The world economic system needs to be completely overhauled in order to provide greater ‘policy space’ for the developing countries to pursue policies that are more suitable to them (the rich countries have much greater scope to bend, or even ignore, international rules). The developing countries need a more permissive regime regarding the use of protectionism, regulation of foreign investment and intellectual property rights, among others. These are policies that the rich countries actually used when they were developing countries themselves. All this requires a reform of the WTO, abolition and/or reform of existing bilateral trade and investment agreements between rich and poor countries, and changes in the policy conditions attached to loans from international financial organizations and to foreign aid from the rich countries.
Of course, these things are ‘unfairly favourable’ to the developing countries, as some rich countries would argue. However, developing countries already suffer from so many disadvantages in the international system that they need these breaks to have a hope of catching up.
The eight principles all directly go against the received economic wisdom of the last three decades. This will have made some readers uncomfortable. But unless we now abandon the principles that have failed us and that are continuing to hold us back, we will meet similar disasters down the road. And we will have done nothing to alleviate the conditions of billions suffering poverty and insecurity, especially, but not exclusively, in the developing world. It is time to get uncomfortable.
Acknowledgements
I have benefited from many people in writing this book. Having played such a pivotal role in bringing about my previous book, Bad Samaritans, which focused on the developing world, Ivan Mulcahy, my literary agent, gave me constant encouragement to write another book with a broader appeal. Peter Ginna, my editor at Bloomsbury USA, not only provided valuable editorial feedback but also played a crucial role in setting the tone of the book by coming up with the title, 23 Things They Don’t Tell You about Capitalism, while I was conceptualizing the book. William Goodlad, my editor at Allen Lane, took the lead in the editorial work and did a superb job in getting everything just right.
Many people read chapters of the book and provided helpful comments. Duncan Green read all the chapters and gave me very useful advice, both content-wise and editorially. Geoff Harcourt and Deepak Nayyar read many of the chapters and provided sagacious advice. Dirk Bezemer, Chris Cramer, Shailaja Fennell, Patrick Imam, Deborah Johnston, Amy Klatzkin, Barry Lynn, Kenia Parsons, and Bob Rowthorn read various chapters and gave me valuable comments.
Without the help of my capable research assistants, I could not have got all the detailed information on which the book is built. I thank, in alphabetical order, Bhargav Adhvaryu, Hassan Akram, Antonio Andreoni, Yurendra Basnett, Muhammad Irfan, Veerayooth Kanchoochat, and Francesca Reinhardt, for their assistance.
I also would like to thank Seung-il Jeong and Buhm Lee for providing me with data that are not easily accessible.
Last but not least, I thank my family, without whose support and love the book would not have been finished. Hee-Jeong, my wife, not only gave me strong emotional support while I was writing the book but also read all the chapters and helped me formulate my arguments in a more coherent and user-friendly way. I was extremely pleased to see that, when I floated some of my ideas to Yuna, my daughter, she responded with a surprising intellectual maturity for a 14-year-old. Jin-Gyu, my son, gave me some very interesting ideas as well as a lot of moral support for the book. I dedicate this book to the three of them.
Notes
THING 1
1 On how tariff (hampering free trade in goods) was another important issue in the making of the American Civil War, see my earlier book Kicking Away the Ladder – Development Strategy in Historical Perspective (Anthem Press, London, 2002), pp. 24–8 and references thereof.
THING 2
1 A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Clarendon Press, Oxford, 1976), p. 741.
2 N. Rosenberg and L. Birdzell, How the West Grew Rich (IB Tauris & Co., London, 1986), p. 200.
3 A. Glyn, Capitalism Unleashed – Finance, Globalisation, and Welfare (Oxford University Press, Oxford, 2004), p. 7, fig. 1.3.
4 J. G. Palma, ‘The revenge of the market on the rentiers – Why neo-liberal reports on the end of history turned out to be premature’, Cambridge Journal of Economics, 2009, vol. 33, no. 4, p. 851, fig. 12.
5 See W. Lazonick and M. O’Sullivan, ‘Maximising shareholder value: A new ideology for corporate governance’, Economy and Society, 2000, vol. 29, no. 1, and W. Lazonick, ‘The buyback boondoggle’, Business Week, 24 August 2009.
6 Lazonick, op. cit.
THING 4
1 R. Sarti, ‘Domestic service: Past and present in Southern and Northern Europe’, Gender and History, 2006, vol. 18, no. 2, p. 223, table 1.
2 As cited in J. Greenwood, A. Seshadri and M. Yorukoglu, ‘Engines of liberation’, Review of Economic Studies, 2005, vol. 72, p. 112.
3 C. Goldin, ‘The quiet revolution that transformed women’s employment, education, and family’, American Economic Review, 2006, vol. 96, no. 2, p. 4, fig. 1.
4 I. Rubinow, ‘The problem of domestic service’, Journal of Political Economy, 1906, vol. 14, no. 8, p. 505.
5 The book is H.-J. Chang and I. Grabel, Reclaiming Development – An Alternative Economic Policy Manual (Zed Press, London, 2004).
6 K. Ohmae, The Borderless World: Power and Strategy in the Interlinked Economy (Harper & Row, New York, 1990).
THING 5
1 An accessible summary of the academic literature on the complexity of human motivations can be found in B. Frey, Not Just for the Money – Economic Theory of Personal Motivation (Edward Elgar, Cheltenham, 1997).
2 The example is an elaboration of the one used by K. Basu, ‘On why we do not try to walk off without paying after a taxi-ride’, Economic and Political Weekly, 1983, no. 48.
THING 6
1 S. Fischer, ‘Maintaining price stability’, Finance and Development, December 1996.
2 A study by Robert Barro, a leading free-market economist, concludes that moderate inflation (10–20 per cent) has low negative effects on growth, and that, below 10 per cent, inflation has no effect at all. See R. Barro, ‘Inflation and growth’, Review of Federal Reserve Bank of St Louis, 1996, vol. 78, no. 3. A study by Michael Sarel, an IMF economist, estimates that below 8 per cent inflation has little impact on growth – if anything, he points out, the relationship is positive below that level – that is, inflation helps rather than hinders growth. See M. Sarel, ‘Non-linear effects of inflation on economic growth’, IMF Staff Papers, 1996, vol. 43, March.
3 See: M. Bruno, ‘Does inflation really lower growth?’, Finance and Development, 1995, vol. 32, pp. 35–8; M. Bruno and W. Easterly, ‘Inflation and growth: In search of a stable relationship’, Review of Federal Reserve Bank of St Louis, 1996, vol. 78, no. 3.
4 In the 1960s, Korea’s inflation rate was much higher than that of five Latin American countries (Venezuela, Bolivia, Mexico, Peru and Colombia) and not much lower than that of Argentina. In the 1970s, the Korean inflation rate was higher than that found in Venezuela, Ecuador and Mexico, and not much lower than that of Colombia and Bolivia. The information is from A. Singh, ‘How did East Asia grow so fast? – Slow progress towards an analytical consensus’, 1995, UNCTAD Discussion Paper, no. 97, table 8.
5 There are many different ways to calculate profit rates, but the relevant concept here is returns on assets. According to S. Claessens, S. Djankov and L. Lang, ‘Corporate growth, financing, and risks in the decades before East Asia’s financial crisis’, 1998, Policy Research Working Paper, no. 2017, World Bank, Washington, DC, fig. 1, the returns on assets in forty-six developed and developing countries during 1988–96 ranged between 3.3 per cent (Austria) and 9.8 per cent (Thailand). The ratio ranged between 4 per cent and 7 per cent in forty of the forty-six countries; it was below 4 per cent in three countri
es and above 7 per cent in three countries. Another World Bank study puts the average profit rate for non-financial firms in ‘emerging market’ economies (middle-income countries) during the 1990s (1992–2001) at an even lower level of 3.1 per cent (net income/assets). See S. Mohapatra, D. Ratha and P. Suttle, ‘Corporate financing patterns and performance in emerging markets’, mimeo., March 2003,World Bank, Washington, DC.
6 C. Reinhart and K. Rogoff, This Time is Different (Princeton University Press, Princeton and Oxford, 2008), p. 252, fig. 16.1.
THING 7
1 On Lincoln’s protectionist views, see my earlier book Kicking Away the Ladder (Anthem Press, London, 2002), pp. 27–8 and the references thereof.
2 This story is told in greater detail in my earlier books: Kicking Away the Ladder is a heavily referenced and annotated academic – but by no means difficult-to-read – monograph, focused particularly on trade policy; Bad Samaritans (Random House, London, 2007, and Bloomsbury USA, New York, 2008) covers a broader range of policy areas and is written in a more user-friendly way.
THING 8
1 For further evidence, see my recent book Bad Samaritans (Random House, London, 2007, and Bloomsbury USA, New York, 2008), ch. 4, ‘The Finn and the Elephant’, and R. Kozul-Wright and P. Rayment, The Resistible Rise of Market Fundamentalism (Zed Books, London, 2007), ch. 4.
THING 9
1 K. Coutts, A. Glyn and B. Rowthorn, ‘Structural change under New Labour’, Cambridge Journal of Economics, 2007, vol. 31, no. 5.
2 The term is borrowed from the 2008 report by the British government’s Department for BERR (Business, Enterprise and Regulatory Reform), Globalisation and the Changing UK Economy (2008).
3 B. Alford, ‘De-industrialisation’, ReFRESH, Autumn 1997, p. 6, table 1.
4 B. Rowthorn and K. Coutts, ‘De-industrialisation and the balance of payments in advanced economies’, Cambridge Journal of Economics, 2004, vol. 28, no. 5.
THING 10
1 T. Gylfason, ‘Why Europe works less and grows taller’, Challenge, 2007, January/February.
THING 11
1 P. Collier and J. Gunning, ‘Why has Africa grown slowly?’, Journal of Economic Perspectives, 1999, vol. 13, no. 3, p. 4.
2 Daniel Etounga-Manguelle, a Cameroonian engineer and writer, notes: ‘The African, anchored in his ancestral culture, is so convinced that the past can only repeat itself that he worries only superficially about the future. However, without a dynamic perception of the future, there is no planning, no foresight, no scenario building; in other words, no policy to affect the course of events’ (p. 69). And then he goes on to say that ‘African societies are like a football team in which, as a result of personal rivalries and a lack of team spirit, one player will not pass the ball to another out of fear that the latter might score a goal’ (p. 75). D. Etounga-Manguelle, ‘Does Africa need a cultural adjustment program?’ in L. Harrison and S. Huntington (eds.), Culture Matters – How Values Shape Human Progress (Basic Books, New York, 2000).
3 According to Weber, in 1863, around a quarter of France’s population did not speak French. In the same year, 11 per cent of schoolchildren aged seven to thirteen spoke no French at all, while another 37 per cent spoke or understood it but could not write it. E. Weber, Peasants into Frenchmen – The Modernisation of Rural France, 1870-1914 (Stanford University Press, Stanford, 1976), p. 67.
4 See H-J. Chang, ‘Under-explored treasure troves of development lessons – lessons from the histories of small rich European countries (SRECs)’ in M. Kremer, P. van Lieshoust and R. Went (eds.), Doing Good or Doing Better – Development Policies in a Globalising World (Amsterdam University Press, Amsterdam, 2009), and H-J. Chang, ‘Economic history of the developed world: Lessons for Africa’, a lecture delivered in the Eminent Speakers Programme of the African Development Bank, 26 February 2009 (can be downloaded from: http://www.econ.cam.ac.uk/faculty/chang/pubs/ChangAfDBlecturetext.pdf).
5 See H-J. Chang, ‘How important were the “initial conditions” for economic development – East Asia vs. Sub-Saharan Africa’ (ch. 4) in H-J. Chang, The East Asian Development Experience: The Miracle, the Crisis, and the Future (Zed Press, London, 2006).
6 For comparison of the quality of institutions in today’s rich countries when they were at similar levels of development with those found in today’s developing countries, see H-J. Chang, Kicking Away the Ladder (Anthem Press, London, 2002), ch. 3.
THING 12
1 For a user-friendly explanation and criticism of the theory of comparative advantage, see ‘My six-year-old son should get a job’, ch. 3 of my Bad Samaritans (Random House, London, 2007, and Bloomsbury USA, New York, 2008).
2 Further details can be found from my earlier books, Kicking Away the Ladder (Anthem Press, London, 2002) and Bad Samaritans.
THING 13
1 The sixteen countries where inequality increased are, in descending order of income inequality as of 2000, the US, South Korea, the UK, Israel, Spain, Italy, the Netherlands, Japan, Australia, Canada, Sweden, Norway, Belgium, Finland, Luxemburg and Austria. The four countries where income inequality fell were Germany, Switzerland, France and Denmark.
2 L. Mishel, J. Bernstein and H. Shierholz, The State of Working America, 2008/9 (Economic Policy Institute, Washington, DC, 2009), p. 26, table 3.
3 According to the OECD (Organization for Economic Development and Cooperation), before taxes and transfers, the US, as of mid 2000s, had a Gini coefficient (the measure of income inequality, with 0 as absolute equality and 1 as absolute inequality) of 0.46. The figures were 0.51 for Germany, 0.49 for Belgium, 0.44 for Japan, 0.43 for Sweden and 0.42 for the Netherlands.
THING 14
1 L. Mishel, J. Bernstein and H. Shierholz, The State of Working America, 2008/9 (Economic Policy Institute, Washington, DC, 2009), table 3.2.
2 Ibid., table 3.1.
3 ‘Should Congress put a cap on executive pay?’, New York Times, 3 January 2009.
4 Mishel et al., op. cit., table 3.A2. The thirteen countries are Australia, Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, New Zealand, Spain, Sweden, Switzerland and the UK.
5 Ibid., table 3.A2.
6 L. A. Bebchuk and J. M. Fried, ‘Executive compensation as an agency problem’, Journal of Economic Perspectives, 2003, vol. 17, no. 3, p. 81.
THING 15
1 OECD, ‘Is informal normal? – Towards more and better jobs in developing countries’, 2009.
2 D. Roodman and J. Morduch, ‘The impact of microcredit on the poor in Bangladesh: Revisiting the evidence’, 2009, working paper, no. 174, Center for Global Development, Washington, DC.
3 M. Bateman, Why Doesn’t Microfinance Work? (Zed Books, London, 2010).
THING 16
1 Mansion House speech, 19 June 2009.
2 For a very engaging and user-friendly presentation of the researches on the irrational side of human nature, see P. Ubel, Free Market Madness: Why Human Nature is at Odds with Economics – and Why it Matters (Harvard Business School Press, Boston, 2009).
THING 17
1 J. Samoff, ‘Education for all in Africa: Still a distant dream’ in R. Arnove and C. Torres (eds.), Comparative Education – The Dialectic of the Global and the Local (Rowman and Littlefield Publishers Inc., Lanham, Maryland, 2007), p. 361, table 16.3.
2 L. Pritchett, ‘Where has all the education gone?’, The World Bank Economic Review, 2001, vol. 13, no. 3.
3 A. Wolf, Does Education Matter? (Penguin Books, London, 2002), p. 42.
4 In the eighth grade, the US overtook Lithuania, but was still behind Russia and Hungary; fourth-grader score for Hungary and eighth-grader scores for Latvia and Kazakhstan are not available.
5 The other European countries were, in order of their rankings in the test, Germany, Denmark, Italy, Austria, Sweden, Scotland and Norway. See the website of the National Center for Educational Statistics of the US Department of Education Institute of Education Sciences, http://nces.ed.gov/timss/table07_1.asp.
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p; 6 The other rich countries were, in order of their rankings in the test, Japan, England, the US, Australia, Sweden, Scotland and Italy. See the above website.
7 The most influential works in this school of thought were Harry Braverman’s Labor and Monopoly Capital: The Degradation of Work in the Twentieth Century (Monthly Review Press, New York, 1974) and Stephen Marglin’s ‘What do bosses do?’, published in two parts in The Review of Radical Political Economy in 1974 and 1975.
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