23 Things They Don't Tell You About Capitalism

also expose the limits to the belief that smaller governments are always better for growth.

Free-market economists have also told us that active (or intrusive, as they put it) governments are bad for economic growth. However, contrary to common perception, virtually all of today’s rich countries used government intervention to get rich (if you are still not convinced about this point, see my earlier book, Bad Samaritans). If designed and implemented appropriately, government intervention can increase economic dynamism by augmenting the supply of inputs that markets are bad at supplying (e.g., R&D, worker training), sharing risk for projects with high social returns but low private returns, and, in developing countries, providing the space in which nascent firms in ‘infant’ industries can develop their productive capabilities.

We need to think more creatively how the government becomes an essential element in an economic system where there is more dynamism, greater stability and more acceptable levels of equity. This means building a better welfare state, a better regulatory system (especially for finance) and better industrial policy.

Eighth: the world economic system needs to ‘unfairly’ favour developing countries.

Because of the constraints imposed by their democratic checks, the free-market advocates in most rich countries have actually found it difficult to implement full-blown free-market reform. Even Margaret Thatcher found it impossible to consider dismantling the National Health Service. As a result, it was actually developing countries that have been the main subjects of free-market policy experiments.

Many poorer countries, especially in Africa and Latin America, have been forced to adopt free-market policies in order to borrow money from free-market-loving international financial organizations (such as the IMF and the World Bank) and rich-country governments (that also ultimately control the IMF and the World Bank). The weakness of their democracies meant that free-market policies could be implemented more ruthlessly in developing countries, even when they hurt a lot of people. This is the ultimate irony of all – people needing most help were worst hit. This tendency was reinforced by the strengthening of global rules over the last couple of decades on what governments can do to protect and develop their economies (more necessary in the poor countries) through the establishment and/ or strengthening of organizations such as the WTO, the BIS and various bilateral and regional free-trade and investment agreements. The result has been a much more thorough implementation of free-market policies and much worse performance in terms of growth, stability and inequality than in developed countries.

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.

Copyright

Copyright © 2010 by Ha-Joon Chang

All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission from the publisher except in the case of brief quotations embodied in critical articles or reviews. For information address Bloomsbury Press, 175 Fifth Avenue, New York, NY 10010.

Published by Bloomsbury Press, New York

LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA HAS BEEN APPLIED FOR.

ISBN: 978-1-60819-166-6 (hardcover)

First published in Great Britain in 2010 by Allen Lane, an imprint of Penguin Books First published in the United States by Bloomsbury Press in 2011 This e-book edition published in 2011

E-book ISBN: 978-1-60819-358-5

www.bloomsburypress.com

,

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