A number of factors contributed to the pursuit of protectionism and interventionism in developing countries. “Wrong” theories, such as the infant industry argument, the “big push” theory, and Latin American structuralism, not to speak of various Marxist theories, prevailed. Protectionist policies were also motivated by political requirements, such as the need for nation building and the need to “buy off” certain interest groups. There were also legacies of wartime control that persisted into peacetime.
Britain entered its post-feudal age (13th and 14th centuries) as a relatively backward economy. Before 1600, it was an importer of technology from the Continent.
Others elements were deliberately created by the state. In order to open new markets, Elizabeth I dispatched trade envoys to the Pope and the Emperors of Russia, Mogul, and Persia. Britain’s massive investment in building its naval supremacy allowed it to break into new markets and often to colonize them and keep them as captive markets.
It does seem clear that, without what can only be described as the 16th-century equivalent of modern infant industry promotion strategy, it would have been very difficult, if not necessarily impossible, for Britain to achieve this initial success in industrialization: without this key industry, which accounted for at least half of Britain’s export revenue during the 18th century, its Industrial Revolution might have been very difficult, to say the least.
Introducing the new law, Walpole stated, through the king’s address to Parliament: “it is evident that nothing so much contributes to promote the public well-being as the exportation of manufactured goods and the importation of foreign raw material.”
Regulation was introduced to control the quality of manufactured products, especially textile products, so that unscrupulous manufacturers could not damage the reputation of British products in foreign markets.
Moreover, the free-trade regime did not last long. By the 1880s, some hard-pressed British manufacturers were asking for protection. By the early 20th century, reintroduction of protectionism was one of the hottest issues in British politics, as the country was rapidly losing its manufacturing advantage to the USA and Germany. The era of free trade ended when Britain finally acknowledged that it had lost its manufacturing eminence and re-introduced tariffs on a large scale in 1932.
Britain was the first country successfully to launch an infant industry promotion strategy. However, its most ardent user was probably the USA — the eminent economic historian Paul Bairoch once called it “the mother country and bastion of modern protectionism.”
To begin with, Britain did not want to industrialize the colonies and duly implemented policies to that effect. Around the time of independence, Southern agrarian interests opposed any protection, while Northern manufacturing interests wanted it.
It is important to recognize that the role of the US federal government in industrial development has been substantial even in the post-war era, thanks to the large amount of defense-related procurements and R&D spending, which have had enormous spillover effects. The share of the US federal government in total R&D spending, which was only 16% in 1930, remained between one-half and two-thirds during the postwar years.
During the 19th century, the USA was not only the strongest bastion of protectionist policies, but was also their intellectual home. At that time it was widely believed among US intellectuals that “the new country required a new economics, one grounded in different political institutions and economic conditions than those prevailing in the Old World.” Some of them went so far as to argue that even internationally competitive US industries should have tariff protection because of the possibility of predatory dumping by large European enterprises, who, after decimating the American firms, would revert to monopolistic pricing.
From the early 19th century onward, the Prussian state also pioneered a less direct and more sophisticated form of interventionism than that used in Silesia. One important example is the government financing of road building in the Ruhr. Another important example is educational reform, which involved not only building new schools and universities but also the reorientation of their teaching from theology to technology — this at a time when science and technology was not being taught in Oxford or Cambridge.
Like other European states at the time, the French state in the period leading up to the Revolution encouraged industrial espionage by offering bounties to those who procured target technologies, even appointing an official whose main task was to organize industrial espionage. It is partly through these government efforts that France closed the technology gap with Britain, becoming successfully industrialized by the time of the Revolution.
It is often argued that this long-term technical cooperation with SOEs in the infrastructural industries was instrumental in making companies like Ericsson (telephones) and ASEA, which manufactures railway equipment and electrical engineering, into world-class firms.
They share the belief that a shift to high value-added activities is crucial for a nation’s prosperity and that, if left to market forces, this shift may not happen at a rate which is socially desirable.
By the early 19th century, Belgium was one of the most industrialized parts of Continental Europe, although it was significantly disadvantaged by its relatively small size and political weakness vis-a-vis France and Germany. At the time it was the world’s technological leader in certain industries, particularly wool manufacturing.
In 1869, the country abolished patent law on the ground that it created an artificial monopoly. This move was partly inspired by the anti-patent movement that was sweeping Europe at the time, which in fact had a strong association with the free trade movement. Despite international pressures, the country refused to reintroduce the patent law until 1912.
Switzerland’s laissez-faire policy did not necessarily mean that its government had no sense of strategy in its policy-making. Its refusal to introduce a patent law until 1907, despite strong international pressure, is such an example. This anti-patent policy is argued to have contributed to the development of a number of industries. Especially affected by this were the chemical and pharmaceutical industries, which actively stole technologies from Germany, and the food industry, in which the absence of patents actually encouraged direct foreign investment.
Japanese Ministry of Education was established in 1871; by the turn of the century it claimed a 100% literary ratio.
The criminal law was influenced by the French law, while the commercial and civil laws were largely German, with some British elements. The army was built in the German mould (with some French influence), and the navy in the British. The central bank was modeled on the Belgian one, and the overall banking system on the American. The universities were American, and the schools initially American but quickly changed to the French and German models, and so on.
Britain instituted a strong set of policies intended to prevent the development of manufacturing in the colonies, especially America.
Britain first used unequal treaties in Latin America, starting with Brazil in 1810, as the countries in the continent acquired political independence. Starting with the Nanking Treaty (1842), China was forced to sign a series of unequal treaties. From 1824 onwards, Siam signed various unequal treaties. Persia signed unequal treaties in 1836 and 1857, as did the Ottoman Empire in 1838 and 1861.
Despite all these efforts, legitimate and illegitimate, technological catching-up was not easy. As the recent literature on technology transfer shows, technology contains a lot of tacit knowledge that cannot easily be transferred. This problem could not even be solved by the importation of skilled workers, even in the days when they embodied most of the key technologies. These people faced language and cultural barriers, and more importantly did not have access to the same technological infrastructure as they had at home.
Government financial incentives for forms to use more advanced technology, especially through rebates and exemptions of duties on imports of industrial equipment, were also widely used. It is interesting to note that tariff rebate or exemption on certain imported capital goods was until recently one of the key tools of the East Asian industrial policy.
What is notable is that, despite the emergence of an international IPR regime in the last years of the 19th century, even the most advanced countries were still routinely violating the IPR of other countries’ citizens well into the 20th century. As mentioned above, Switzerland and the Netherlands did not have a patent law until 1907 and 1912 respectively. Even the USA, already a strong advocate of patentee rights, did not acknowledge foreigners’ copyrights until 1891.
As the early Prussian experience from the 18th century onwards best illustrates, infant industries could be — and were — promoted through means other than tariffs, including state investment, public-private cooperation and various subsidies.
One important fact that has emerged from my discussion in this chapter is that the NDCs shifted their policy stances according to their relative position in the international competitive struggle. Part of this is deliberate “ladder-kicking,” but it also seems to be due to human tendency to reinterpret the past from the point of view of the present.
When they were in catching-up positions, the NDCS protected infant industries, poached skilled workers and smuggled contraband machines from more developed countries, engaged in industrial espionage, and willfully violated patents and trademarks. However, once they joined the league of the most developed nations, they began to advocate free trade and prevent the outflow of skilled workers and technologies; they also became strong protectors of patents and trademarks. In this way, the poachers appear to have turned gamekeepers with disturbing regularity.
There were many other tools, such as export subsidies, tariff rebates on inputs used for exports, conferring of monopoly rights, cartel arrangements, directed credits, investment planning, manpower planning, R&D supports and the promotion of institutions that allow public-private cooperation. Tariffs were not, and are not, the only policy tool available to a state intent on developing new industries or upgrading old ones. In some countries, such as Germany up to the late 19th century or Japan before the restoration of its tariff autonomy in 1911, tariff protection was not even the most important tool for infant industry promotion.
These critics have an important point to make, but in the absence of some idea of which institutions are necessary and/or viable under what conditions, they are in danger of simply justifying whatever institutional status quo exists in developing countries.
Today, the dominant view is that democracy helps economic development and therefore has to be promoted as a precondition for development. However, still others point out that democracy is more of an outcome of, rather than a precondition for, development, and is therefore not really a variable we can manipulate, whether or not we think it is good for development.
In Prussia, employers could exert pressure on their workers to vote in a particular way until the electoral reform of 1919 because balloting was not held in secret. France only introduced the voting envelope and voting booth in 1913 — several decades after the introduction of universal male suffrage.
Second, vote buying and electoral fraud were also very common. For example, bribery, threats and promises of employment to voters were widespread in British elections until the late 19th century.
In this light, the road to democracy in the NDCs was a rocky one. It was only though several decades of political campaigning (e.g., for female or black suffrage) and electoral reforms that these countries acquired even the basic trappings of democracy — universal suffrage and secret ballots — and even then its practice was swamped with electoral fraud, vote-buying and violence.
It could be argued that a judiciary with a very high degree of political independence (for example, the German or Japanese judiciary) is not necessarily desirable, as it lacks democratic accountability. This is why some countries elect some of their judicial officials — the best-known examples being the USA today, and the UK in the 19th century. In the UK, the boundary between the judiciary and the legislature is also blurred, since its highest judges sit in the House of Lords; however, few people would argue that this is a major problem.
Given this, we need to understand the quality of the judiciary not simply in terms of its political independence, but in a number of dimensions — the professionalism of the judicial officials, the quality of their judgments (not simply from a narrow “rule of law” point of view, but also from a broader societal point of view) and the cost of administering the system.
Like their counterparts in modern-day developing countries, the judiciary in many NDCs suffered from excessive political influence and corruption in appointments (or, where applicable, elections) up to, and often beyond, the late 19th century. It was also frequently filled exclusively with men from a narrow, privileged social background with little, if any, training in law, with the result that justice was often dispensed in biased and unprofessional ways.
In the “good governance” discourse, the “quality” of property rights regimes is regarded as crucial, as it is believed to be a key determinant of investment incentives and thus of wealth creation. However, measuring the “quality” of a property rights regime is not easy, because it has numerous components — contract law, company law, bankruptcy law, inheritance law, tax law and laws regulating land use (e.g., urban zoning laws, environmental standards, and fire safety regulations), to name just a few.
These days, we tend to take the principle of limited liability for granted. However, for a few centuries after its invention in the 16th century for highly risky large-scale commercial projects, it tended to be regarded with great suspicion.
While the debate is still unresolved as to what makes the best bankruptcy law — the USA’s debtor-friendly law, the UK’s creditor-friendly one, or the employee-protecting French one — there is little disagreement that an effective bankruptcy law is desirable.
In pre-industrial Europe, bankruptcy law was mainly regarded as a means of establishing the procedures for creditors both to seize the assets of and to punish dishonest and profligate bankrupt businessmen. In the UK, the first bankruptcy law, applicable to traders with a certain amount of debt, was introduced in 1542, although it only became consolidated with the 1571 legislation. However, the law was very harsh on the bankrupt businessmen, as it deemed that all their future property was liable for former debts.
With industrial development came an increasing acceptance that business can fail due to circumstances beyond individual control, not just as a result of dishonest or profligacy. As a result, bankruptcy law also began to be seen as a way of providing a clean slate for bankrupt. This transformation of bankruptcy law was, altogether with generalized limited liability, one of the key elements in the development of mechanisms for “socializing risk” that allowed the greater risk-taking necessary for modern large-scale industries.
During the Depression of the 1930s, the state endorsed rationalization and cartelization. It was only with the 1948 Monopolies and Restrictive Practices Act that serious antimonopoly/antitrust legislation was attempted, but this remained largely ineffective.
In the NDCs, banks only became professional lending institutions after the early 20th century. Before then, personal connections strongly influenced bank lending decisions. For example, throughout the 19th century, US banks lent the bulk of their money to their directors, their relatives, and those they knew. Scottish banks in the 18th century and English banks in the 19th century were basically self-help associations for merchants wanting credit rather than banks in the modern sense.
However, many people at the time believed that creating a central bank would encourage excessive risk-taking by bailing out imprudent borrowers in times of financial turmoil (or what we these days call “moral hazard). This sentiment is best summed up in Herbert Spencer’s observation that “the ultimate result of shielding man from the effects of folly is to people the world with fools.” As a result, the development of central banking was a very slow and halting process in the NDCs.
In the current phase of financial globalization led by the USA, the stock market has become the symbol of capitalism. When Communism was overthrown, many transition economies rushed to establish stock exchanges and sent promising young people abroad to train as stockbrokers, even before they had founded other more basic institutions of capitalism. Likewise, many developing country governments have tried very hard to establish and promote their stock markets, and to open them up to foreign investors, in the belief that this would allow them to tap into hitherto unavailable pool of financial resources.
The ability to tax requires, at the deepest level, the ability to command political legitimacy, both for the government itself and for the particular taxes concerned. For example, the Community Charge (“Poll Tax”) that Margaret Thatcher tried to introduce in the UK failed because most British taxpayers thought it was an “unfair” (and thus illegitimate) tax, rather than because they thought they were being taxed at too high a rate, or because they thought her government was illegitimate.
The absence of income tax (some countries had had property tax and/or wealth tax from relatively early on) in part reflected the political under-representation of the poorer classes, but also the limited administrative capability of the bureaucracy. This restricted bureaucratic capacity was indeed one reason why tariffs (the easiest taxes to collect), were so important as a source of revenue in the NDCs in earlier times, and also for many of today’s poorest developing countries.
Income tax was initially only used as an emergency tax intended for war financing. Britain introduced graduated income tax in 1799 to finance the war with France, but scrapped it with the end of the war.
Income taxes requires a constant interference with, and inquiry into the affairs of individuals, so that, independent of their inequality, they keep up with a perpetual feeling of irritation.
Social welfare institutions are, however, much more than “safety nets”; if carefully designed and implemented they can enhance efficiency and productivity growth. Cost-effective public provision of health and education can bring about improvements in labor force quality that can, in turn, raise efficiency and accelerate productivity growth. Social welfare institutions reduce social tensions and enhance the legitimacy of the political system, thus providing a more stable environment for long-term investments.
All these potential benefits of social welfare institutions have to be set against their potential cost. First, there are the potentially corrosive effects of social welfare institutions on the work ethic and the sense of self-worth felt by the recipients of benefits. Second, apparently technical issues can significantly determine the effectiveness and legitimacy of these institutions. These include assessing whether benefit and contribution levels are adequately set, whether the administration of the system is seen as fair and efficient, and whether there is an effective mechanism for checking frauds in the system. Third, trying to raise more taxes in order to finance a social welfare program in a context where its political legitimacy is not firmly established may lead to “investment strikes” by the rich — or even support for a violent reversal, as in the case of Chile under Allende.
The poor relief laws of the time stigmatized the recipients of state help, with many countries depriving of voting rights.
Some commentators point out that it is unreasonable to expect a swift eradication of child labor in today’s developing countries, when the NDCs took centuries to achieve it.
In the 1820s, British child ren were working between 12.5 to 16 hours per day.
Not until the mid-1870s did even cosmetic legislation on child labor exist in the majority of the 15 countries listed.
In the US, until as late as the 1890s, only a small number of enlightened employers were willing to go below the customary 10-hour working day. Many recent immigrant workers worked for up to 16 hours a day throughout the 19th century.
In 1820, none of the NDCs even had universal male suffrage. When, if at all, the vote was extended, it was only to men with substantial property — and often to only those over 30. In all these countries, nepotism, spoils, sinecures and sales of office were common in bureaucratic appointments. Public office was often formally treated as private property, and in most countries salaried professional bureaucracy in the modern sense did not exist (Prussia and some other German states being notable exceptions).
Bankruptcy laws, if they existed at all, were highly deficient, covering only a limited class of business; moreover, they were restricted in their ability to “socialize risk” by “wiping the slate clean” for the bankrupts. Competition law was all but non-existent.
Banks were still for the most part a novelty, excepts in parts of Italy (Venice and Genoa, among others), the UK and to a lesser extent the US; however, none of the countries had a proper central bank with monopoly over note issues and a formal lender-of-last-resort function. Securities market regulation existed in few countries, but was highly inadequate and rarely enforced. No countries had income tax except as an “emergency” measure during wars.
In addition, none of the NDCs had social welfare institutions or labor regulations on working hours, child labor, or health and safety at work.
Even in the UK and the US, corporate governance institutions fell miserably short of modern standards. The UK had introduced compulsory auditing for limited liability companies just over a decade earlier (1900), but due to a loophole in legislation, the balance sheets companies provided did not have to be up-to-date. In both countries, full disclosure to investors on public stock offering was still not compulsory.
In many cases institutions were not accepted, even when they had become “affordable,” because of the resistance from those who would (at least in the short run) lose out from the introduction of such institutions. The resistance to democracy, labor regulation, or income tax by the propertied classes are probably the best examples in this regard.
Institutions were sometimes not adopted because the economic logic behind them had not been properly understood by their contemporaries. Resistance to limited liability or central banking, even by those who would have benefited from such institutions, are good examples of this.
Is it fair to say that the WTO agreement that put restrictions on the ability of the developing countries to pursue activist ITT policies is only a modern, multilateral version of the “unequal treaties” that Britain and other NDCs used to impose on semi-independent countries?
The plain fact is that the Neo-Liberal “policy reforms” have not been able to deliver their central promise — namely, economic growth. When they were implemented, we were told that, while these “reforms” might increase inequality in the short term and possibly in the long run as well, they would generate faster growth and eventually lift everyone up more effectively than the interventionist polices of the early postwar years had done. The records of the last 2 decades show that the only negative part of this predictions has been met.
The records in the former Communist economies — except China and Vietnam, which did not follow Neo-Liberal recommendations — are even more dismal.
So we have an apparent “paradox” here — at last if you are a Neo-Liberal economist. All countries, but especially developing countries, grew much faster when they used “bad” policies during the 1960-80 period than when they used “good” ones during the following 2 decades.
It may be argued that it is irrelevant whether or not the developing countries like these “new rules,” or even whether the IDPE is willing to change them, because in this globalized age it is the international investors who are calling the shots. Countries that do not adopt policies and institutions that international investors want, it is argued, will be shunned by them and suffer as a result.
However, it is not clear whether international investors do necessarily care so much about the policies and institutions promoted by the IDPE. For example, China has been able to attract a huge amount of foreign investment.
Examples include democracies undermined by military coups, electoral frauds and vote buying, or income taxes routinely and openly evaded by the rich. These will also be problems with institutional changes that are imposed from outside without “local ownership,” as the current jargon has it. If that is the case, clever international investors will figure out that possessing certain institutions on paper is not the same as really having them, which means that the formal introduction of “global standard” institutions will in fact make little difference to the country’s attractiveness to foreign investors.
However, this makes it no less harmful for developing countries. Indeed, it may be even more dangerous than “ladder-kicking” based on naked national interest, as self-righteousness can be a lot more stubborn than self-interest.