Once upon a time, the leading car-maker of a developing country exported its first passenger cars to the US. Until then, the company had only made poor copies of cars made by richer countries. The car was just a cheap subcompact (“four wheels and an ashtray”) but it was a big moment for the country and its exporters felt proud.
Unfortunately, the car failed. Most people thought it looked lousy, and were reluctant to spend serious money on a family car that came from a place where only second-rate products were made. The car had to be withdrawn from the US. This disaster led to a major debate among the country’s citizens. Many argued that the company should have stuck to its original business of making simple textile machinery. After all, the country’s biggest export item was silk. If the company could not make decent cars after 25 years of trying, there was no future for it. The government had given the car-maker every chance. It had ensured high profits for it through high tariffs and tough controls on foreign investment. Less than ten years earlier, it had even given public money to save the company from bankruptcy. So, the critics argued, foreign cars should now be let in freely and foreign car-makers, who had been kicked out 20 years before, allowed back again. Others disagreed. They argued that no country had ever got anywhere without developing “serious” industries like car production. They just needed more time.
The year was 1958 and the country was Japan. The company was Toyota, and the car was called the Toyopet. Toyota started out as a manufacturer of textile machinery and moved into car production in 1933. The Japanese government kicked out General Motors and Ford in 1939, and bailed out Toyota with money from the central bank in 1949. Today, Japanese cars are considered as “natural” as Scottish salmon or French wine, but less than 50 years ago, most people, including many Japanese, thought the Japanese car industry simply should not exist.
Half a century after the Toyopet debacle, Toyota’s luxury brand Lexus has become an icon of globalisation, thanks to the American journalist Thomas Friedman’s book The Lexus and the Olive Tree. The book owes its title to an epiphany that Friedman had in Japan in 1992. He had paid a visit to a Lexus factory, which deeply impressed him. On the bullet train back to Tokyo, he read yet another newspaper article about the troubles in the middle east, where he had been a correspondent. Then it hit him. He realised that “half the world seemed to be… intent on building a better Lexus, dedicated to modernising, streamlining and privatising their economies in order to thrive in the system of globalisation. And half of the world—sometimes half the same country, sometimes half the same person—was still caught up in the fight over who owns which olive tree.”
According to Friedman, countries in the olive-tree world will not be able to join the Lexus world unless they fit themselves into a particular set of economic policies he calls “the golden straitjacket.” In describing the golden straitjacket, Friedman pretty much sums up today’s neoliberal orthodoxy: countries should privatise state-owned enterprises, maintain low inflation, reduce the size of government, balance the budget, liberalise trade, deregulate foreign investment and capital markets, make the currency convertible, reduce corruption and privatise pensions. The golden straitjacket, Friedman argues, is the only clothing suitable for the harsh but exhilarating game of globalisation.
However, had the Japanese government followed the free-trade economists back in the early 1960s, there would have been no Lexus. Toyota today would at best be a junior partner to a western car manufacturer and Japan would have remained the third-rate industrial power it was in the 1960s—on the same level as Chile, Argentina and South Africa.
Had it just been Japan that became rich through the heretical policies of protection, subsidies and the restriction of foreign investment, the free-market champions might be able to dismiss it as the exception that proves the rule. But Japan is no exception. Practically all of today’s developed countries, including Britain and the US, the supposed homes of the free market and free trade, have become rich on the basis of policy recipes that contradict today’s orthodoxy.
Cambridge economist Ha-Joon Chang’s book Bad Samaritans: The Guilty Secrets of Rich Nations and The Threat to Global Prosperity (Random House 2007) is an amazing demolition job on the neo-liberal orthodoxy, with a chapter devoted to exposing each mantra:
- Protectionism is bad for economic growth (The US and Britain were the most protectionist of nations when they were growing.).
- Free Trade is the only way to grow rich (The US and Britain had some of the highest tarrifs on imports).
- Foreign investment should not be regulated (The US imposed severe controls on foreign investment, Japan banned them altogether).
- Private enterprise is good, public enterprise bad (Large numbers of world class companies developed as state owned enterprises, some still are).
- IProtecting intellectual propert rights is essential for innovation and growth (In most countries, including Britain, Austria, France and the US, patenting of imported inventions was explicitly allowed in the 19th century.)
- Financial discipline is essential for growth, in particular inflation must be kept below 5 %. (Korea had 17 % inflation during periods of strogest growth).
- Corrupt and undemocratic governments are responsible for poverty (The great push for growth in Korea was under the dictatorship of Gen. Park).
- Some cultures are intrinsically incapable of growth (Korea and Japan were considered to be such!)
In other words, the policies rich nations are thrusting down the throats of poor ones today are the exact opposite of those they followed to get rich! There is an interesting exchange between Ha-Joon Chang and the neoliberals . While Martin Wolf is at least respectful and has read the book, the arrogance of the neo-liberal stalwarts who have clearly not even turned a page is astonishing!
At the end, the neoiberals are reduced to look like a pack of utter idiots. The truth is quite the opposite – these are among the finest, devilishly clever minds around. So if they advocate the neo-liberal line, it could hardly be out of ignorance of their consequences as Chang suggests at some points. At other places Chang comes closer when he talks of rich nations pursuing their own interests. But this is still not the correct diagnosis, for these policies have their admirers in poor countries too …
