Amidst the hot debate on “good policy” proposed by IMF and its cronies to be enforced in developing countries, Ha Joon Chang offered a different perspective. Developing countries should look at the history of policies and institutions in developed countries when they were still in the phase of development.
Discourse on the political economy today has been dominated by faith in the free market as the best—or even the only—means to realize welfare. The free market is also frequently associated with democracy. Milton Friedman, a monetarist and free-market advocate, strongly insisted that profit-seeking served as the core of democracy. He argued that any government that was not in favor of market policy was an anti-democratic one (Friedman, 1970).
Profit-seeking, as Friedman said it, means generating gain by applying market mechanism, in which buyers and sellers act are based on individual interests of competing in the market. This competition will, in turn, establish a balance of supply and demand of products and services (Williamson, 1975 in Siddiqui, 2012). In other words, applying the market mechanism by limiting state intervention will ensure welfare.
Contrary to popular opinion, the principles actually go against each other. Democracy, in which everybody can equally voice their aspirations (manifested in the one man, one vote principle) will only be weakened by market principles itself (which believes one dollar means one vote). Such market principles cannot ensure that people stand on the same ground as they possess different levels of economic strength.
The free-market ideology, also well-known as neoliberalism, has been developing worldwide since the 1970s. This ideology strived to bring back the classic liberal doctrine which beliefs in the power of the market in governing itself, in line with the laissez-faire concept posited by Adam Smith and David Ricardo (Steger and Roy, 2010).
Classic liberal thinkers believe that state intervention should be limited to mere protection of individual rights, in particular private ownership. Economist Hayek (2005 ) viewed state intervention—such as the one in the Keynesian economy model— as a gateway to slavery. Agreeing with Hayek, Friedman (in Steger and Roy, 2010) promoted the free market by pointing out the flaw of state intervention, which included creating inflation. Martin Flow (2009), a supporter of the free market, claimed that the recent development of pro-market ideology in western countries was a response to the failure of the Keynesian mixed economy scheme prominent in the 1950-70s.
State intervention in the Keynesian economy—in which the government actively spends the state budget, sets market prices, and owns enterprises that manage resources—is contradictory with the free market principle that rejects the idea of state monopoly. State monopoly, by neoliberal economists, is believed to be the cause of stagflation—a condition in which economic growth becomes stagnant, accompanied by high inflation and unemployment—which occurred in the 1970s. Hence, the neoliberals urged for the abolition of state intervention by committing deregulation, liberalization, and privatization according to the neoliberal economic model in order to escape the crisis (see Palley, 2004; Zinn, 2013).
The Consequence of Neoliberalism and Its Failure in Developing Countries
On the global level, the shift to neoliberal economy happened upon the election of Ronald Reagan as POTUS in 1989, Margaret Thatcher as British PM in 1979, and Deng Xiaoping as the President of the PR China in 1978. Following the phenomena, the rulers immediately adopted neoliberalism and advocated it to neighboring countries. Meanwhile, neoliberal economist John Williamsson—together with IMF, the World Bank, and the US Department of Treasury—formulated a set of development policy strategy which focused on privatization, liberalization, and neoliberal macroeconomic policy (that was enforced to recover 1980s post-crisis economy in regions like Latin America) (Williamsson, 2004). The strategy went by the name of the Washington Consensus and involved a set of policies as a reference for developing countries in their attempt to achieve welfare.
In the late 1980s, 70 developing countries were compelled by IMF to receive structural adjustment programs which included policies of austerity, deregulation, liberalization, and privatization based on neoliberal agenda (Bello, 2005 in Siddiqui, 2012). They were also required to import technology. As a result, developing countries’ import rate of manufactured goods surged from 5% in the late 1970s to 30.1% in 2003 (UNCTAD, 2005 in Siddiqui, 2012). Neoliberals claimed the increase as a success of neoliberal policies. In fact, the increase didn’t help developing countries move towards industrialization. Instead, it created a dependency on developed countries. The unemployment rate didn’t improve and disparity became even more visible. Moreover, the trade balance deficit affected the economy as a whole.
Moreover, after 40 years of supremacy, neoliberalism miserably failed in many developing regions, such as Latin America and sub-Saharan Africa (Stiglitz, 2008 in Siddiqui, 2013). In 2008 Pakistan, the number of people living in poverty reached 30% and disparity skyrocketed following the adoption of neoliberal economic policies (Siddiqui, 2013). Slower economic growth in countries that adopted the Consensus drove them into thinking of abandoning it. Bolivia as one of the first countries to adopt the consensus also questioned, ”We have experienced the inconveniences. When will we enjoy the gain?” Responding to them, IMF told developing countries to simply persist. They reckoned that leaving the Consensus will only deem the strenuous effort to adapt with neoliberal doctrines and structural adjustments pointless.
Amidst the ongoing debate of the good policy offered by IMF and its cronies, Ha Joon Chang—a lecturer on the political economy of Cambridge University—had a different idea: why not look at developed countries’ track record of policies and institutions? That way, developing countries can learn from the developed and avoid the cost the developed paid to be in their place now. This is an advantage for the newcomers (Chang, 2020). Chang’s discovery was shocking and concerning. History showed that the currently developed countries like the US, England, Germany, France, Netherlands, and even the east Asian countries who are currently creeping up did not apply the neoliberal economy.
Do as We Say, Not As We Did
Looking at the failure of neoliberal policies in developing countries, Chang was not in favor of the developed countries’ preach on the developing. In his writing, he referred to Friedrich List (1789-1846), a German economist who thought of the “infant industry argument”, to show that this was not the first time the developed countries patronize the developing. The list was critical of the hypocrisy of the free market preach and the British lasses-faire doctrine. He realized that Germany wouldn’t have been able to catch up with the British industrial power had they obeyed the British lecture on the free market
The general view Chang (2002) identified as the formal history of globalization exhibited that the success of 18th century British economy—which was immediately followed by other countries liberalizing their market— was thanks to free-market policy and free trade. The perfect liberal world order dominated by the British in the 1870s was claimed as the result of several free-market aspects: (1) the adoption of lasses-faire by domestic industries; (2) minimum challenge on flows of goods, services, and international workforce; (3) macroeconomic stability, which was guaranteed—domestically and internationally—by the sound-money principle and balanced funding. This era of massive wealth started to become chaotic at the beginning of the first World War. However, to Chang (2002:16) who has looked into List’s archive, the formal history of globalization was actually misleading.
List thought otherwise: that the British were the first to perfect the art of developing infant industry. The British economic supremacy in the 1700s was not the result of simply adopting the free market and trade. Prior to embracing the free market, they administered interventionist policies, such as subsidies and high tariffs. They promoted domestic industries until manufacturers became self-assured and later on, in 1833, a tariff was reduced. Moreover, Corn Law was abolished in 1846 (Chang, 2002). As their economy became second to none, they preached on the importance of free-market with help from cosmopolitan economists like Adam Smith. At the same time, many countries were forced to practice free market through colonialism and unfair treaties (like the Nanking Treaty). This, Chang conceived, was such a clever trick done by a country: climb to the top first and kick its ladder away later (Chang, 2002).
On the basis of List’s critique, Chang (2002) noticed the same pattern in developed countries today. Initially, developed countries protect their industries with high tariffs and subsidies. As their industries eventually develop the ability to compete, they start suggesting neoliberal policies and hide the fact that they never actually used such policies initially.
For developing countries, Ha Joon Chang’s findings give historical legitimacy to the idea of rethinking the use of the neoliberal approach on a country’s development phase. His findings are crucial to challenge worldwide economists’ and policy-makers perception of neoliberal success as a “fact”. Hence, Chang recommended taking another route to success, i. e. by adopting the policies that the currently-developed nations employed throughout their development stage.
Author: Luqman Abdul M
Editor: Kenny Setya Abdiel
Translator: Medisita Febrina