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

I don’t call the Developmentalist tradition a school , because the latter term implies that there are identifiable founders and followers, with clear core theories. This tradition is very dispersed, with multiple sources of inspiration and with a complicated intellectual lineage.

This is because policy-makers, who are interested in solving real-world problems, rather than intellectual purity, started the tradition. [82] A few, like Jean-Baptiste Colbert (Louis XIV ’s finance minister between 1665 and 1683), are still remembered for their policies. Most are forgotten altogether. Some, such as Henry VII and Robert Walpole, are still remembered but not for their economic policies. They pulled together elements from different sources in a pragmatic, eclectic manner, even though some of them have made important original contributions of their own.

But the tradition is no less important for that. It is arguably the most important intellectual tradition in economics in terms of its impact on the real world. It is this tradition, rather than the narrow rationalism of Neoclassical economics or the Marxist vision of classless society, that has been behind almost all of the successful economic development experiences in human history, from eighteenth-century Britain, through nineteenth-century America and Germany, down to today’s China. [83] For this history, see my books Kicking Away the Ladder (more academic and detailed) and Bad Samaritans (less detailed and more user-friendly).

Raising productive capabilities to overcome economic backwardness

The Developmentalist tradition is focused on helping economically backward countries develop their economies and catch up with the more advanced ones. For economists belonging to the tradition, economic development is not simply a matter of increasing income, which could happen due to a resource bonanza, such as striking oil or diamonds. It is a matter of acquiring more sophisticated productive capabilities, that is, the abilities to produce by using (and developing new) technologies and organizations.

The tradition argues that some economic activities, such as hi-tech manufacturing industries, are better than others at enabling countries to develop their productive capabilities. However, it argues, these activities do not naturally develop in a backward economy, as they are already conducted by firms in the more advanced economies. In such an economy, unless the government intervenes – with tariffs, subsidies and regulations – to promote such activities, free markets will constantly pull it back to what it is already good at – namely, low-productivity activities, based on natural resources or cheap labour. [84] Typically recommended were: promotion of new industries through tariffs, subsidies and preferential treatment in government procurement (that is, government buying things from the private sector); encouragement of domestic processing of raw materials through export taxes on raw materials or through a ban on their exports; discouragement of the imports of luxury goods through tariffs or prohibitions so that more resources can be channelled into investments; export promotion through marketing support and quality control; support for technological improvements through government-granted monopoly, patents and government-subsidized recruitment of skilled workers from economically more advanced countries; and, last but not least, public investment in infrastructure. The tradition emphasizes that desirable activities and appropriate policies depend on time and context. Yesterday’s hi-tech industry (e.g., textiles in the eighteenth century) may be today’s dead-end industry, while a policy that is good for an advanced economy (e.g., free trade) may be bad for a less developed country.

Early strands in the Developmentalist tradition: Mercantilism, the infant industry argument and the German historical school

Although the policy practice started earlier (for example, under Henry VII, who reigned between 1485 and 1509), theoretical writings in the Developmentalist tradition started in the late sixteenth and the early seventeenth centuries, with Renaissance Italian economists like Giovanni Botero and Antonio Serra, who emphasized the need for promotion of manufacturing activities by the government.

The Developmentalist economists of the seventeenth and eighteenth centuries – known as Mercantilists– are these days typically portrayed as having been solely focused on generating trade surplus, that is, the difference between your exports and imports when the former is larger. But many of them were actually more interested in promoting higher- productivity economic activities through policy interventions. At least the more sophisticated of them valued trade surplus as a symptom of economic success (that is, the development of high-productivity activities), rather than as a goal in itself.

From the late eighteenth century, shedding the Mercantilist garb and its interest in trade surplus, the Develop mentalist tradition became more clearly focused on production. The critical development came from Alexander Hamilton’s invention of the infant industry argument, which we encountered in the last chapter. Hamilton’s theory was further developed by the German economist Friedrich List, who is these days often mistakenly known as the father of the infant industry argument. [85] List started out as a free-trader, promoting the idea of a free-trade agreement between various German states, which was realized in 1834 as Zollverein (literally the customs union). However, during his political exile in the US during the 1820s, he came across Hamilton’s ideas, through the works of Daniel Raymond and Henry Carey, and came to accept that free trade may be good between countries at similar levels of development (e.g., the German states then) but not so between economically more advanced countries, such as Britain, and backward countries, such as Germany and the US then. It may be added that, like most Europeans at the time, List was a racist and explicitly argued that his theory applied only to ‘temperate’ countries. Alongside List, in the mid- nineteenth century, the German Historical school emerged and dominated German economics until the mid-twentieth century. It also heavily influenced American economics. [86] The early leaders of the American Economic Association, John Bates Clark (1847–1938) and Richard Ely (1854–1943) studied under economists of the German Historical school, such as Wilhelm Roscher (1817–94) and Karl Knies (1821–98). The school emphasized the importance of understanding the history of how the material production system has changed, both influencing and influenced by law and other social institutions. [87] This contrasts with the predominantly (although not exclusively) one-way causality supposed by the Marxist school, from material production system – or the base – to institutions – or the superstructure.

The Developmentalist tradition in the modern world: Development Economics

The Developmentalist tradition was advanced in its modern form in the 1950s and the 1960s by economists such as, in alphabetical order, Albert Hirschman (1915–2012), Simon Kuznets (1901–85), Arthur Lewis (1915–91) and Gunnar Myrdal (1899–87) – this time, under the rubric of Development Economics. Writing mostly about the countries on the periphery of capitalism in Asia, Africa and Latin America, they and their followers not only refined the earlier Developmentalist theories but also added quite a lot of new theoretical innovations.

The most important innovation came from Hirschman, who pointed out that some industries have particularly dense linkages(or connections) with other industries; in other words, they buy from – and sell to – a particularly large number of industries. If the government identified and deliberately promoted these industries (the automobile and the steel industries are common examples), the economy would grow more vigorously than when left to the market.