked foreign cigarettes or ate illicit cookies. A considerable quantity of illegal and semi-legal foreign goods was in circulation. There was some smuggling, especially from Japan, but most of the goods involved were things brought in – illegally or semi-legally – from the numerous American army bases in the country. Those American soldiers who fought in the Korean War may still remember malnourished Korean children running after them begging for chewing gum or chocolates.Even in the Korea of the 1970s, American army goods were still considered luxuries. Increasingly affluent middle class families could afford to buy M&M chocolates and Tang juice powders from shops and itinerant pedlars. Less affluent people might go to restaurants that served boodae chige, literally ‘army base stew’. This was a cheaper version of the classic Korean stew, kimchee chige, using kimchee (cabbages pickled in garlic and chilli) but substituting the other key ingredient, pork belly, with cheaper meats, like surplus bacon, sausages and spam smuggled out of American army bases.
I longed for the chance to sample the tins of spam, corned beef, chocolates, biscuits and countless other things whose names I did not even know, from the boxes of the American Army’s ‘C Ration’ (the canned and dried food ration for the battlefield). A maternal uncle, who was a general in the Korean army, used to accumulate supplies during joint field exercises with his American colleagues and gave them to me as an occasional treat. American soldiers cursed the wretched quality of their field rations. For me they were like a Fortnum & Mason picnic hamper. But, then, I was living in a country where vanilla ice cream had so little vanilla in it that I thought vanilla meant ‘no flavour’, until I learnt English in secondary school. If that was the case with a well-fed upper-middle-class child like me, you can imagine what it must have been like for the rest.
When I went to secondary school, my father gave me a Casio electronic calculator, a gift beyond my wildest dreams. Then it was probably worth half a month’s wages for a garment factory worker, and was a huge expense even for my father, who spared nothing on our education. Some 20 years later, a combination of rapid development in electronics technologies and the rise in Korea’s living standards meant that electronic calculators were so abundant that they were given out as free gifts in department stores. Many of them ended up as toys for toddlers (no, I don’t believe this is why Korean kids are good at maths!).
Korea’s economic ‘miracle’ was not, of course, without its dark sides. Many girls from poor families in the countryside were forced to find a job as soon as they left primary school at the age of 12 – to ‘get rid of an extra mouth’ and to earn money so that at least one brother could receive higher education.Many ended up as housemaids in urban middle-class families, working for room and board and, if they were lucky, a tiny amount of pocket money. The other girls, and the less fortunate boys, were exploited in factories where conditions were reminiscent of 19th-century ‘dark satanic mills’ or today’s sweatshops in China. In the textile and garment industries, which were the main export industries, workers often worked 12 hours or more in very hazardous and unhealthy conditions for low pay. Some factories refused to serve soup in the canteen, lest the workers should require an extra toilet break that might wipe out their wafer-thin profit margins. Conditions were better in the newly emerging heavy industries – cars, steel, chemicals, machinery and so on – but, overall, Korean workers, with their average 53–4 hour working week, put in longer hours than just about anyone else in the world at the time.
Urban slums emerged. Because they were usually up in the low mountains that comprise a great deal of the Korean landscape, they were nicknamed ‘Moon Neighbourhoods’, after a popular TV sitcom series of the 1970s. Families of five or six would be squashed into a tiny room and hundreds of people would share one toilet and a single standpipe for running water. Many of these slums would ultimately be cleared forcefully by the police and the residents dumped in far-flung neighbourhoods, with even worse sanitation and poorer road access, to make way for new apartment blocks for the ever-growing middle class. If the poor could not get out of the new slums fast enough (though getting out of the slums was at least possible, given the rapid growth of the economy and the creation of new jobs), the urban sprawl would catch up with them and see them rounded up once again and dumped in an even more remote place. Some people ended up scavenging in the city’s main rubbish dump, Nanji Island. Few people outside Korea were aware that the beautiful public parks surrounding the impressive Seoul Football Stadium they saw during the 2002 World Cup were built literally on top of the old rubbish dump on the island (which nowadays has an ultra-modern eco-friendly methane-burning power station, which taps into the organic material dumped there).
In October 1979, when I was still a secondary school student, President Park was unexpectedly assassinated by the chief of his own Intelligence Service, amid mounting popular discontent with his dictatorship and the economic turmoil following the Second Oil Shock. A brief ‘Spring of Seoul’ followed, with hopes of democracy welling up. But it was brutally ended by the next military government of General Chun Doo-Hwan, which seized power after the two-week armed popular uprising that was crushed in the Kwangju Massacre of May 1980.
Despite this grave political setback, by the early 1980s, Korea had become a solid middle-income country, on a par with Ecuador, Mauritius and Costa Rica. But it was still far removed from the prosperous nation we know today. One of the slang expressions common among us high-school students was ‘I’ve been to Hong Kong’, which meant ‘I have had an experience out of this world’. Even today, Hong Kong is still considerably richer than Korea, but the expression reflects the fact that, in the 1960s or the 1970s, Hong Kong’s per capita income was three to four times greater than my country’s.
When I went to university in 1982, I became interested in the issue of intellectual property rights, something that is even more hotly debated today. By that time, Korea had become competent enough to copy advanced products and rich enough to want the finer things in life (music, fashion goods, books). But it was still not sophisticated enough to come up with original ideas and to develop and own international patents, copyrights and trademarks.
Today, Korea is one of the most ‘inventive’ nations in the world – it ranks among the top five nations in terms of the number of patents granted annually by the US Patent Office. But until the mid-1980s it lived on ‘reverse engineering’. My friends would buy ‘copy’ computers that were made by small workshops, which would take apart IBM machines, copy the parts, and put them together. It was the same with trademarks. At the time, the country was one of the ‘pirate capitals’ of the world, churning out fake Nike shoes and Louis Vuitton bags in huge quantities. Those who had more delicate consciences would settle for near-counterfeits. There were shoes that looked like Nike but were called Nice, or shoes that had the Nike swoosh but with an extra prong. Counterfeit goods were rarely sold as the genuine article. Those who bought them were perfectly aware that they were buying fakes; the point was to make a fashion statement, rather than to mislead. Copyrighted items were treated in the same way. Today, Korea exports a large and increasing quantity of copyrighted materials (movies, TV soaps, popular songs), but at the time imported music (LP records) or films (videos) were so expensive that few people could afford the real thing.We grew up listening to pirate rock’n’ roll records, which we called ‘tempura shop records’, because their sound quality was so bad it sounded as if someone was deep-frying in the background. As for foreign books, they were still beyond the means of most students. Coming from a well-off family that was willing to invest in education, I did have some imported books. But most of my books in English were pirated. I could never have entered and survived Cambridge without those illegal books.
By the time I was finishing my graduate studies at Cambridge in the late 1980s, Korea had become a solid upper-middle-income country. The surest proof of this was that European countries stopped demanding that Koreans get an entry visa. Most of us by then had no reason to want to emigrate illegally anyway. In 1996, the country even joined the OECD (Organisation for Economic Co-operation and Development) – the club of the rich countries – and declared itself to have ‘arrived’, although that euphoria was badly deflated by the financial crisis that engulfed Korea in 1997. Since that financial crisis, the country has not been doing as well by its own high standards, mainly because it has over-enthusiastically embraced the ‘free market rules’ model. But that is a story for later.
Whatever its recent problems have been, Korea’s economic growth and the resulting social transformation over the last four and a half decades have been truly spectacular. It has gone from being one of the poorest countries in the world to a country on a par with Portugal and Slovenia in terms of per capita income.5 A country whose main exports included tungsten ore, fish and wigs made with human hair has become a high-tech powerhouse, exporting stylish mobile phones and flat-screen TVs coveted all over the world. Better nutrition and health care mean that a child born in Korea today can expect to live 24 years longer than someone born in the early 1960s (77 years instead of 53 years). Instead of 78 babies out of 1, 000, only five babies will die within a year of birth, breaking far fewer parents’ hearts. In terms of these life-chance indicators, Korea’s progress is as if Haiti had turned into Switzerland.6 How has this ‘miracle’ been possible?
For most economists, the answer is a very simple one. Korea has succeeded because it has followed the dictates of the free market. It has embraced the principles of sound money (low inflation), small government, private enterprise, free trade and friendliness towards foreign investment. The view is known as neo-liberal economics.
Neo-liberal economics is an updated version of the liberal economics of the 18th-century economist Adam Smith and his followers. It first emerged in the 1960s and has been the dominant economic view since the 1980s. Liberal economists of the 18th and the 19th centuries believed that unlimited competition in the free market was the best way to organise an economy, because it forces everyone to perform with maximum efficiency. Government intervention was judged harmful because it reduces competitive pressure by restricting the entry of the potential competitors, whether through import controls or the creation of monopolies.Neo-liberal economists support certain things that the old liberals did not – most notably certain forms of monopoly (such as patents or the central bank’s monopoly over the issue of bank notes) and political democracy. But in general they share the old liberals’ enthusiasm for the free market.And despite a few ‘tweaks’ in the wake of a whole series of disappointing results of neo-liberal policies applied to developing nations during the past quarter of a century, the core neo-liberal agenda of deregulation, privatization and opening up of international trade and investment has remained the same since the 1980s.
In relation to the developing countries, the neo-liberal agenda has been pushed by an alliance of rich country governments led by the US and mediated by the ‘Unholy Trinity’ of international economic organizations that they largely control – the International Monetary Fund (IMF), the World Bank and the World Trade Organisation (WTO). The rich governments use their aid budgets and access to their home markets as carrots to induce the developing countries to adopt neo-liberal policies. This is sometimes to benefit specific firms that lobby, but usually to create an environment in the developing country concerned that is friendly to foreign goods and investment in general. The IMF and the World Bank play their part by attaching to their loans the condition that the recipient countries adopt neo-liberal policies. The WTO contributes by making trading rules that favour free trade in areas where the rich countries are stronger but not where they are weak (e.g., agriculture or textiles). These governments and international organizations are supported by an army of ideologues. Some of these people are highly trained academics who should know the limits of their free-market economics but tend to ignore them when it comes to giving policy advice (as happened especially when they advised the former communist economies in the 1990s). Together, these various bodies and individuals form a powerful propaganda machine, a financial-intellectual complex backed by money and power.
This neo-liberal establishment would have us believe that, during its miracle years between the 1960s and the 1980s, Korea pursued a neo-liberal economic development strategy.7 The reality, however, was very different indeed. What Korea actually did during these decades was to nurture certain new industries, selected by the government in consultation with the private sector, through tariff protection, subsidies and other forms of government support (e.g., overseas marketing information services provided by the state export agency) until they ‘grew up’ enough to withstand international competition. The government owned all the banks, so it could direct the life blood of business – credit. Some big projects were undertaken directly by state-owned enterprises – the steel maker, POSCO, being the best example – although the country had a pragmatic, rather than ideological, attitude to the issue of state ownership. If private enterprises worked well, that was fine; if they did not invest in important areas, the government had no qualms about setting up state-owned enterprises (SOEs); and if some private enterprises were mismanaged, the government often took them over, restructured them, and usually (but not always) sold them off again.
The Korean government also had absolute control over scarce foreign exchange (violation of foreign exchange controls could be punished with the death penalty). When combined with a carefully designed list of priorities in the use of foreign exchange, it ensured that hard-earned foreign currencies were used for importing vital machinery and industrial inputs. The Korean government heavily controlled foreign investment as well, welcoming it with open arms in certain sectors while shutting it out completely in others, according to the evolving national development plan. It also had a lax attitude towards foreign patents, encouraging ‘reverse engineering’ and overlooking ‘pirating’ of patented products.
The popular impression of Korea as a free-trade economy was created by its export success. But export success does not require free trade, as Japan and China have also shown. Korean exports in the earlier period – things like simple garments and cheap electronics – were all means to earn the hard currencies needed to pay for the advanced technologies and expensive machines that were necessary for the new, more difficult industries, which were protected through tariffs and subsidies. At the same time, tariff protection and subsidies were not there to shield industries from international competition forever, but to give them the time to absorb new technologies and establish new organizational capabilities until they could compete in the world market.
The Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state direction. The Korean government did not vanquish the market as the communist states did. However, it did not have blind faith in the free market either. While it took markets seriously, the Korean strategy recognized that they often need to be corrected through policy intervention.
Now, if it was only Korea that became rich through such ‘heretical’ policies, the free-market gurus might be able to dismiss it as merely the exception that proves the rule. However, Korea is no exception. As I shall show later, practically all of today’s developed countries, including Britain and the US, the supposed homes of the free market and free trade, have become rich on the basis of policy recipes that go against the orthodoxy of neo-liberal economics.
Today’s rich countries used protection and subsidies, while discriminating against foreign investors – all anathema to today’s economic orthodoxy and now severely restricted by multilateral treaties, like the WTO Agreements, and proscribed by aid donors and international financial organizations (notably the IMF and the World Bank). There are a few countries that did not use much protection, such as the Netherlands and (until the First World War) Switzerland. But they deviated from the orthodoxy in other ways, such as their refusal to protect patents. The records of today’s rich countries on policies regarding foreign investment, state-owned enterprises, macroeconomic management and political institutions also show significant deviations from today’s orthodoxy regarding these matters.
Why then don’t the rich countries recommend to today’s developing countries the strategies that served them so well? Why do they instead hand out a fiction about the history of capitalism, and a bad one at that?
In 1841, a German economist, Friedrich List, criticized Britain for preaching free trade to other countries, while having achieved its economic supremacy through high tariffs and extensive subsidies. He accused the British of ‘kicking away the ladder’ that they had climbed to reach the world’s top economic position: ‘[i]t is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him [italics added]’.8
Today, there are certainly some people in the rich countries who preach free market and free trade to the poor countries in order to capture larger shares of the latter’s markets and to pre-empt the emergence of possible competitors. They are saying ‘do as we say, not as we did’ and act as ‘Bad Samaritans’, taking advantage of others who are in trouble.* But what is more worrying is that many of today’s Bad Samaritans do not even realize that they are hurting the developing countries with their policies. The history of capitalism has been so totally re-written that many people in the rich world do not perceive the historical double standards involved in recommending free trade and free market to developing countries.
I am not suggesting that there is a sinister secret committee somewhere that systematically air-brushes undesirable people out of photographs and re-writes historical accounts. However, history is written by the victors and it is human nature to re-interpret the past from the point of view of the present. As a result, the rich countries have, over time, gradually, if often sub-consciously, re-written their own histories to make them more consistent with how they see themselves today, rather than as they really were – in much the same way that today people write about Renaissance ‘Italy’ (a country that did not exist until 1871) or include the French-speaking Scandinavians (Norman conqueror kings) in the list of ‘English’ kings and queens.
The result is that many Bad Samaritans are recommending free-trade, free-market policies to the poor countries in the honest but mistaken belief that those are the routes their own countries took in the past to become rich. But they are in fact making the lives of those whom they are trying to help more difficult. Sometimes these Bad Samaritans may be more of a problem than those knowingly engaged in ‘kicking away the ladder’, because self-righteousness is often more stubborn than self-interest.
So how do we dissuade the Bad Samaritans from hurting the poor countries, whatever their intentions are? What else should they do instead? This book offers some answers through a mix of history, analysis of the world today, some future predictions and suggestions for change.
The place to start is with a true history of capitalism and globalization, which I examine in the next two chapters (chapters 1 and 2). In these chapters, I will show how many things that the reader may have accepted as ‘historical facts’ are either wrong or partial truths. Britain and the US are not the homes of free trade; in fact, for a long time they were the most protectionist countries in the world. Not all countries have succeeded through protection and subsidies, but few have done so without them. For developing countries, free trade has rarely been a matter of choice; it was often an imposition from outside, sometimes even through military power. Most of them did very poorly under free trade; they did much better when they used protection and subsidies. The best-performing economies have been those that opened up their economies selectively and gradually. Neo-liberal free-trade free-market policy claims to sacrifice equity for growth, but in fact it achieves neither; growth has slowed down in the past two and a half decades when markets were freed and borders opened.
In the main chapters of the book that follow the historical chapters (chapters 3 to 9), I deploy a mixture of economic theory, history and contemporary evidence to turn much of the conventional wisdom about development on its head.
• Free trade reduces freedom of choice for poor countries.
• Keeping foreign companies out may be good for them in the long run.
• Investing in a company that is going to make a loss for 17 years may be an excellent proposition.
• Some of the world’s best firms are owned and run by the state.
• ‘Borrowing’ ideas from more productive foreigners is essential for economic development.
• Low inflation and government prudence may be harmful for economic development.
• Corruption exists because there is too much, not too little, market.
• Free market and democracy are not natural partners.
• Countries are poor not because their people are lazy; their people are ‘lazy’ because they are poor.
Like this opening chapter, the closing chapter of the book opens with an alternative ‘future history’ – but this time a very bleak one. The scenario is deliberately pessimistic, but it is firmly rooted in reality, showing how close we are to such a future, should we continue with the neo-liberal policies propagated by the Bad Samaritans. In the rest of the chapter, I present some key principles, distilled from the detailed policy alternatives that I discuss throughout the book, which should guide our action if we are to enable developing countries to advance their economies. Despite its bleak scenario, the chapter – and therefore the book – closes with a note of optimism, explaining why I believe most Bad Samaritans can be changed and really made to help developing countries improve their economic situations.
* Samsung in Korean means Three Stars, as does my fictitious Mozambican firm, Tres Estrelas. The last sentence in my imaginary 2061 Economist piece is based on a real Economist article about Samsung, ‘As good as it gets?’ (January 13 2005), whose final sentence reads: ‘Might a relatively unknown electronics manufacturer somewhere in China decide that, if Samsung was able to move from the darkest shadows to the top of the tree, then perhaps it could too?’ The 17 years during which the fuel cell division of my fictitious Mozambican firm lost money is the same investment period during which the electronics division of Nokia, founded in 1960, lost money.
* The original story is that of the ‘Good Samaritan’ from the Bible. In that parable, a man who was robbed by highwaymen was helped by a ‘Good Samaritan’, despite the fact that the Samaritans were stereotyped as being callous and not above taking advantage of the others in trouble.
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