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

Soon after the Second World War, many European countries took private enterprises into public ownership or set up new public enterprises, or state-owned enterprises(SOEs), in key industries, such as steel, railways, banking and energy (coal, nuclear and electricity). These were reflective of the European socialist movements’ belief in public control over the means of production as a key element of social democracy, as embodied in the famous Clause IV of the British Labour Party (abolished in 1995 under Tony Blair’s ‘New Labour’ make-over). In countries such as France, Finland, Norway and Austria, SOEs are deemed to have played a key role in generating high growth during the Golden Age by aggressively moving into high-technology industries that the private sector firms found too risky.

Welfare measures, first introduced in the late nineteenth century, were vastly strengthened, with the provision of some basic services nationalized in some countries (e.g., Britain’s National Health Service). These were funded by a large increase in taxes (as a proportion of national income). Better welfare measures increased social mobility, increasing the legitimacy of the capitalist system. The resulting social peace encouraged more longterm-oriented investments and thus growth.

Learning the lessons of the Great Depression, governments in all ACCs started to deploy deliberately counter- cyclical macroeconomic policies, also known as Keynesian policies (see Chapter 4), expanding government spending and money supply from the central bank during economic downturns and reducing them during upturns.

In recognition of the potential dangers of unregulated financial markets, as manifested in the Great Depression, financial regulations were strengthened. Few countries went as far as the US in separating investment banking from commercial banking, but they all had restrictions on what banks and financial investors can do. This was an era when bankers were considered to be respectable but boring people, unlike their swashbuckling successors today. [52] Paul Krugman wrote in 2009: ‘Thirty-plus years ago, when I was a graduate student in economics, only the least ambitious of my classmates sought careers in the financial world. Even then, investment banks paid more than teaching or public service – but not that much more, and anyway, everyone knew that banking was, well, boring’ (‘Making banking boring’, The New York Times , 9 April 2009).

Many governments practised selective industrial policythat deliberately promoted targeted ‘strategic’ industries through a range of measures, such as trade protection and subsidies. The US government officially had no industrial policy but greatly influenced the country’s industrial development by providing massive research funding to advanced industries such as computers (funded by the Pentagon), semi-conductors (US Navy), aircraft (US Air Forces), the internet (the DARPA, Defense Advanced Research Projects Agency), and pharmaceuticals and life sciences (National Institutes of Health). [53] Further details can be found in F. Block, ‘Swimming against the current: the rise of a hidden developmental state in the United States’, Politics and Society , vol. 36, no. 2 (2008), and in M. Mazzucato, The Entrepreneurial State: Debunking Private vs. Public Sector Myths (London: Anthem Press, 2013). Governments in countries such as France, Japan and South Korea did not stop at promoting particular industries and explicitly coordinated policies across industrial sectors through their Five Year Plans – an exercise known as indicative planning, to distinguish it from the ‘directive’ Soviet central planning.

The Golden Age saw widespread decolonization. Starting with Korea in 1945 (which was then divided into North and South in 1948) and India (from which Pakistan separated) in 1947, most colonies gained independence. Independence in many nations involved violent struggles against the colonizers. Independence came later to Sub-Saharan Africa, with Kenya becoming the first independent country in 1957. Around half the Sub-Saharan African countries became independent in the first half of the 1960s. Some nations had to wait much longer (Angola and Mozambique in 1975 from Portugal; Namibia in 1990 from South Africa), and some are still waiting, but the vast majority of former colonial societies – now called developing countries – gained independence by the end of the Golden Age.

Upon independence, most post-colonial nations rejected the free-market and free-trade policies that had been imposed on them under colonialism. Some of them became outright socialist (China, North Korea, North Vietnam and Cuba), but most of them pursued state-led industrialization strategies while basically remaining capitalist. The strategy is known as the import substitution industrialization(ISI) strategy – so called because you are substituting imported manufactured goods with your own. This was done by protecting domestic producers from superior foreign competition by restricting imports (infant industry protection) or heavily regulating the activities of foreign companies operating within national borders. Governments often subsidized private-sector producers and set up SOEs in industries in which private-sector investors were unwilling to invest due to high risk.

With independence dates stretching from 1945 to 1973 and beyond, it is impossible to talk about the ‘economic performance of developing countries during the Golden Age’. The usual compromise timeframe for judging developing country economic performance is 1960–80. According to the World Bank data, during this period, per capita income in the developing countries grew at 3 per cent per year, which meant that they kept pace with the more advanced economies, in which growth was 3.2 per cent. The ‘miracle’ economies of South Korea, Taiwan, Singapore and Hong Kong grew at 7–8 per cent per year in per capita terms during this period, achieving some of the fastest growth rates in human history (together with Japan before them and China after them).

One thing to note, however, is that even the more slowly growing developing regions saw considerable progress during this period. During 1960–80, with per capita income growth of 1.6 per cent per year, Sub-Saharan Africa was the slowest-growing region in the world – Latin America grew at double that rate (3.1 per cent), and East Asia at more than triple that rate (5.3 per cent). However, this is still not a growth rate to be sniffed at. Recall that during the Industrial Revolution, the growth rate of per capita income in Western Europe was only 1 per cent.

During the Golden Age of capitalism, government intervention increased enormously in almost all areas in all countries, with the exception of international trade in the rich countries. Despite this, economic performance both in the rich and in the developing countries was much better than before. It has not been bettered since the 1980s, when state intervention was considerably reduced, as I shall show shortly. The Golden Age shows that capitalism’s potential can be maximized when it is properly regulated and stimulated by appropriate government actions.

The Golden Age started to unravel with the suspension of US dollar–gold convertibility in 1971. In the Bretton Woods system, the old Gold Standard was abandoned on the recognition that it made macroeconomic management too rigid, as seen during the Great Depression. But the system was still ultimately anchored in gold, because the US dollar, which had fixed exchange rates with all the other major currencies, was freely convertible to gold (at $35 per ounce). This, of course, was based on the assumption that the dollar was ‘as good as gold’ – not an unreasonable assumption when the US was producing about half of the world’s output and there was an acute dollar shortage all around the world, as everyone wanted to buy American things.