Ha-Joon Chang - Economics - The User's Guide

According to the International Social Survey Programme, run by a consortium of research institutes in the US, the UK, Germany and Australia, workers from rich countries value security more highly than any other attribute of a job (e.g., wage, interestingness, usefulness for society).

The so-called active labour market programmes (ALMP s) in Sweden and Finland have vastly reduced such problems by retraining unemployed workers and helping them establish and follow through a re-employment strategy. See Basu and Stuckler, The Body Economic , Chapter 7.

The Keynesian theory says that at that point the government should tighten its fiscal and monetary policies, lest the economy overheats and generates too much inflation.

In many poor countries, a lot of children below the threshold age work. Their employment is often not recognized in the official employment/unemployment statistics.

In order to deal with the difficulties created by discouraged workers, economists sometimes look at the labour force participation rate, which is the share of the economically active population (the employed and the officially unemployed) in the working-age population. A sudden fall in that rate is likely to indicate that there has been an increase in the number of discouraged workers, who are not counted as unemployed any more.

Many people use the term ‘the state’ as something broader than ‘the government’ and something akin to ‘the country’. This distinction has good philosophical and political justifications. But, for the purpose of this book, the two terms can be used interchangeably.

When a firm has market power, the profit-maximizing level of output is lower than the socially optimal one, which is where the maximum price that a consumer is willing to pay is the same as the minimum price that the producer requires in order not to lose money. When the amount produced is less than the socially optimal quantity, it means not serving some consumers who are perfectly willing to pay more than the minimum price that the producer requires but who are unwilling to bear the price at which the firm can maximize its profit. The unfulfilled desire of those neglected consumers is the allocative deadweight loss, which is the social cost of monopoly and oligopoly.

Costs here include ‘normal return’, namely, the return that the firm’s owners would have got from investing in other non-monopoly industries.

Some economists, including myself, go even further and argue that, in industries that require large capital investments for productivity growth (e.g., steel, automobile), ‘anti-competitive’ arrangements among oligopolistic firms – such as cartels – can be socially useful. In such industries, unfettered price competition reduces profit margins of the firms to the extent that it reduces their ability to invest, harming their long-term growth. When such competition leads to bankruptcy of certain firms, the machines and the workers deployed in them may be lost to the society, as they cannot be easily deployed in other industries. For example, see H.-J. Chang, The Political Economy of Industrial Policy (Basingstoke: Macmillan Press, 1994), Chapter 3, and A. Amsden and A. Singh, ‘The optimal degree of competition and dynamic efficiency in Japan and Korea’, European Economic Review , vol. 38, nos. 3 / 4 (1994).

The holders with a finance background were Donald Regan (January 1981 –February 1985), Nicholas Brady (September 1988 –January 1993), Lloyd Bentsen (January 1993 –December 1994), Robert Rubin (January 1995 –July 1999), Henry Paulson (July 2006 –January 2009), Tim Geithner (January 2009 –January 2013).

For information on corruption and other ills of public life in today’s rich countries in the past, see Chang, Kicking Away the Ladder , Chapter 3, especially pp. 71–81, and Chang, Bad Samaritans , Chapter 8.

This is what I meant when I declared that ‘there is no such thing as a free market’ in the first chapter (Thing 1) of my book, 23 Things They Don’t Tell You about Capitalism .

This refers to the trading of shares of publicly listed corporations by individuals who have exclusive access to internal information about those corporations.

World Bank, World Development Report 1991 (Washington, DC: The World Bank, 1991), p. 139, table 7.4.

Exceptions include Myanmar (10 per cent) at the lower end and Mongolia and Burundi at the higher end (over 40 per cent).

The data are from OECD, Government at a Glance , 2011 (Paris: OECD, 2011).

The full text of Emperor Qianlong’s letter to George III can be found at:

http://www.history.ucsb.edu/faculty/marcuse/classes/2c/texts/1792QianlongLetterGeorgeIII.htm.

There are other assumptions underlying HOS whose relaxation also undermines the ‘free trade is the best’ conclusion, even though I don’t discuss them in this chapter. One of these is that of perfect competition (that is, the absence of market power), whose relaxation has generated the so-called ‘New Trade Theory’, represented by Paul Krugman. Another important assumption is that there are no externalities (see Chapter 4 for a definition of externalities).

The Ricardian version assumes that different countries have different productive capabilities but also assumes that these differences cannot be deliberately changed.

For a more detailed discussion, see H.-J. Chang and J. Lin, ‘Should industrial policy in developing countries conform to comparative advantage or defy it?: A debate between Justin Lin and Ha-Joon Chang’, Development Policy Review , vol. 27, no.5 (2009).

Trade data in the next few paragraphs are from the World Bank data set, World Development Indicators 2013.

The data are from the WTO.

United Nations, International Trade Statistics , 1900–1960 (New York: United Nations, 1962).

The number is based on export figures. For the period before the 1980s, there are quite significant gaps in export and import data, so the shares were 50–58 per cent in the 1960s and 54–61 per cent for the 1970s, if we use import figures.

As a proportion of overall trade (primary commodities, manufacturing, and services), manufacturing’s share rose from 47 per cent in 1980–82 to 63 per cent in 1998–2000 and stood at 55 per cent in 2009–11.

The average for 1984–6 was 8.8 per cent. The average for 2009–11 was 27.8 per cent.

A more detailed definition is provided by the UNCTAD (United Nations Conference on Trade and Development) at: http://unctad.org/en/Pages/DIAE/Foreign-Direct-Investment(FDI).aspx.

The figures were 63 per cent for Liberia, 50 per cent for Haiti and 42 per cent for Kosovo.

All the FDI flow figures cited below are inflow figures. In theory, inflows and outflows of FDI on the world scale should be the same, but the actual data always show discrepancies.