Chang(2003)_the Myth of Free Trade

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Kicking Away the Ladder

– The “Real” History of Free Trade

Ha-Joon Chang 1

Faculty of Economics and Politics

University of Cambridge

First draft: A ril !""#

A a er resented at the conference on

$%lobalisation and the &yth of Free 'rade(

)e* +chool University

)e* ,or . U+A

1/ A ril !""#

1. Introduction

Central to the neo-liberal discourse on globalisation is the conviction that free

trade. more than free movements of ca ital or labour. is the ey to global ros erity0

Even many of those *ho are not enthusiastic about all as ects of globalisation

ranging from the free-trade economist Jagdish 2hag*ati advocating ca ital control to

some )%3s accusing the develo ed countries for not o ening u their agricultural1 'his article dra*s heavily on my recent boo . Kicking Away the Ladder –

Development Strategy in Historical Perspective 4Anthem Press. !""!50 6 than theresearch su ort from the 7orea 8esearch Foundation through its 27!1 rogrammeat the 9e artment of Economics. 7orea University. *here 6 *as a visiting research

rofessor *hen the first draft *as *ritten0

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mar ets seem to agree that free trade is the most benign. or at least the least

roblematic. element in the rogress of globalisation0

Part of the conviction in free trade that the ro onents of globalisation

ossess comes from the belief that economic theory has irrefutably established the

su eriority of free trade *ell. almost. as there are some formal models *hich sho*

free trade may not be the best 4although even the builders of such models as Paul

7rugman *ill argue that free trade is still the best olicy because interventionist trade

olicies are almost certain to be olitically abused50 Ho*ever. even more o*erful is

their belief that history is on their side. so to s ea 0 After all. the defenders of free

trade as . isn t free trade ho* all the *orld s develo ed countries have become rich;

<hat are some develo ing countries thin ing. they *onder. *hen they refuse to ado t

such a tried and tested reci e for economic develo ment;

A closer loo at the history of ca italism. ho*ever. reveals a very different

story 4Chang. !""!50 As *e shall establish in some detail in this a er. *hen they

*ere develo ing countries themselves. virtually all of today s develo ed countries did

not ractice free trade 4and laissez-faire industrial olicy as its domestic counter art5

but romoted their national industries through tariffs. subsidies. and other measures0

Particularly notable is the fact that the ga bet*een $real( and the $imagined(

histories of trade olicy is the greatest in relation to 2ritain and the U+A. *hich are

conventionally believed to have reached the to of the *orld s economic hierarchy by

ado ting free trade *hen other countries *ere stuc *ith outdated mercantilist

olicies0 As *e shall sho* in some detail. these t*o countries *ere in fact often the

ioneers and fre=uently the most ardent users of interventionist trade and industrial

olicy measures in their early stages of develo ment0

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2y debun ing the myth of free trade from the historical ers ective. this a er

sho*s that there is an urgent need for a thorough re-thin on some ey conventional

*isdoms in the debate on trade olicy. and more broadly on globalisation0

2. The “Official History of Capitalism” and Its Limitations

'he $official history of ca italism(. *hich informs today s debate on trade

olicy. economic develo ment. and globalisation. goes li e the follo*ing0

From the 1/ th century. 2ritain roved the su eriority of free-mar et and free-

trade olicies by beating interventionist France. its main com etitor at the time. and

establishing itself as the su reme *orld economic o*er0 Es ecially once it had

abandoned its de lorable agricultural rotection 4the Corn >a*5 and other remnants of

old mercantilist rotectionist measures in 1/?@. it *as able to lay the role of the

architect and hegemon of a ne* $>iberal( *orld economic order0 'his >iberal *orld

order. erfected around 1/ ". *as based on: laissez faire industrial olicies at homeB

lo* barriers to the international flo*s of goods. ca ital. and labourB and

macroeconomic stability. both nationally and internationally. guaranteed by the %old

+tandard and the rinci le of balanced budgets0 A eriod of un recedented ros erity

follo*ed0

Unfortunately. according to this story. things started to go *rong *ith the First

<orld <ar0 6n res onse to the ensuing instability of the *orld economic and olitical

system. countries started to erect trade barriers again0 6n 1 #". the U+A also

abandoned free trade and raised tariffs *ith the infamous +moot-Ha*ley tariff. *hich

the famous free-trade economist Jagdish 2hag*ati called $the most visible and

dramatic act of anti-trade folly( 42hag*ati. 1 /D. 0 !!. f0n0 1"50 'he *orld free trade

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system finally ended in 1 #!. *hen 2ritain. hitherto the cham ion of free trade.

succumbed to the tem tation and re-introduced tariffs0 'he resulting contraction and

instability in the *orld economy and then finally the +econd <orld <ar destroyed the

last remnants of the first >iberal *orld order0

After the +econd <orld <ar. so the story goes. some significant rogress *as

made in trade liberalisation through the early %A'' 4%eneral Agreement on 'rade

and 'ariffs5 tal s0 Ho*ever. unfortunately. dirigiste a roaches to economic

management dominated the olicy-ma ing scene until the 1 "s in the develo ed

*orld. and until the early 1 /"s in the develo ing *orld 4and the Communist *orld

until its colla se in 1 / 50

Fortunately. it is said. interventionist olicies have been largely abandoned

across the *orld since the 1 /"s *ith the rise of neo-liberalism. *hich em hasised the

virtues of small government. laissez faire olicies. and international o enness0

Es ecially in the develo ing *orld. by the late 1 "s economic gro*th had begun to

falter in most countries outside East and +outheast Asia. *hich *ere already ursuing

$good( olicies 4of free mar et and free trade50 'his gro*th failure. *hich often

manifested itself in economic crises of the early 1 /"s. e osed the limitations of old-

style interventionism and rotectionism0 As a result. most develo ing countries have

come to embrace $ olicy reform( in a neo-liberal direction0

<hen combined *ith the establishment of ne* global governance institutions

re resented by the <'3. these olicy changes at the national level have created a ne*

global economic system. com arable in its 4at least otential5 ros erity only to the

earlier $golden age( of >iberalism 41/ "-1 1?50 8enato 8uggiero. the first 9irector-

%eneral of the <'3. thus argues that. than s to this ne* *orld order. *e no* have

$the otential for eradicating global overty in the early art of the ne t !1st

G century

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a uto ian notion even a fe* decades ago. but a real ossibility today( 41 /. 0

1#150

As *e shall see later. this story aints a fundamentally misleading icture. but

no less a o*erful one for it0 And it should be acce ted that there are some senses in

*hich the late 1 th century can indeed be described as an era of laissez faire 0

'o begin *ith. there *as a eriod in the late-1 th century. albeit a brief one.

*hen liberal trade regimes revailed in large arts of the *orld economy0 2et*een

1/@" and 1//". many Euro ean countries reduced tariff rotection substantially 4see

table 150 At the same time. most of the rest of the *orld *as forced to ractice free

trade through colonialism and through une=ual treaties in the cases of a fe* nominally

$inde endent( countries 4such as the >atin American countries. China. 'hailand then

+iamG. 6ran then PersiaG. and 'ur ey then the 3ttoman Em ireG. and even Ja an until

1 1150 3f course. the obvious e ce tion to this *as the U+A. *hich maintained very

high tariff barriers even during this eriod 4see table 150 Ho*ever. given that the U+A

*as still a relatively small art of the *orld economy. it may not be totally

unreasonable to say that this is as close to free trade as the *orld has ever got0

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Table 1. Average Tariff Rates on Manufactured Products for Selected DevelopedCountries in Their Early Stages of Development

(weighted average; in percentages of value) 1

1820 2 1875 2 1913 1925 1931 1950Austria 3 R 15-20 18 16 24 18Belgium 4 6-8 9-10 9 15 14 11Denmark 25-35 15-20 14 10 n.a. 3France R 12-15 20 21 30 18Germany 5 8-12 4-6 13 20 21 26Italy n.a. 8-10 18 22 46 25Japan 6 R 5 30 n.a. n.a. n.a.Netherlands 4 6-8 3-5 4 6 n.a. 11Russia R 15-20 84 R R RSpain R 15-20 41 41 63 n.a.Sweden R 3-5 20 16 21 9

Switzerland 8-12 4-6 9 14 19 n.a.United Kingdom 45-55 0 0 5 n.a. 23United States 35-45 40-50 44 37 48 14Source: Bairoch (1993), p. 40, table 3.3.Notes:R= Numerous and important restrictions on manufactured imports existed and thereforeaverage tariff rates are not meaningful.1. World Bank (1991, p. 97, Box table 5.2) provides a similar table, partly drawing onBairoch’s own studies that form the basis of the above table. However, the World Bankfigures, although in most cases very similar to Bairoch’s figures, are unweighted averages,which are obviously less preferable to weighted average figures that Bairoch provides.

2. These are very approximate rates, and give range of average rates, not extremes.3. Austria-Hungary before 1925.4. In 1820, Belgium was united with the Netherlands.5. The 1820 figure is for Prussia only.6. Before 1911, Japan was obliged to keep low tariff rates (up to 5%) through a series of "unequal treaties" with the European countries and the USA. The World Bank table cited innote 1 above gives Japan’s unweighted average tariff rate for all goods (and not justmanufactured goods) for the years 1925, 1930, 1950 as 13%, 19%, 4%.

&ore im ortantly. the sco e of state intervention before the First <orld <ar

*as =uite limited by modern standards0 +tates had limited budgetary olicy ca ability

because there *as no income ta in most countries ! and the balanced budget doctrine

! 2ritain *as the first country to introduce a ermanent income ta . *hich ha ened in1/?!0 9enmar introduced income ta in 1 "#0 6n the U+. the income ta la* of 1/ ?*as overturned as $unconstitutional( by the +u reme Court0 'he +i teenthAmendment allo*ing federal income ta *as ado ted only in 1 1#0 6n 2elgium.income ta *as introduced only in 1 1 0 6n Portugal. income ta *as first introducedin 1 !!. but *as abolished in 1 !/. and re-instated only in 1 ##0 6n +*eden. des ite

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dominated0 'hey also had limited monetary olicy ca ability because many of them

did not have a central ban #. and the %old +tandard restricted their olicy freedom0

'hey also had limited command over investment resources. as they o*ned or

regulated fe* financial institutions and industrial enter rises0 3ne some*hat

arado ical conse=uence of all these limitations *as that tariff rotection *as far

more im ortant as a olicy tool in the 1 th century than it is in our time0

9es ite these limitations. as *e shall soon see. virtually all of today s

develo ed countries or no*-develo ed countries 4henceforth )9Cs5 actively used

interventionist trade and industrial olicies aimed at romoting not sim ly

$ rotecting(. it should be em hasised infant industries during their catch-u

eriods0?

its later fame for the *illingness to im ose high rates of income ta . income ta *asfirst introduced only in 1 #!0 +ee Chang 4!""!. 0 1"15 for further details0# 'he +*edish 8i sban *as nominally the first official central ban in the *orld4established in1@//5. but until the mid-1 th century. it could not function as a ro ercentral ban because it did not have mono oly over note issue. *hich it ac=uired onlyin 1 "?0 'he first $real( central ban *as the 2an of England. *hich *as establishedin 1@ ? but became a full central ban in 1/??0 2y the end of the 1 th century. thecentral ban s of France 41/?/5. 2elgium 41/D15. + ain 41/ ?5. and Portugal 41/ 15gained note issue mono oly. but it *as only in the !" th century that the central ban sof %ermany 41 "D5. +*it erland 41 " 5. and 6taly 41 !@5 gained it0 'he +*iss

)ational 2an *as formed only in 1 " by merging the four note-issue ban s0 'heU+ Federal 8eserve +ystem came into being only in 1 1#0 Until 1 1D. ho*ever. only#"I of the ban s 4*ith D"I of all ban ing assets5 *ere in the system. and even aslate as 1 ! . @DI of the ban s *ere still outside the system. although by this timethey accounted for only !"I of total ban ing assets0 +ee Chang 4!""!. 0 ?- 5 forfurther details0? &oreover. *hen they reached the frontier. the )9Cs used a range of olicies inorder to hel themselves $ ull a*ay( from their e isting and otential com etitors0'hey used measures to control transfer of technology to its otential com etitors 4e0g0.controls on s illed *or er migration or machinery e ort5 and made the lessdevelo ed countries to o en u their mar ets by une=ual treaties and colonisation0Ho*ever. the catch-u economies that *ere not 4formal or informal5 colonies did notsim ly sit do*n and acce t these restrictive measures0 'hey mobilised all inds ofdifferent $legal( and $illegal( means to overcome the obstacles created by theserestrictions. such as industrial es ionage. $illegal( oaching of *or ers. andsmuggling of contraband machinery0 +ee Chang 4!""!. 0 D1- 5 for further details0



3. History of Trade and Industrial Policies in Today s !e"eloped Countries

3.1. #ritain

As the intellectual fountain of the modern laissez faire doctrines and as the

only country that can claim to have racticed a total free trade at least at one oint.

2ritain is *idely regarded as having develo ed *ithout significant state intervention0

Ho*ever. this cannot be further from the truth0

2ritain entered its ost-feudal age 41# th-1? th centuries5 as a relatively bac *ard

economy0 6t relied on e orts of ra* *ool and. to a lesser e tent. of lo*-value-added

*ool cloth to the then more advanced >o* Countries 48amsay. 1 /!. 0 D B 9avies.

1 . 0 #?/50 Ed*ard 666 41#1!-1# 5 is believed to have been the first 7ing *ho

deliberately tried to develo local *ool cloth manufacturing0 He only *ore English

cloth to set an e am le D. brought in the Flemish *eavers. centralised trade in ra*

*ool. and banned the im ort of *oollen cloth 49avies. 1 . 0 #? B 9avis. 1 @@. 0

!/150

Further im etus came from the 'udor monarchs0 'he famous 1/ th century

merchant. olitician. and the author of the novel. o!inson "r#soe . 9aniel 9efoe.

describes this olicy in his no*-almost-forgotten boo . A Plan of the $nglish

"ommerce 41 !/50 6n this boo . he describes in some detail ho* the 'udor monarchs.

es ecially Henry 66 41?/D 1D" 5. transformed England from a ra*-*ool e orter

into the most formidable *oollen-manufacturing nation in the *orld 4 0 /1-1"150

According to 9efoe. from 1?/ . Henry 66 im lemented schemes to romote *oollen

manufacturing. *hich included: sending royal missions to identify locations suited to

*ool manufacturingB oaching s illed *or ers from the >o* CountriesB increasingD 6t is also said that %eorge <ashington insisted on *earing the then lo*er-=ualityAmerican clothes rather than the then su erior 2ritish one at his inaugurationceremony0 2oth e isodes are reminiscent of the olicies used by Ja an and 7oreaduring the ost*ar eriod to control $lu ury consum tion(. es ecially concerningim orted lu ury goods0 3n this. see Chang 41 50

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duties on the e ort of ra* *oolB and even tem orarily banning the e ort of ra*

*ool 48amsay. 1 /!. rovides further details50

For obvious reasons. it is difficult to establish the e act im ortance of the

above-mentioned infant industry romotion olicies0 Ho*ever. *ithout them. it *ould

have been very difficult for 2ritain to ma e this initial success in industrialisation.

*ithout *hich its 6ndustrial 8evolution may have been ne t to im ossible0

'he most im ortant event in 2ritain s industrial develo ment. ho*ever. *as

the 1 !1 olicy reform introduced by 8obert <al ole. the first 2ritish Prime &inister.

during the reign of %eorge 6 41@@"-1 ! 50 Prior to this. the 2ritish government s

olicies *ere in general aimed at ca turing trade and generating government revenue0

Even the romotion of *oollen manufacturing *as artly motivated by revenue

considerations0 6n contrast. the olicies introduced after 1 !1 *ere deliberately aimed

at romoting manufacturing industries0 6ntroducing the ne* la*. <al ole stated.

through the 7ing s address to the Parliament: $it is evident that nothing so much

contributes to romote the ublic *ell-being as the e ortation of manufactured

goods and the im ortation of foreign ra* material( 4as cited in >ist. 1//D. 0 ?"50

'he 1 !1 legislation. and the su lementary olicy changes subse=uently

made. included the follo*ing measures 4for details. see 2risco. 1 " . 0 1#1-#. 0

1?/-DD. 0 1@ - 1B &cCus er. 1 @. 0 #D/B 9avis. 1 @@. 0 #1#-?50 First of all.

im ort duties on ra* materials used for manufactures *ere lo*ered. or even

altogether dro ed0 +econd. duty dra*bac s on im orted ra* materials for e orted

manufactures *ere increased0 'hird. e ort duties on most manufactures *ere

abolished0 Fourth. duties on im orted foreign manufactured goods *ere raised0 Fifth.

e ort subsidies 4then called $bounties(5 *ere e tended to ne* e ort items li e sil

roducts and gun o*der. *hile the e isting e ort subsidies to sailcloth and refined



sugar *ere increased0 +i th. regulation *as introduced to control the =uality of

manufactured roducts. es ecially te tile roducts. so that unscru ulous

manufacturers *ould not damage the re utation of 2ritish roducts in foreign

mar ets0 <hat is very interesting is that these olicies. as *ell as the rinci les

behind them. *ere uncannily similar to those used by countries li e Ja an. 7orea. and

'ai*an during the ost*ar eriod 4see belo*50

9es ite its *idening of technological lead over other countries. 2ritain

continued its olicies of industrial romotion until the mid-1 th century0 As *e can see

from table 1. 2ritain had very high tariffs on manufacturing roducts even as late as

the 1/!"s. some t*o generations after the start of its 6ndustrial 8evolution0

2y the end of the )a oleonic <ar in 1/1D. ho*ever. there *ere increasing

ressures for free trade in 2ritain from the increasingly confident manufacturers0

Although there *as a round of tariff reduction in 1/##. the big change came in 1/?@.

*hen the Corn >a* *as re ealed and tariffs on many manufacturing goods abolished

42airoch. 1 #. 0 !"-150

'he re eal of the Corn >a* is these days commonly regarded as the ultimate

victory of the Classical liberal economic doctrine over *rong-headed mercantilism0

Although *e should not under-estimate the role of economic theory in this olicy

shift. it is robably better understood as an act of $free trade im erialism( 4the term is

due to %allagher K 8obinson. 1 D#5 intended to $halt the move to industrialisation on

the Continent by enlarging the mar et for agricultural roduce and rimary materials(

47indleberger. 1 /. 0 1 @50 6ndeed. many leaders of the cam aign to re eal the Corn

>a*. such as the olitician 8obert Cobden and John 2o*ring of the 2oard of 'rade.

1"



sa* their cam aign recisely in such terms 47indleberger. 1 D. and 8einert. 1 /50 @

Cobden s vie* on this is clearly revealed in the follo*ing assage:

$'he factory system *ould. in all robability. not have ta en lace in

America and %ermany0 6t most certainly could not have flourished. as it

has done. both in these states. and in France. 2elgium. and +*it erland.

through the fostering bounties *hich the high- riced food of the 2ritish

artisan has offered to the chea er fed manufacturer of those countries(

4%he Political &ritings of ichard "o!den . 1/@/. <illiam 8idge*ay.

>ondon. vol0 1. 0 1D"B as cited in 8einert. 1 /. 0 ! !50

+ymbolic the re eal of Corn >a* may have been. it *as only after 1/@" that

most tariffs *ere abolished0 Ho*ever. the era of free trade did not last very long0 6t

ended *hen 2ritain finally ac no*ledged that it has lost its manufacturing eminence

and re-introduced tariffs on a large scale in 1 #! 42airoch. 1 #. 0 ! -/50

'hus seen. contrary to the o ular belief. 2ritain s technological lead that

enabled this shift to a free trade regime had been achieved $behind high and long-

lasting tariff barriers( 42airoch. 1 #. 0 ?@50 And it is for this reason that Friedrich

>ist. the 1 th-century %erman economist *ho is 4mista enly see section #0! belo*5

no*n as the father of modern $infant industry( theory. *rote the follo*ing assages0

$6t is a very common clever device that *hen anyone has attained the

summit of greatness. he kicks away the ladder by *hich he has climbed@ 6n 1/?". 2o*ring gave the advice to the member states of %erman 'ollverein thatthey should gro* *heat and sell it to buy 2ritish manufactures 4>andes. 1 /. 0D!150

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u . in order to de rive others of the means of climbing u after him0 6n

this lies the secret of the cosmo olitical doctrine of Adam +mith. and of

the cosmo olitical tendencies of his great contem orary <illiam Pitt.

and of all his successors in the 2ritish %overnment administrations0

Any nation *hich by means of rotective duties and restrictions

on navigation has raised her manufacturing o*er and her navigation to

such a degree of develo ment that no other nation can sustain free

com etition *ith her. can do nothing *iser than to throw away these

ladders of her greatness. to reach to other nations the benefits of free

trade. and to declare in enitent tones that she has hitherto *andered in

the aths of error. and has no* for the first time succeeded in

discovering the truth italics addedG( 4>ist. 1//D. 0 ! D-@50

3.2. $%&

As *e have Lust seen. 2ritain *as the first country to successfully use a large-

scale infant industry romotion strategy0 Ho*ever. its most ardent user *as robably

the U+A the eminent economic historian Paul 2airoch once called it $the mother

country and bastion of modern rotectionism( 42airoch. 1 #. 0 #"50 'his fact is.

interestingly. rarely ac no*ledged in the modern literature. es ecially coming out of

the U+A0 Ho*ever. the im ortance of infant industry rotection in U+ develo ment

cannot be over-em hasised0

Even *hen the e istence of high tariff is ac no*ledged. its im ortance is severelydo*n layed0 For e am le. in *hat used to be the standard overvie* iece on U+economic history until recently. )orth 41 @D5 mentions tariffs only once. only todismiss it as an insignificant factor in e laining the U+ industrial develo ment Heargues. *ithout bothering to establish the case and by citing only one highly-biasedsecondary source 4the classic study by F0 'aussig. 1/ !5. $*hile tariffs becameincreasingly rotective in the years after the Civil <ar. it is doubtful if they *ere veryinfluential in affecting seriously the s read of manufacturing( 4 0 @ ?50

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From the early days of colonisation. industrial rotection *as a controversial

olicy issue in *hat later became the U+A0 'o begin *ith. 2ritain did not *ant to

industrialise the colonies and duly im lemented olicies to that effect 4e0g0. banning

of high-value-added manufacturing activities50 Around the time of the inde endence.

the +outhern agrarian interests o osed any rotection. and the )orthern

manufacturing interests *anted it. re resented by. among others. Ale ander Hamilton.

the first +ecretary of the 'reasury of the U+A 41 / - D50

6n fact. it *as Ale ander Hamilton in his eports of the Secretary of the

%reas#ry on the S#!(ect of )an#fact#res 41 15 *ho first systematically set out the

infant industry argument. and not the %erman economist Friedrich >ist as it is often

thought 4Corden. 1 ?. ch0 /B 8einert. 1 @50 6ndeed. >ist started out as a free trade

advocate and only converted to the infant industry argument follo*ing his e ile in the

U+ 41/!D-#"5 4Henderson. 1 /#. 8einert. 1 /50 &any U+ intellectuals and

oliticians during the country s catch-u eriod clearly understood that the free trade

theory advocated by the 2ritish Classical Economists *as unsuited to their country0

6ndeed. it *as against the advice of great economists li e Adam +mith and Jean

2a tiste +ay that the Americans *ere rotecting their industries0 /

6n his eports . Hamilton argued that the com etition from abroad and the

$forces of habit( *ould mean that ne* industries that could soon become

internationally com etitive 4$infant industries(5 *ould not be started in the U+A.

unless the initial losses *ere guaranteed by government aid 49orfman K 'ug*ell.

/ 6n his &ealth of *ations . Adam +mith *rote: $<ere the Americans. either bycombination or by any other sort of violence. to sto the im ortation of Euro eanmanufactures. and. by thus giving a mono oly to such of their o*n countrymen ascould manufacture the li e goods. divert any considerable art of their ca ital into thisem loyment. they *ould retard instead of accelerating the further increase in thevalue of their annual roduce. and *ould obstruct instead of romoting the rogressof their country to*ards real *ealth and greatness( 4+mith. 1 # 1 @G. 0 #? -/50 2airoch 41 #. 0 1 5 credits Hamilton for inventing the term. $infant industry(0

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1 @". 0 #1-!B Con in. 1 /". 0 1 @- 50 According to him. this aid could ta e the

form of im ort duties or. in rare cases. rohibition of im orts 49orfman K 'ug*ell.

1 @". 0 #!50 He also believed that duties on ra* materials should be generally lo* 4 0

#!50 <e can see close resemblance bet*een this vie* and the vie* es oused by

<al ole 4see section #01 above5 a oint that *as not lost on the contem orary

Americans. es ecially Hamilton s olitical o onents 4El ins K &c7itric . 1 #. 0

1 501"

6nitially. the U+ did not have a federal-level tariff system. but *hen the

Congress ac=uired the o*er to ta . it assed a liberal tariff act 41 / 5. im osing a

DI flat rate tariff on all im orts. *ith some e ce tions 4%arraty K Carnes. !""". 0

1# -?". 0 1D#B 2airoch. 1 #. 0 ##50 And des ite Hamilton s eports . bet*een 1 !

and the *ar *ith 2ritain in 1/1!. the average tariff level remained around 1!0D er

cent. although during the *ar all tariffs *ere doubled in order to meet the increased

government e enses due to the *ar. 4 0 !1"50

A significant shift in olicy occurred in 1/1@. *hen a ne* la* *as introduced

to ee the tariff level close to the *artime level es ecially rotected *ere cotton.

*oollen. and iron goods 4%arraty K Carnes. !""". 0 !1"B Cochran K &iller. 1 ?!.

0 1D-@50 2et*een 1/1@ and the end of the +econd <orld <ar. the U+A had one of

the highest average tariff rates on manufacturing im orts in the *orld 4see table 150

%iven that the country enLoyed an e ce tionally high degree of $natural( rotection

due to high trans ortation costs at least until the 1/ "s. *e can say that the U+

industries *ere literally the most rotected in the *orld until 1 ?D0

1" According to El ins K &c7itric 41 #5. $ aGs the Hamiltonian rogress revealeditself M a si eable funded debt. a o*erful national ban . e cises. nationallysubsidised manufactures. and eventually even a standing army the <al olean

arallel at every oint *as too obvious to miss0 6t *as in resistance to this. andeverything it seemed to im ly that the NJeffersonian ersuasion *as erected( 4 0 1 50

1?



Even the +moot-Ha*ley 'ariff of 1 #". *hich 2hag*ati in the above =uote

ortrays as a radical de arture from a historic free-trade stance. only marginally 4if at

all5 increased the degree of rotectionism in the U+ economy0 As *e can see from

table 1. the average tariff rate for manufactured goods that resulted from this bill *as

?/I. and it still falls *ithin the range of the average rates that had revailed in the

U+A since the Civil <ar. albeit in the u er region of this range0 6t is only in relation

to the brief $liberal( interlude of 1 1#-1 ! that the 1 #" tariff bill can be inter reted

as increasing rotectionism. although even then it *as not by very much 4from # I in

1 !D to ?/I in 1 #1 see table 150

6n this conte t. it is also im ortant to note that the American Civil <ar *as

fought on the issue of tariffs as much as. if not more than. on the issue of slavery0 3f

the t*o maLor issues that divided the )orth and the +outh. the +outh had actually

more to fear on the tariff front than on the slavery front0 Abraham >incoln *as a *ell-

no*n rotectionist *ho had cut his olitical teeth under the charismatic olitician

Henry Clay in the <hig Party. *hich advocated the $American +ystem( based on

infrastructural develo ment and rotectionism thus named on recognition that free

trade *as in $2ritish( interest 4>uthin. 1 ??. 0 @1"-1B FrayssO. 1 /@. 0 -1""50

&oreover. >incoln thought the blac s *ere racially inferior and slave emanci ation

*as an idealistic ro osal *ith no ros ect of immediate im lementation 4%arraty K

Carnes. !""". 0 # 1-!B Foner. 1 /. 0 !5 he is said to have emanci ated the

slaves in 1/@! as a strategic move to *in the <ar rather than out of some moral

conviction 4%arraty K Carnes. !""". 0 ?"D50 11

11 6n res onse to a ne*s a er editorial urging immediate slave emanci ation. >incoln*rote: $6f 6 could save the Union *ithout freeing any slave. 6 *ould do itB and if 6could save it by freeing all the slaves. 6 *ould do itB and if 6 could do it by freeingsome and leaving others alone. 6 *ould also do that( 4%arraty K Carnes. !""". 0?"D50

1D



6t *as only after the +econd <orld <ar. *ith its industrial su remacy

unchallenged. that the U+ liberalised its trade 4although not as une=uivocally as

2ritain did in the mid-1 th century5 and started cham ioning the cause of free trade

once again roving >ist right on his $ladder- ic ing( meta hor 01! 'he follo*ing =uote

from Ulysses %rant. the Civil <ar hero and the President of the U+A during 1/@/-

1/ @ clearly sho*s ho* the Americans had no illusions about ladder- ic ing on the

2ritish side and their side0

$For centuries England has relied on rotection. has carried it to

e tremes and has obtained satisfactory results from it0 'here is no doubt

that it is to this system that it o*es its resent strength0 After t*o

centuries. England has found it convenient to ado t free trade because it

thin s that rotection can no longer offer it anything0 ery *ell then.

%entlemen. my no*ledge of our country leads me to believe that

*ithin !"" years. *hen America has gotten out of rotection all that it

can offer. it too *ill ado t free trade0( 4Ulysses +0 %rant. the President

of the U+A. 1/@/- @. cited in A0%0 Fran . "apitalism and

+nderdevelopment in Latin America . )e* ,or . &onthly 8evie*

Press. 1 @ . 0 1@?501#

1! Ho*ever. it should be noted that U+A never racticed free trade to the same degreeas *hat 2ritain did in its free trade eriod 41/@" to 1 #!50 6t never had a ero-tariffregime li e the U7 and it *as much more aggressively in using $hidden( rotectionistmeasures0 'hese included: E8s 4voluntary e ort restraints5B =uotas on te tile andclothing 4through the &ulti-Fibre Agreement5B rotection and subsidies for agriculture4cf0 the re eal of the Corn >a* in 2ritain5B and unilateral trade sanctions 4es eciallythrough the use of anti-dum ing duties501# 6 am grateful to 9uncan %reen for dra*ing my attention to this =uote0

1@



6m ortant as it may have been. tariff rotection *as not the only olicy

de loyed by the U+ government in order to romote the country s economic

develo ment during its catch-u hase0 At least from the 1/#"s. it su orted an

e tensive range of agricultural research through the granting of government land to

agricultural colleges and the establishment of government research institutes 47o ul-

<right. 1 D. 0 1""50 6n the second half of the 1 th century. it e anded ublic

educational investments in 1/?". less than half of the total investment in education

*as ublic. *hereas by 1 "" this figure had risen to almost /"I and raised the

literacy ratio to ?I by 1 "" 4 0 1"1. es ecially f0n0 # 50 6t also romoted the

develo ment of trans ortation infrastructure. es ecially through the granting of land

and subsidies to rail*ay com anies 4 0 1"1-!50

And it is im ortant to recognise that the role of the U+ federal government in

industrial develo ment has been substantial even in the ost*ar era. than s to the

large amount of defense-related rocurements and 8K9 s ending. *hich have had

enormous s ill-over effects 4+ha iro K 'aylor. 1 ". 0 /@@B 3*en. 1 @@. ch0 B

&o*ery K 8osenberg. 1 #50 1? 'he share of the U+ federal government in total 8K9

s ending. *hich *as only 1@I in 1 #" 43*en. 1 @@. 0 1? -D"5. remained bet*een

one-half and t*o-thirds during the ost*ar years 4&o*ery K 8osenberg. 1 #. table

!0#50 'he critical role of the U+ government s )ational 6nstitutes of Health 4)6H5 in

su orting 8K9 in harmaceutical and biotechnology industries should also be

mentioned0 Even according to the U+ harmaceutical industry association itself 4see

htt : ***0 hrma0org ublications5. only ?#I of harmaceutical 8K9 is funded by

the industry itself. *hile ! I is funded by the )6H0

1? +ha iro K 'aylor 41 "5 sum this u nicely: $2oeing *ould not be 2oeing. nor*ould 62& be 62&. in either military or commercial endeavours *ithout Pentagoncontracts and civilian research su ort( 4 0 /@@50

1



3.3. 'ermany

%ermany is a country that is today commonly no*n as the home of infant

industry rotection. both intellectually and in terms of olicies0 Ho*ever. historically

s ea ing. tariff rotection actually layed a much less im ortant role in the economic

develo ment of %ermany than that of the U7 or the U+A0

'he tariff rotection for industry in Prussia before the 1/#? %erman customs

union under its leadershi 4 'ollverein 5 and that subse=uently accorded to %erman

industry in general remained mild 42lac bourn. 1 . 0 11 50 6n 1/ . the Chancellor

of %ermany. 3tto von 2ismarc introduced a great tariff increase in order to cement

the olitical alliance bet*een the ,#nkers 4landlords5 and the heavy industrialists the

so-called $marriage of iron and rye(0 Ho*ever. even after this. substantial rotection

*as accorded only to the ey heavy industries. es ecially the iron K steel industry.

and industrial rotection remained lo* in general 42lac bourn. 1 . 0 #!"50 As it

can be seen from table 1. the level of rotection in %erman manufacturing *as one of

the lowest among com arable countries throughout the 1 th century and the first half

of the !" th century0

'he relatively lo* tariff rotection does not. ho*ever. mean that the %erman

state too a laissez faire a roach to economic develo ment0 Es ecially under

Frederic <illiam 6 41 1#-?"5 and Frederic the %reat 41 ?"-/@5 in the 1/ th century.

the Prussian state ursued a range of olicies to romote ne* industries es ecially

te tiles 4linen above all5. metals. armaments. orcelain. sil . and sugar refining by

roviding mono oly rights. trade rotection. e ort subsidies. ca ital investments.

and s illed *or ers from abroad 4'rebilcoc . 1 /1. 0 1#@-D!50

From the early 1 th century. the Prussian state also invested in infrastructure

the most famous e am le being the government financing of road building in the

1/



8uhr 4&il*ard K +aul. 1 . 0 ?1 50 6t also im lemented educational reform. *hich

not only involved building ne* schools and universities but also the re-orientation of

their teaching from theology to science and technology this at a time *hen science

and technology *as not taught in 3 ford or Cambridge 47indleberger. 1 /. 0

1 1501D

'here *ere some gro*th-retarding effects of Prussian government

intervention. such as the o osition to the develo ment of ban ing 47indleberger.

1 /. 0 1 -!"""50 Ho*ever. on the *hole. *e cannot but agree *ith the statement

by &il*ard K +aul 41 5 that $ tGo successive industrialising countries the attitude

ta en by early nineteenth-century %erman governments seemed much more nearly in

touch *ith economic realities than the rather idealised and fre=uently sim lified

model of *hat had ha ened in 2ritain or France *hich economists resented to

them( 4 0 ?1/50

After the 1/?"s. *ith the gro*th of the rivate sector. the involvement of the

%erman state in industrial develo ment became less ronounced 4'rebilcoc . 1 /1. 0

50 Ho*ever. this did not mean a *ithdra*al of the state. rather a transition from a

directive to a guiding role0 9uring the +econd 8eich 41/ " 1 1?5. there *as a

further erosion in state ca acity and involvement in relation to industrial develo ment.

although it still layed an im ortant role through its tariff olicy and cartel olicy

4'illy. 1 @50

3.(. )rance

+imilar to the case of %ermany. there is an enduring myth about French

economic olicy0 'his is the vie*. ro agated mainly by 2ritish >iberal o inion. that

1D 6nterestingly. the re-orientation of teaching is similar to *hat ha ened in 7oreaduring the 1 @"s0 +ee ,ou K Chang 41 #5 for further details0

1



France has al*ays been a state-led economy some ind of an anti-thesis to laissez

faire 2ritain0 'his characterisation may largely a ly to the re-8evolutionary eriod

and to the ost-<orld-<ar-66 eriod in the country s history. but not to the rest of it0

French economic olicy in the re-8evolutionary eriod often no*n as

"ol!ertism . named after Jean-2a tiste Colbert 41@1 -1@/#5. the famous finance

minister under >ouis Q6 *as certainly highly interventionist0 For e am le. in the

early 1/ th century. the French state tried to recruit s illed *or ers from 2ritain on a

large scale and encouraged industrial es ionage0 1@

'he 8evolution. ho*ever. significantly u set this course0 &il*ard K +aul

41 5 argue that the 8evolution brought about a mar ed shift in French government

economic olicy. because $the destruction of absolutism seemed connected in the

minds of the revolutionaries *ith the introduction of a more laissez-faire system( 4 0

!/?50 Es ecially after the fall of )a oleon. the laissez faire olicy regime got firmly

established and ersisted until the +econd <orld <ar0

For e am le. challenging the conventional *isdom that itches free-trade

2ritain against rotectionist France during the 1 th century. )ye 41 15 e amines

detailed em irical evidence and concludes that $France s trade regime *as more

liberal than that of %reat 2ritain throughout most of the nineteenth century. even in

the eriod from 1/?" to 1/@" the alleged beginning of full-fledged free trade in

2ritainG( 4 0 !D50 'able ! sho*s that. *hen measured by net customs revenue as a

ercentage of net im ort values 4*hich is a standard measure of rotectionism.

es ecially among the historians5. France *as al*ays less rotectionist than 2ritain

bet*een 1/!1 and 1/ D. and es ecially until the early 1/@"s0

1@ Ho*ever. this attem t bac fired and ro elled the 2ritish to introduce a ban on theemigration of s illed *or ers. and es ecially on the attem t to recruit such *or ersfor Lobs abroad 4$suborning(5 in 1 1 4see Chang. !""1. for further details50

!"



Ta*le 2. Protectionism in #ritain and )rance+ 1,21-1 134measured by net customs revenue as a ercentage of net im ort values5

,ears 2ritain France1/!1-1/!D D#01 !"0#1/!@-1/#" ? 0! !!0@1/#1-1/#D ?"0D !10D1/#@-1/?" #"0 1/0"1/?1-1/?D #!0! 1 01/?@-1/D" !D0# 1 0!1/D1-1/DD 1 0D 1#0!1/D@-1/@" 1D0" 1"0"1/@1-1/@D 110D D01/@@-1/ " /0 #0/1/ 1-1/ D @0 D0#1/ @-1//" @01 @0@1//1-1//D D0 0D1//@-1/ " @01 /0#1/ 1-1/ D D0D 1"0@1/ @-1 "" D0# 1"0!1 "1-1 "D 0" /0/1 "@-1 1" D0 /0"1 11-1 1# D0? /0/

+ource: )ye 41 15. 0 !@. 'able 10

<hat is interesting to note is that the artial e ce tion to this century-and-half-

long eriod of $liberalism( in France under )a oleon 666 41/?/- "5 *as the only

eriod of economic dynamism in France during this eriod 4'rebilcoc . 1 /1. 0 1/?50

Under )a oleon 666. the French state actively encouraged infrastructural

develo ments and established various institutions of research and teaching 42ury.

1 @?. ch0 ?50 6t also modernised the country s financial sector by granting limited

liability to. investing in. and overseeing modern large-scale financial institutions

4Cameron. 1 D#50

3n the trade olicy front. )a oleon 666 signed the famous Anglo-French trade

treaty 4the Cobden-Chevalier treaty5 of 1/@". *hich heralded the eriod of trade

liberalism on the Continent 41/@"- 5 4see 7indleberger. 1 D. for further details50

Ho*ever. as *e can see from table !. the degree of rotectionism in France *as

!1



already =uite lo* on the eve of the treaty 4it *as actually lower than in 2ritain at the

time5. and therefore the resulting reduction in rotectionism *as relatively small0

'he treaty *as allo*ed to la se in 1/ ! and many tariff rates. es ecially ones

on manufacturing. *ere raised0 Ho*ever. this had little ositive effects of the ind

that *e sa* in the similar move in countries li e +*eden at the time 4see section #0D

belo*5. because there *as no coherent industrial u grading strategy behind this tariff

increase01 Es ecially during the 'hird 8e ublic. the French government *as almost

as laissez faire in its attitude to*ards economic matters as the then very laissez-faire

2ritish government 47uisel. 1 /1. 0 1!-#50

6t *as only after the +econd <orld <ar that the French elite got galvanised

into re-organising their state machinery in order to address the roblem of the

country s 4relative5 industrial bac *ardness0 9uring this time. es ecially until the late

1 @"s. the French state used indicative lanning. state-o*ned enter rises. and 4*hat is

these days some*hat misleadingly no*n as5 $East-Asian-style( industrial olicy in

order to catch u *ith the more advanced countries0 As a result. France *itnessed a

very successful structural transformation of its economy. and finally overtoo 2ritain

4see +honfield. 1 @D and Hall. 1 /@50

3./. %0eden

+*eden did not enter its modern age *ith a free trade regime0 After the end of

the )a oleonic *ars. its government enacted a strongly rotective tariff la* 41/1@5.

and banned the im orts and e orts of some items 4%ustavson. 1 /@. 0 1D50

1 6f anything. the ne* tariff regime *as actually against such thing the author ofthis tariff regime. the olitician Jules &Oline. *as e licitly against large-scaleindustrialisation. in the belief that France should remain a country of inde endentfarmers and small *or sho s 47uisel. 1 /1. 0 1/50

!!





these resemble the atterns of ublic- rivate collaboration for *hich the East Asian

economies later became famous 4Evans. 1 D. is a classic *or on this issue50

'he +*edish state made great efforts in facilitating the ac=uisition of advanced

foreign technology. including through state-s onsored industrial es ionage0 Ho*ever.

more notable *as its em hasis on the accumulation of *hat the modern literature calls

$technological ca abilities( 4see Fransman K 7ing 4eds05. 1 /?. and >all. 1 !. for

ioneering *or s on this issue50 6t rovided sti ends and travel grants for studies and

research. invested in education. hel ed the establishment of technological research

institutes. and rovided direct research funding to industry 4Chang K 7o ul-<right.

1 ?. 0 / "50

Swedish economic policy underwent a significant change since the electoral

victory of the Socialist Party in 1932 (which has been out of the office for less than 10

years since then) and the signing of the “historical pact” between the union and the

employer’s association in 1936 (the Saltsj ö baden agreement) (see Korpi, 1983). The

policy regime that emerged after the 1936 pact initially focused on the construction of

a system where the employers will finance a generous welfare state and high

investment in return for wage moderation from the union.

After the Second World War, the use was made of the regime’s potential for

promoting industrial upgrading. In the 1950s and the 1960s, the centralised trade

union, LO ( Landsorganisationen i Sverige ) adopted the so-called Rehn-Meidner Plan

(LO, 1963, is the document that set out the strategy in detail). This introduced the so-

called solidaristic wage policy, which explicitly aimed to equalise wage across

industries for the same types of workers. It was expected that this would generate

pressure on the capitalists in low-wage sectors to upgrade their capital stock or shed

labour, while allowing the capitalists in the high-wage sector to retain extra profit and

!?



expand faster than it would otherwise have been possible. This was complemented by

the so-called active labour market policy, which provided retraining and relocation

supports to the workers displaced in this process of industrial upgrading. It is widely

accepted that this strategy contributed to Sweden’s successful industrial upgrading in

the early postwar years (Edquist & Lundvall, 1993, p. 274).

3. . The etherlands

'he )etherlands *as. as it is *ell no*n. the *orld s dominant naval and

commercial o*ers during the 1 th century. its so-called $%olden Century(. than s to

its aggressive $mercantilist( regulations on navigation. fishing. and international trade

since the 1@th century0 Ho*ever. it sho*ed a mar ed decline in the 1/ th century. the so-

called $Peri*ig Period( 4 Pr#ikenti(d 5. *ith its defeat in the 1 /" Fourth Anglo-9utch

<ar mar ing the symbolic end to its international su remacy 42o er. 1 @D. ch0 1"50

A olicy aralysis seem to have gri ed the )etherlands bet*een the late 1th

century and the early !" th century0 'he only e ce tion to this *as the effort by 7ing

<illiam 6 41/1D-1/?"5. *ho established many agencies roviding subsidised

industrial financing 47ossmann. 1 /. 0 1#@-/B van Randen. 1 @. 0 /?-D50 He

also strongly su orted the develo ment of modern cotton te tile industry. es ecially

in the '*ente region 4Henderson. 1 !. 0 1 /-!""50

Ho*ever. from the late 1/?"s. the country reverted to a laissez-faire regime.

*hich lasted until the +econd <orld <ar0 As *e can see in table 1. e ce t for 2ritain

in the late 1 th century and Ja an before the restoration of tariff autonomy. the

)etherlands remained the least rotected economy among the )9Cs0 Also. the

country abolished the atent la* 4*hich *as first introduced in 1/1 5 in 1/@ .

ins ired by the anti- atent movement that s*e t Euro e at the time. *hich

!D



condemned atent as Lust another form of mono oly 4+chiff. 1 1. &achlu K

Penrose. 1 D"50 9es ite international ressures. the country refused to re-introduce

the atent la* until 1 1!0

3n the *hole. during this e treme laissez-faire eriod. the 9utch economy

remained rather sluggish. and its industrialisation remained relatively shallo*0

According to the authoritative estimate by &addison 41 D5. measured in 1 "

dollars. it *as the second richest country in the *orld even after the U7 in 1/!". after

a century of relative decline 4S1. D@ vs0 S1.D@150 Ho*ever. a century later 41 1#5. it

*as overta en by no less than @ countries Australia. )e* Realand. U+A. Canada.

+*it erland. and 2elgium and almost nearly by %ermany0

6t *as largely for this reason that the end of <orld <ar 66 sa* the introduction

of more interventionist olicies 4van Randen. 1 . 0 1/!-?50 Es ecially u to 1 @#.

rather active trade and industrial olicies *ere ractised0 'hese included: financial

su orts for t*o large firms 4one in steel. the other in soda5B subsidies to industrialise

bac *ard areasB encouragement of technical educationB encouraging the develo ment

of the aluminium industry through subsidised gasB and the develo ment of ey

infrastructures0

3. . %0it4erland

+*it erland *as one of the earliest industrialisers of Euro e starting its

6ndustrial 8evolution barely !" years later than 2ritain 42iucchi. 1 #. 0 @!/50 6t *as

a *orld technological leader in a number of im ortant industries 4&il*ard K +aul.

1 . 0 ?D?-DD5. es ecially in the cotton te tile industry. *here it *as deemed

technologically more advanced in many areas than 2ritain 42iucchi. 1 #. 0 @! 50

!@



%iven this very small technological ga *ith the leader country 4if at all5.

infant industry rotection *as not very necessary for +*it erland0 Also. given its

small si e. rotection *ould have been more costly for the country than *hat it *ould

been the case for bigger countries0 &oreover. given its highly decentralised olitical

structure and very small si e. there *as little room for centralised infant industry

rotection 42iucchi. 1 #. 0 ?DD50

Ho*ever. +*it erland s laissez-faire trade olicy did not necessarily mean that

its government had no sense of strategy in its olicy-ma ing0 6ts refusal to introduce a

atent la* until 1 " . des ite strong international ressure. is such an e am le0 'his

anti- atent olicy is argued to have contributed to the country s develo ment of

es ecially by allo*ing the $theft( of %erman ideas in the chemical and

harmaceutical industries and by encouraging foreign direct investments in the food

industry 4see +chiff. 1 1. and Chang. !""150

3.,. 5apan and the 6ast &sian ICs

+oon after it *as forced o en by the Americans in 1/D#. Ja an s feudal

olitical order colla sed and a modernising regime *as established after the so-called

&eiLi 8estoration of 1/@/0 'he role of the its state since then has been crucial in the

country s develo ment0

Until 1 11. Ja an *as not able to use tariff rotection. due to the $une=ual

treaties( that barred it from having tariff rates over DI0 'herefore. the Ja anese state

had to use other means to encourage industrialisation0 +o. to start *ith. it established

state-o*ned $model factories( 4or $ ilot lants(5 in a number of industries notably

in shi building. mining. te tile. and military industries 4+mith. 1 DD. and Allen.

1 /150 Although most of these *ere rivatised by the 1/ "s. it continued to subsidise

!



the rivatised firms. notably in shi building 4&cPherson. 1 / . 0 #1. 0 #?-D50

+ubse=uently. it established the first modern steel mill. and develo ed rail*ays and

telegra h 4&cPherson. 1 / . 0 #1B +mith. 1 DD. 0 ??-D50

Follo*ing the ending of the une=ual treaties in 1 11. the Ja anese state started

introducing a range of tariff reforms intended to rotect infant industries. ma e

im orted ra* materials more affordable. and control the im orts of lu ury

consum tion goods 4&cPherson. 1 / . 0 #!50 9uring the 1 !"s. under strong

%erman influence 4Johnson. 1 /!. 0 1"D-@5. it started encouraging $rationalisation(

of ey industries by sanctioning cartel arrangements and encouraging mergers. *hich

*ere aimed at restraining $*asteful com etition(. achieving scale economies.

standardisation. and the introduction of scientific management 4&cPherson. 1 / . 0

#!-#50 'hese efforts *ere intensified in the 1 #"s 4Johnson. 1 /!. 0 1"D-11D50

9es ite all these develo mental efforts. during the first half of the !" th century.

Ja an *as on the *hole not the economic su er-star that it became after <orld <ar 660

According to &addison 41 / 5. bet*een 1 "" and 1 D". Ja an s er ca ita income

gro*th rate *as only 1I 0a00 'his *as some*hat belo* the average for the 1@

largest )9Cs that he studied. *hich *as 10#I 0a0 1 although it must be noted that

art of this rather oor erformance *as due to the dramatic colla se in out ut

follo*ing the defeat in the +econd <orld <ar 0!"

2et*een the end of <orld <ar 66 and the early 1 "s. Ja an s gro*th record

*as unrivalled0 According to the data from &addison 41 / . 0 #D. 'able #0!5.

1 'he 1@ countries are Australia. Austria. 2elgium. Canada. 9enmar . Finland.France. %ermany. 6taly. Ja an. the )etherlands. )or*ay. +*eden. +*it erland. theU7. and the U+A0!" Ja anese %9P 4not er ca ita5 in 1 ?D is estimated to have fallen to ?/I of the ea reached in 1 ?#0 'his *as. ho*ever. less dramatic than *hat %ermany e erienced.*here 1 ?@ %9P *as only ?"I of the ea reached in 1 ?? or Austria. *here the1 ?D %9P *as only ?1I of the ea s reached in 1 ?1 and 1 ??0 +ee &addison41 / . 0 1!"-1. 'able 2-!50

!/



bet*een 1 D" and 1 #. er ca ita %9P in Ja an gre* at a staggering /I. more than

double the #0/I average achieved by the 1@ )9Cs mentioned above 4the average

includes Ja an50 'he ne t best erformers among the )9Cs *ere %ermany. Austria

4both at ?0 I5 and 6taly 4?0/I5. *hile even the East Asian $miracle( develo ing

countries li e 'ai*an 4@0!I5 or 7orea 4D0!I5 came no*here near Ja an. des ite the

bigger $convergence( effect that they could e ect given their greater bac *ardness0

6n the economic successes of Ja an and other East Asian countries 4e ce t

Hong 7ong5. interventionist trade and industrial olicies layed a crucial role0 !1 <hat

is notable is the similarities bet*een their olicies *ith those used by other )9Cs

before them. including. above all. 1/ th-century 2ritain and 1 th-century U+A0

Ho*ever. it is also im ortant to note that the the olicies used by the East Asian

countries 4and indeed those used by some other )9Cs li e France5 during the ost*ar

eriod *ere a lot more so histicated and fine-tuned than their historical e=uivalents0

'hey used more substantial and better-designed e ort subsidies 4both direct

and indirect5 and much less 4actually very little5 e ort ta es than in the earlier

e eriences 4>uedde-)eurath. 1 /@B Amsden. 1 / 50 'ariff rebates for im orted ra*

materials and machinery for e ort industries *ere much more systematically used

than in. for e am le. 1/ th-century 2ritain 4>ueede-)eurath. 1 /@50

Coordination of com lementary investments. *hich had been reviously done.

if ever. in a rather ha ha ard *ay. *as systematised through indicative lanning and

government investment rogrammes 4Chang. 1 # and 1 ?50 8egulations of firm

entry. e it. investments. and ricing intended to $manage com etition( *ere a lot

more a*are of the dangers of mono olistic abuses and more sensitive to its im act on

e ort mar et erformance. *hen com ared to their historical counter arts. namely.!1 'here is an e tensive literature on this no*0 +ee Johnson 41 /?5 and Chang 41 #5for the earlier hase of the debate0 +ee A yu et al0 41 /5 and Chang 4forthcoming.!""#5. for the more recent hase0

!



the late-1 th and early-!" th century cartel olicies 4Amsden K +ingh. 1 ?B Chang.

forthcoming50

'he East Asian states also integrated human-ca ital- and learning-related

olicies into their industrial olicy frame*or a lot more tightly than their

redecessors had done. through $man o*er lanning( 4,ou K Chang. 1 #50

8egulations on technology licensing and foreign direct investments *ere much more

so histicated and com rehensive than in the earlier e eriences 4Chang. 1 /50

+ubsidies to 4and ublic rovision of5 education. training. and 8K9 *ere also much

more systematic and e tensive than their historical counter arts 4>all K 'eubal.

1 /50!!

3. . %ummary

'he follo*ing icture emerges from our e amination of the history of today s

develo ed countries0

First of all. almost all )9Cs used some form of infant industry romotion

strategy *hen they *ere in catching-u ositions0 6nterestingly it *as the U7 and the

U+A the su osed homes of free trade olicy and not countries li e %ermany or

!! <ith the recent crisis in 7orea and the rolonged recession in Ja an. it has become o ular to argue that activist trade and industrial olicies have been roved mista en0<hile this is not a lace to go into this debate. a fe* oints may be made 4for acriticism of this vie*. see Chang. !""" and forthcoming50 First of all. *hether or not*e thin the recent troubles in Ja an and 7orea are due to activist 6'' olicies. *ecannot deny that these olicies *ere behind their $miracle(0 +econd. 'ai*an. des itehaving used activist 6'' olicies. did not e erience any financial or macroeconomiccrisis0 'hird. all informed observers of Ja an. regardless of their vie*s. agree that thecountry s current recession cannot be attributed to government industrial olicy ithas more to do *ith factors li e structural savings sur lus. ill-timed financialliberalisation 4that led to the bubble economy5. and macroeconomic mismanagement0Fourth. in the case of 7orea. industrial olicy *as largely dismantled by the mid-1 "s. *hen the debt build-u that led to the recent crisis started. so it cannot be

blamed for the crisis0 6ndeed. it may be argued that. if anything. the demise ofindustrial olicy contributed to the ma ing of the crisis by ma ing $du licativeinvestments( easier 4see Chang et al0. 1 /50

#"



Ja an countries *hich are usually associated *ith state activism that used tariff

rotection most aggressively0

3f course. tariff figures do not give a full icture of industrial romotion

efforts0 9uring the late 1 th and the early !" th century. *hile maintaining a relatively

lo* average tariff rate. %ermany accorded strong tariff rotection to strategic

industries li e iron and steel0 +imilarly. +*eden rovided targeted rotection for the

steel and the engineering industries. *hile maintaining generally lo* tariffs0 %ermany.

+*eden. and Ja an actively used non-tariff measures to romote their industries. such

as establishment of state-o*ned $model factories(. state financing of ris y ventures.

su ort for 8K9. and the develo ment of institutions that romote ublic- rivate

coo eration0

'he e ce tions to this historical attern are +*it erland and the )etherlands0

Ho*ever. these *ere countries that *ere already on the frontier of technological

develo ment by the 1/ th century and therefore did not need much rotection0 Also. it

should be noted that the )etherlands had de loyed an im ressive range of

interventionist measures u till the 1 th century in order to build u its maritime and

commercial su remacy0 &oreover. +*it erland did not have a atent la* until 1 " .

flying directly against the em hasis that today s orthodo y uts on the rotection of

intellectual ro erty rights0 &ore interestingly. the )etherlands abolished its 1/1

atent la* in 1/@ on the ground that atents *ere olitically-created mono olies

inconsistent *ith its free-mar et rinci les a osition that seems to elude most of

today s free-mar et economists and did not introduce a atent la* again until 1 1!0

6t must be ointed out that tariff rotection *as in many countries a ey

com onent of this strategy. but *as by no means the only. and not necessarily the

most im ortant. com onent in the strategy0 'here *ere many other tools. such as

#1



e ort subsidies. tariff rebates on in uts used for e orts. conferring of mono oly

rights. cartel arrangements. directed credits. investment lanning. man o*er

lanning. 8K9 su orts. and the romotion of institutions that allo* ublic- rivate

coo eration0 'hese olicies are thought to have been invented by Ja an and other East

Asian countries after <<66 or at least by %ermany in the late 1 th century. but many

of them have a long edigree0

Finally. des ite sharing the same underlying rinci le. there *as a

considerable degree of diversity among the )9Cs in terms of their olicy mi .

suggesting that there is no $one-si e-fits-all( model for industrial develo ment0

(. Comparison 0ith Today s !e"elopin7 Countries

'hose fe* )eo->iberal economists *ho are a*are of the records of

rotectionism in the )9Cs try to avoid the obvious conclusion namely. it can be

very useful for economic develo ment by arguing that. *hile some 4minimal5 tariff

rotection may be necessary. most develo ing countries have tariffs rates that are

much higher than *hat most )9Cs used in the ast0

For e am le. >ittle et al0 41 "5 argues that $ aG art from 8ussia. the United

+tates. + ain. and Portugal. it does not a ear that tariff levels in the first =uarter of

the t*entieth century. *hen they *ere certainly higher for most countries than in the

nineteenth century. usually afforded degrees of rotection that *ere much higher than

the sort of degrees of romotion for industry *hich *e have seen. in the revious

cha ter. to be ossibly Lustifiable for develo ing countries today *hich they argue to

be at most !"I even for the oorest countries and virtually ero for the more

advanced develo ing countriesG( 4 01@#-?50 +imilarly. <orld 2an 41 15 argues

#!



that $ aGlthough industrial countries did benefit from higher natural rotection before

trans ort costs declined. the average tariff for t*elve industrial countries !# ranged

from 11 to #! ercent from 1/!" to 1 /" M 6n contrast. the average tariff on

manufactures in develo ing countries is #? ercent( 4 0 . 2o D0!50

'his argument sounds reasonable enough. but is actually highly misleading in

one im ortant sense0 'he roblem *ith it is that the roductivity ga bet*een today s

develo ed countries and the develo ing countries is much greater than *hat e isted

bet*een the more develo ed )9Cs and the less develo ed )9Cs in earlier times0

'hroughout the 1 th century. the ratio of er ca ita income in PPP terms

bet*een the oorest )9Cs 4say. Ja an and Finland5 and the richest )9Cs 4say. the

)etherlands and the U75 *as about ! or ? to 10 'oday. the ga in er ca ita income in

PPP terms bet*een the most develo ed countries 4e0g0. +*it erland. Ja an. the U+A5

and the least develo ed ones 4e0g0. Ethio ia. &ala*i. 'an ania5 is ty ically in the

region of D" or @" to 10 &iddle-level develo ing countries li e )icaragua 4S!."@"5.

6ndia 4S!.!#"5. and Rimbab*e 4S!.@ "5 have to contend *ith roductivity ga s in the

region of 1" or 1D to 10 Even for =uite advanced develo ing countries li e 2ra il

4S@./?"5 or Columbia 4SD.D/"5. the roductivity ga *ith the to industrial countries

is about D to 10

'his means that today s develo ing countries need to im ose much higher

rates of tariff than those used by the )9Cs in earlier times. if they are to rovide the

same degree of actual rotection to their industries as the ones accorded to the )9C

industries in the ast0

For e am le. *hen the U+A accorded over ?"I average tariff rotection to its

industries in the late 1 th century. its er ca ita income in PPP terms *as already

!# 'hey are Austria. 2elgium. 9enmar . France. %ermany. 6taly. the )etherlands.+ ain. +*eden. +*it erland. the U7. and the U+A0

##



about # ? that of 2ritain0 And this *as *hen the $natural rotection( accorded by

distance. *hich *as es ecially im ortant for the U+A. *as considerably higher than

today0 Com ared to this. the 1I trade-*eighted average tariff rate that 6ndia used to

have Lust before the <'3 agreement. des ite the fact that its er ca ita income in PPP

terms is only about 1 1D that of the U+. ma es the country loo li e a cham ion of

free trade0 Follo*ing the <'3 agreement. 6ndia cut its trade-*eighted average tariff

to #!I. bringing it do*n to the level belo* *hich the U+ average tariff rate never

san bet*een the end of the Civil <ar and <orld <ar 660

'o ta e a less e treme e am le. in 1/ D. 9enmar had an average tariff rate

around 1D-!"I. *hen its income *as slightly less than @"I that of 2ritain0 Follo*ing

the <'3 agreement. 2ra il cut its trade-*eighted average tariff from ?1I to ! I. a

level that is not far above the 9anish level. but its income in PPP terms is barely !"I

that of the U+A0

'hus seen. given the prod#ctivity gap . even the relatively high levels of

rotection that had revailed in the develo ing countries until the 1 /"s do not seem

e cessive by historical standards of the )9Cs0 <hen it comes to the substantially

lo*er levels that have come to revail after t*o decades of e tensive trade

liberalisation in these countries. it may even be argued that today s develo ing

countries are actually even less rotectionist than the )9Cs in earlier times0

/. Lessons for the Present

'he historical icture is clear0 <hen they *ere trying to catch-u *ith the

frontier economies. the )9Cs used interventionist trade and industrial olicies in

order to romote their infant industries0 'he forms of these olicies and the em hases

#?



among them may have been different across countries. but there is no denying that

they actively used such olicies0 And. in relative terms 4that is. ta ing into account the

roductivity ga *ith the more advanced countries5. many of them actually rotected

their industries a lot more heavily than *hat the currently develo ing countries have

done0

6f this is the case. the current orthodo y advocating free trade and laissez-faire

industrial olicies seems at odds *ith historical e erience. and the develo ed

countries that ro agate such vie* seem to be indeed $ ic ing a*ay the ladder( that

they used in order to climb u *here they are0

'he only ossible *ay for the develo ed countries to counter this accusation

of $ladder- ic ing( *ill be to argue that the activist trade and industrial olicies that

they had ursued used to be beneficial for economic develo ment but are not so any

more. because $times have changed(0 A art from the aucity of convincing reasons

*hy this may be the case. the oor gro*th records of the develo ing countries over

the last t*o decades ma es this line of defence sim ly untenable0 6t de ends on the

data *e use. but roughly s ea ing. er ca ita income in develo ing countries gre* at

#I er year bet*een 1 @" and 1 /". but has gro*n only at about 10DI bet*een 1 /"

and !"""0 And even this 10DI *ill be reduced to 1I. if *e ta e out 6ndia and China.

*hich have not ursued liberal trade and industrial olicies recommended by the

develo ed countries0

+o if you are a )eo->iberal economist. you are faced *ith a $ arado ( here0

'he develo ing countries gre* much faster *hen they used $bad( trade and industrial

olicies during 1 @"-/" than *hen they used $good( 4at least $better(5 olicies during

the follo*ing t*o decades0 'he obvious solution to this $ arado ( is to acce t that the

su osedly $good( olicies are actually not good for the develo ing countries but that

#D



the $bad( olicies are actually good for them0 'his gets further confirmation from the

fact that these $bad( olicies are also the ones that the )9Cs had ursued *hen they

*ere develo ing countries themselves0

%iven these arguments. *e can only conclude that. in recommending the

allegedly $good( olicies. the )9Cs are in effect $ ic ing a*ay the ladder( by *hich

they have climbed to the to beyond the reach of the develo ing countries0 6 do acce t

that this $ladder- ic ing( may be done genuinely out of 4misinformed5 good*ill0

+ome of those )9C olicy-ma ers and scholars *ho ma e the recommendations may

sincerely believe that their o*n countries had develo ed through free trade and other

laissez faire olicies and *ant the develo ing countries benefit from the same

olicies0 Ho*ever. this ma es it no less harmful for the develo ing countries0 6ndeed.

it may be even more dangerous than $ladder- ic ing( based on na ed national

interests. as self-righteousness can be even stubborn than self-interest0

<hatever the intention is behind the $ladder- ic ing(. the fact remains that

these allegedly $good( olicies have not been able to generate the romised gro*th

dynamism in the develo ing countries during the last t*o decades or0 6ndeed. in many

develo ing countries gro*th has sim ly colla sed0

+o *hat is to be done; <hile s elling out a detailed agenda for action is

beyond the sco e of this article. the follo*ing oints may be made0

'o begin *ith. the historical facts about the develo mental e eriences of the

develo ed countries should be more *idely ublicised0 'his is not Lust a matter of

$getting history right(. but also of allo*ing the develo ing countries to ma e

informed choices0 I do not wish to give the impression that every developing country

should adopt an active infant industry promotion strategy like the 18 th century Britain,

#@



19 th century USA, or 20 th century Korea. Some of them may indeed benefit from

following the Swiss or Hong Kong models. However, this strategic choice should be

made in the full knowledge that historically the vast majority of the successful

countries used the opposite strategy in order to become rich.

6n addition. the olicy-related conditionalities attached to financial assistance

from the 6&F and the <orld 2an or from the donor governments should be radically

changed0 'hese conditionalities should be based on the recognition that many of the

olicies that are considered $bad( are in fact not. and that there can be no $best

ractice( olicy that everyone should use0 +econd. the <'3 rules and other

multilateral trade agreements should be re-*ritten in such a *ay that a more active

use of infant industry romotion tools 4e0g0. tariffs. subsidies5 is allo*ed0

Allo*ing the develo ing countries to ado t the olicies 4and institutions5 that

are more suitable to their stages of develo ment and to other conditions they face *ill

enable them to gro* faster. as indeed it did during the 1 @"s and the 1 "s0 'his *ill

benefit not only the develo ing countries but also the develo ed countries in the long

run. as it *ill increase the trade and investment o ortunities available to the

develo ed countries in the develo ing countries0 'hat the develo ed countries are not

able to see this is the tragedy of our time0

#



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Chang(2003)_the Myth of Free Trade

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