THING #7

Free-market policies rarely make poor

countries rich

What They Tell You…

All of today’s rich countries (except Japan, and few more) have become rich through free-market policies, especially through free trade with the rest of the

world

Economies that adopted policies of state intervention, socialism or trade protectionism, especially during early period after obtaining independence, grew

anemically. Such strategy produced Stagnation

Free Market is GOOD…

What They Don’t Tell You…

Performance of most of the developing countries in the period of state-led development was much superior – Faster Growth and Fewer Financial Crises

Most of today’s developed countries, including The US and Britain, have become rich through combination of protectionism, subsidies and other policies that

today they advise developing countries not to adopt

But they protected their markets…

Two Basket Cases

Country A Country B

• Highly protectionist, average industrial tariff rate above 30%

• Heavy restriction on cross-border flow of capital

• State-owned and highly regulated banking sector

• Restriction on foreign ownership of financial assets

• Foreign firms discriminated against through differential taxes and regulations by local government

• No elections and high corruption• Opaque and complicated property rights• Large number of state-owned enterprises,

many of which make losses but are propped up by subsidies and government granted monopoly rights

• Trade policy most protectionist in last few decades, average industrial tariff rates 40-55%

• Majority population cannot vote, vote-buying and electoral fraud is widespread

• Rampant corruption• Never recruited any civil servant through

open, competitive process• Records of government loan default worry

foreign investors• Foreigners are prohibited from becoming

Directors, shareholders cannot exercise voting rights unless resident

• No competition law, promoting cartels and monopolies

• IPR does not protect foreigner’s copyrights

Today’s China

1880’s USA

Dead Presidents

Don’t Talk…

Alexender Hamilton

• Architect of modern American Economic system, Treasury secretary in 1789

• Argued that “industries in their infancy” need to be protected and nurtured by government

• Public investment in infra, development of banking system, promotion of government bond market

• First US president• Insisted on wearing American clothes rather than higher quality

British clothes• Appointed Hamilton as Treasury Secretary in full knowledge of his

views George Washington

• Well known protectionist, raised industrial tariffs to highest level during civil war

Abraham Lincoln

• He remarked: “within 200 years when America has gotten out of protection all that it can offer, it too will adopt free trade”

Ulysses Grant

• Insisted on high tariff protection to protect domestic manufacturers• Free domestic land available made minimum wage 4 times higher

than average European wagesBenjamin Franklin

Do As I Say, Not As I did…

Free Market Economists argue

• US was destined to grow fast, because:• It is endowed with natural resources• Received lot of highly motivated and hard-working immigrants

• Large internal market mitigated negative effects of protectionism, by allowing a degree of competition among domestic firms

But US is not the only case

Many smaller countries, which do not fit in the above arguments, have succeeded with protectionist policies

Britain adopted free trade only in 1860s when its global dominance was absolute.

Other notable examples:Finland

SingaporeHong Kong

Taiwan

Therefore,

All rich countries advise developing countries to do as they say, but not as they practiced

A Pro-growth Doctrine that

reduces Growth…

Since 1980s, global opening of markets and

deregulation

• Per capita income growth fell from 3% per year in 1960s and 70s to 1.7% during 1980-2000 period

• Latin America and Sub-Saharan Africa followed neo-liberal policies and performed much inferior to old days