This interview originally appeared in NOW Magazine, which retains all rights.

Follow the author at www.twitter.com/strukhoff or www.nowmagazineblog.blogspot.com

Dr. Ha-Joon Chang has taught at the Faculty of Economics, University of Cambridge, since 1990. He has consulted for numerous international organizations, including the United Nations, the World Bank, and the Asian Development Bank. He has published eleven books, including Kicking Away the Ladder, winner of the 2003 Myrdal Prize. His latest book, Bad Samaritans, was published by Bloomsbury Press in December 2007.

Roger Strukhoff: Your new book, Bad Samaritans, follows up on your previous work in being highly critical of neoliberal—or neoclassical—economics, whose proponents espouse totally free markets and capital flows, no tariffs or other “barriers” to free trade, and in general take the point of view that global businesses, rather than national governments, should direct the way a country should manage its imports and exports.

You point out that today’s economic powers did not follow similar policies in their rise to wealthy nation status, yet favor those policies for less-developed nations today. Is it this seeming hypocrisy that troubles you the most, or is it that you believe that neoliberal policies simply don’t work well?

Dr. Ha-Joon Chang: It is the fact that neo-liberal policies do not work well, especially for developing countries, that bothers me more. Hypocrisy and unwarranted moral lecturing by the rich countries may be irritating but acceptable, if neo-liberal policies were producing good results in developing countries—in the end, who cares whether the cat is black and white, if it catches mice? However, this has not been the case.

The rich countries, through the IMF, the World Bank, and their bilateral aids, have induced, or sometimes even forced, developing countries into neo-liberal policies on the ground that the protectionist, interventionist policies that the developing countries had used in the 1960s and the 1970s have produced poor results, especially in terms of growth and that neo-liberal policies will revive their economies. As I explain in the (new) book, the result has been the contrary.

Strukhoff: What are some of the numbers behind this viewpoint?

Chang: Growth in per capita income in the developing world used to be about 3% per year during the “bad old days” of the 1960s and the 1970s. Yet in the 1980s and the 1990s, it fell to half that level (1.7%). In the last several years, the rapid growth of China and the resulting rise in commodity prices have raised growth rates in some resource-rich develolping countries, but even so the growth rate of per capita income in developing countries in the last quarter of a century has been just over 2%.

And let’s not forget that even this rate was possible only because of the rapid growth of China and India, which, while liberalizing, did not follow the neo-liberal recipe.
Growth in those countries that followed the recipe most diligently, namely, countries in Latin America and Sub-Saharan Africa (SSA), have evaporated. In the 1960s and the 1970s, per capita income in Latin America grew at 3.1% and that in SSA grew at 1.6%. Between 1980 and 2004, when they embraced neo-liberal reform, they grew at 0.5% and -0.3%.

Strukhoff: And this has been a disaster in your view…

Chang: Yes. Living standards in SSA has been falling for the last two and half decades!

NOW: Sounds like you’re making a blanket indictment about the conventional wisdom of economists over the past couple of decades.

Chang: Well, there is no mystery about falling growth rates. Now, I don’t deny that under certain circumstances, removing regulations can encourage investment and thus growth. However, this is not guaranteed and can be easily offset by other elements of the neo-liberal package. Neo-liberal policies discourage investment (and thus growth) by putting excessive emphasis on inflation control and thereby often imposing high interest rates, which make borrowing by business firms more difficult.

Strukhoff This sounds like short-term stuff. What about the longer term?

Chang: These policies also discourage long-term-oriented investments by exposing firms to the short-termist tendencies of liberalized financial market, thereby hurting long-term growth. The excessive emphasis that they put on blancing the budget often leads to cuts in public spending on education, training, and research—things whose cuts do not show immediate effects—that diminish the economy’s long-term growth potential.

In other words, neo-liberal policies that have been sold as ‘pro-growth’ policies are actually anti-growth. And here we are not even talking about the increase in inequality and job insecurity that neo-liberal reforms have created.

Strukhoff: You point to examples of countries in the post-WWII era, notably Japan, South Korea, and Finland, who have achieved their present economic might by having strong industrial policies driven by their national governments. Do you believe that similar policies will be the key for other nations trying to win their place at the table of strong economic nations?

Chang: Yes, history shows that, while it may be possible to become a decent middle-income country without effective industrial policy—Chile comes to mind—it is extremely difficult to become rich without it. This is because the producers in a relatively backward economy need a period of government protection and nurturing—during which they of course will have to invest in building their productive capabilities—before they can compete fully with the more advanced producers from more economically developed countries.

Strukhoff: You mentioned this in your book. Something along the lines of feed the baby…

Chang: Yes, This is the logic of so-called infant industry argument, theorized by Alexander Hamilton, the first US Treasury Secretary, and used by most economic success stories since then. The essential idea was also put forward by Robert Walpole, who is known as the first British Prime Minister, whose theories Hamilton emulated.

So industrial policy is becoming even more necessary, as the technological gaps between the rich countries and the poor countries is growing, which means that poor country producers need even more government support than those in the poor countries of the past.

Unfortunately, while the need may be rising, it is becoming more and more  difficult to implement industrial policy in developing countries, because of the power of the neo-liberal orthodoxy, manifested in terms of a.) the “conditionalities” imposed by the IMF, the World Bank, and the donor governments, b.) the WTO and the bilateral and regional free-trade and investment agreements, and c.) the ideological influence on national policy makers.

Strukhoff: With Information Technology specifically, what sort of policies do you see in place today that seem to be working?

Chang: First of all, it is important to invest in education and research. IT is an industry where technology is evolving fast, and therefore it is important to have capable people who can absorb new technologies fast. Even in relatively poor countries, it is necessary to have some research people, even if they are doing it just to follow up the global trends and not necessarily to make world-class innovation.

Second, scale economy is important in IT. The best example here is, of course, with semiconductors. Governments need to make it sure that factories are built for the global market, and not for domestic markets, which are often too small to support the minimum efficient scale.

Third, government procurement has played an important role in ensuring the success of IT industry. Government procurement not only increases the volume of production--thus allowing the firms to achieve scale economy more easily--but but also gives it stability, which encourages long-term investment. Even in the US, which has been on the frontier of this technology, the early demands for computers and semiconductors in the US came from military procurement.