Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism

poor and socialism for the rich’.[28] Macroeconomic policy on the global scale is a bit like that. It is Keynesianism for the rich countries and monetarism for the poor.

When the rich countries get into recession, they usually relax monetary policy and increase budget deficits. When the same thing happens in developing countries, the Bad Samaritans, through the IMF, force them to raise interest rates to absurd levels and balance their budgets, or even generate budget surplus – even if these actions treble unemployment and spark riots in the streets. As noted above, during Korea’s financial crisis in 1997, the IMF allowed the country to run budget deficits equivalent to only 0.8% of GDP (and, at that, after trying the opposite for several months, with disastrous consequences); when Sweden had a similar problem (due to the ill-managed opening-up of its capital market, as was the case with Korea in 1997) in the early 1990s, its budget deficits were, in proportional terms, ten times that (8% of its GDP).

Ironically, when the citizens of developing countries voluntarily tighten their belts, they are derided for not understanding basic Keynesian economics. For example, when some Korean housewives campaigned for voluntary austerity measures, including serving smaller meals at home in the wake of the 1997 financial crisis, the Financial Times correspondent in Korea sneered at their stupidity, saying that such actions ‘could deepen the country’s plunge into recession since it would further reduce the demand needed to bolster growth’.[29] But what is the difference between what these Korean housewives were doing and the spending cuts imposed by the IMF, which the FT correspondent thought were eminently sensible?

The Bad Samaritans have imposed macroeconomic policies on developing countries that seriously hamper their ability to invest, grow and create jobs in the long run. The categorical – and simplistic – denunciation of ‘living beyond one’s means’ has made it impossible for them to ‘borrow to invest’ in order to accelerate economic growth. If we categorically denounce people for living beyond their means, we should, amongst other things, condemn young people for borrowing to invest in their career development or in their children’s education. That cannot be right. Living beyond one’s means may or may not be right; it all depends on the stage of development that the country is in and the use to which the borrowed money is put.

Mr Cavallo, the Argentine finance minister, may have been right in saying that developing countries are like ‘rebel teenagers’ who need to ‘grow up’. But acting like a grown-up is not really growing up. The teenager needs to get an education and find a proper job; it is not enough just to pretend that he is grown up and quit his school so that he can increase his savings. Similarly, in order really to ‘grow up’, it is not enough for developing countries to use policies that suit ‘grown-up’ countries.What they need to do is to invest in their future. In order to do that, they should be allowed to pursue macroeconomic policies that are more pro-investment and pro-growth than the ones used by the rich countries, and that are a lot more aggressive than those they are allowed to pursue today by the Bad Samaritans.

CHAPTER 8 Zaire vs Indonesia

Should we turn our backs on corrupt and undemocratic countries?

Zaire: In 1961, Zaire (now the Democratic Republic of the Congo) was a desperately poor country with a per capita annual income of $67. Mobutu Sese Seko came to power in a military coup in 1965 and ruled until 1997. He is estimated to have stolen $5 billion during his 32-year rule, or about 4.5 times the country’s national income in 1961 ($1.1 billion).

Indonesia: In that same year, with a per capita annual income of only $49, Indonesia was even poorer than Zaire. Mohamed Suharto came to power in a military coup in 1966 and ruled until 1998. He is estimated to have stolen at least $15 billion during his 32-year rule. Some suggest the figure may even have been as high as $35 billion.His children became some of the country’s richest business people. If we take the mid-point of these two estimates ($25 billion), Suharto has stolen the equivalent of 5.2 times his country’s national income in 1961 ($4.8 billion).

Zaire’s income per capita in purchasing power terms in 1997, when Mobutu was deposed, was one third of its level in 1965, when he came to power. In 1997, the country stood 141st among the 174 countries for which the UN calculated a ‘human development index’ (HDI). The HDI takes into account not only income but also ‘quality of life’ measured by life expectancy and literacy.

Considering the corruption statistics, Indonesia should have performed even worse than Zaire. Yet where Zaire’s living standards fell by three times during Mobutu’s rule, Indonesia’s rose by more than three times during Suharto’s rule. Its HDI ranking in 1997 was 105th – not the score of a ‘miracle’ economy, but creditable nonetheless, especially considering where it had started.

The Zaire-Indonesia contrast shows the limitations of the increasingly popular view propagated by the Bad Samaritans that corruption is one of the biggest, if not necessarily the biggest, obstacle to economic development. The argument goes that there is no point in helping poor countries with corrupt leaders, because they will ‘do a Mobutu’ and waste the money. This view is reflected in the World Bank’s recent anti-corruption drive, under the leadership of former US deputy defence secretary Paul Wolfowitz, who declared: ‘The fight against corruption is a part of the fight against poverty, not just because corruption is wrong and bad but because it really retards economic development’.[1] After Wolfowitz assumed leadership in January 2005, the World Bank suspended loan disbursements to several developing countries on grounds of corruption.[2] Wolfowitz resigned from the Bank in 2007, but its campaign against corruption continues.

Corruption is a big problem in many developing countries. But the Bad Samaritans are using it as a convenient justification for the reduction in their aid commitments, despite the fact that cutting aid will hurt the poor more than it will a country’s dishonest leaders, especially in the poorst countries (which tend to be more corrupt, for reasons I shall explain).[3] Moreover, they are increasingly using corruption as an ‘explanation’ for the failures of the neo-liberal policies that they have promoted over the past two and a half decades. Those policies have failed because they were wrong, not because they have been overwhelmed by local anti-developmental factors, like corruption or ‘wrong’ culture (as I will discuss in the next chapter).

Does corruption hurt economic development?

Corruption is a violation of the trust vested by its ‘stakeholders’ in the holders of offices in any organization, be it a government, a corporation, a trade union or even an NGO (non-governmental organization). True, there can be instances of ‘noble cause corruption’; one such example being Oscar Schindler’s bribing of Nazi officials that saved the lives of hundreds of Jews, as immortalized in the Steven Spielberg movie, Schindler’s List.[4] But they are the exceptions, and corruption is, in general, morally objectionable.

Life would be simpler if morally objectionable things like corruption also had unambiguously negative economic consequences. But the reality is a lot messier. Looking at just the last half a century, there are certainly countries, like Zaire under Mobutu or Haiti under Duvalier, whose economy was ruined by rampant corruption. At the other extreme, we have countries like Finland, Sweden and Singapore, which are known for their cleanliness and have also done very well economically. Then we have countries like Indonesia that were very corrupt but performed well economically. Some other countries – Italy, Japan, Korea, Taiwan and China come to mind – have done even better than Indonesia during this period, despite ingrained corruption on a widespread and often massive scale (though not as serious as in Indonesia).

And corruption is not just a 20th-century phenomenon. Most of today’s rich countries successfully industrialised despite the fact that their public life was spectacularly corrupt.* In Britain and France, the open sale of public offices (not to speak of honours) was a common practice at least until the 18th century.[5] In Britain, until the early 19th century, it was considered perfectly normal for ministers to ‘borrow’ their departmental funds for personal profit.[6] Until 1870, appointments of high-ranking civil servants in Britain