Two senior UN economists have exposed the economic simplicities of market fundamentalists so much in vogue in recent decades. Protectionism does work. The free market is not the answer…
Read the history: Yes, barriers on free trade can stimulate economic development
WORKERS, FEBRUARY 2009 ISSUE
The “stabilise, liberalise and privatise” mantra has been imposed on developing countries by international financial institutions since the 1980s. But it has not gone unopposed. A fascinating book* written by two senior UN economists explodes the myths behind the mantra.
The book argues cogently against a universal model of development, which alone is well worth studying. But of more pressing interest for readers in countries such as Britain, they condemn the economic simplicities of market fundamentalists so much in vogue in recent decades – highly pertinent in our contemporary situation.
Huge economic shifts have occurred in recent decades, resulting from key international policies since the late 1970s to “reduce national interference and liberalise trade, liberalise financial flows, cut welfare provision, use unemployment as a policy tool, shift the distribution of income back towards profits, encourage the withdrawal of the state from the economy and dismantle the post-war political and social compromise.” Policies clearly designed to make international capitalism freer and fatter.
The book observes that “Traditional borders between nations, disciplines and occupations are seen as vestiges of a passing era and obstacles to modern efficient structures. The call invariably is to cast aside old institutions and loyalties and to embrace the new challenges and opportunities of a globalising world.”
Capitalism propagates the sense that globalisation is somehow akin to an irresistible force beyond the control of governments and that states should adapt by relinquishing economic sovereignty to mobile capital.
One economist cited points out that the ideology of globalism was spoken for largely by tenured professors of economics and management while being led by private sector technocrats working for large joint stock companies that were rarely owned by blocks of active shareholders. An interesting footnote quotes the view of a poor Jamaican banana farmer: “Globalisation seems like a system where the man with the power uses a big stick to put the man without power in his place.”
The authors define globalisation “as a political project aimed both at extending the sway of free markets on a global scale through a singular set of economic policies to be adopted by all countries regardless of their circumstances and at ceding direction over an increasing area of policy-making (and the public realm generally) to business leadership and the values of the marketplace.”
The book proceeds to undermine in detail the market fundamentalists’ claim of a single path to successful development and its one-size-fits-all approach, which is an informative study but beyond the scope of this review to comment on in detail. But one particular piece of evidence they provide is of great relevance to both developing and developed nations, and needs recounting.
The chapter entitled “The greatly exaggerated death of the nation state” opens with the reflection that “A major flaw in the scenario of a world without borders is that it ignores both the resilience of the nation state and the fact that the economy is not an entity [complete in itself] but a component of a larger political and social reality, a reality from which the market economy draws its legitimacy rather than the reverse.”
Regulation is the norm
The authors go on to dismiss the idea that free markets are self-regulating: on the contrary “regulated markets are the norm.” They take issue with the idea that liberalisation and free markets are the answer and admit there is little consensus as to the key determinants of economic growth; why development takes off in some countries and fails in others. They make a thoughtful aside that had the neo-liberal approach been enforced on the East Asian countries during the 1950s, 1960s and early 1970s, then there would not have been the so-called East Asian economic “miracle”.
The second chapter holds a jewel of historical insight, which analyses economic integration before World War 1 and concludes that the expansion of trade in this period was not the result of sustained liberalisation policies, contrary to the conventional wisdom of bourgeois economists. Tariffs protected major industrial development. “Coinciding with the start of European liberalisation, and accelerating after the North’s victory in the Civil War, the United States’ economy began its period of catching-up growth behind rising tariff barriers; from 1866 to 1883 import duties averaged 45 per cent for manufactured goods, with individual rates ranging from about 25 per cent to around 60 per cent.”
During the three decades up to World War 1, protectionism was the dominant policy trend across the developed world, becoming particularly pronounced from the early 1890s, although there were some signs of easing in the years just prior to 1914. By 1914, all the larger industrialising countries were protectionist and even some of the smaller European economies such as Sweden had moved decisively in this direction. After the 1890s, Japan also provided tariff protection for its infant industries.
This protectionist trend was weaker in most developing regions, particularly where trade was organised under colonial rule. Most colonies were forced to accept free entry of goods. In the nominally independent states of Latin America, the Middle East and East Asia, western pressure in the first half of the 19th century imposed on most of them treaties which entailed the elimination of customs duties.
But the lower-tariff story was not a universal one. For political reasons, the self-governing colonies (such as Canada, Australia and New Zealand) were not forced to open up, and they used their greater independence to protect infant industries. Also, in the second half of the 19th century, in Latin America tariffs rose steeply such as in Colombia, Brazil and Uruguay.
Troubling for the market fundamentalist cause is the fact that the protectionist drift did not have an adverse effect on economic growth and, if anything, seems to have stimulated it. The period of trade openness from 1860 to 1879 coincided with a slowdown in the growth of both output and exports. Significantly, the subsequent move towards protectionism coincided with a period of more rapid rates of growth of both output and trade: during the 20 years following the reintroduction of protectionism, output increased by more than 100 per cent and the volume of exports by more than 35 per cent. The myth of successful economic growth due to a liberal cosmopolitan trade order before 1914 is destroyed by this historical evidence.
Today when the voices of globalisation are still strident and when workers in Britain need to find a way to rebuild our economy, it is extremely useful to know about earlier times and previous experiences when state barriers on trade and state encouragement of local industry (even in capitalist countries) have played a key part in stimulating economic growth and social cohesion.
*The Resistible Rise of Market Fundamentalism: Rethinking Development Policy in an Unbalanced World by Richard Kozul-Wright and Paul Rayment, paperback, 374 pages, ISBN 978-1-84277-637-7, Zed Books, 2007, £19.99