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

was one of the ‘pirate capitals’ of the world, churning out fake Nike shoes and Louis Vuitton bags in huge quantities. Those who had more delicate consciences would settle for near-counterfeits. There were shoes that looked like Nike but were called Nice, or shoes that had the Nike swoosh but with an extra prong. Counterfeit goods were rarely sold as the genuine article. Those who bought them were perfectly aware that they were buying fakes; the point was to make a fashion statement, rather than to mislead. Copyrighted items were treated in the same way. Today, Korea exports a large and increasing quantity of copyrighted materials (movies, TV soaps, popular songs), but at the time imported music (LP records) or films (videos) were so expensive that few people could afford the real thing.We grew up listening to pirate rock’n’ roll records, which we called ‘tempura shop records’, because their sound quality was so bad it sounded as if someone was deep-frying in the background. As for foreign books, they were still beyond the means of most students. Coming from a well-off family that was willing to invest in education, I did have some imported books. But most of my books in English were pirated. I could never have entered and survived Cambridge without those illegal books.

By the time I was finishing my graduate studies at Cambridge in the late 1980s, Korea had become a solid upper-middle-income country. The surest proof of this was that European countries stopped demanding that Koreans get an entry visa. Most of us by then had no reason to want to emigrate illegally anyway. In 1996, the country even joined the OECD (Organisation for Economic Co-operation and Development) – the club of the rich countries – and declared itself to have ‘arrived’, although that euphoria was badly deflated by the financial crisis that engulfed Korea in 1997. Since that financial crisis, the country has not been doing as well by its own high standards, mainly because it has over-enthusiastically embraced the ‘free market rules’ model. But that is a story for later.

Whatever its recent problems have been, Korea’s economic growth and the resulting social transformation over the last four and a half decades have been truly spectacular. It has gone from being one of the poorest countries in the world to a country on a par with Portugal and Slovenia in terms of per capita income.[5] A country whose main exports included tungsten ore, fish and wigs made with human hair has become a high-tech powerhouse, exporting stylish mobile phones and flat-screen TVs coveted all over the world. Better nutrition and health care mean that a child born in Korea today can expect to live 24 years longer than someone born in the early 1960s (77 years instead of 53 years). Instead of 78 babies out of 1, 000, only five babies will die within a year of birth, breaking far fewer parents’ hearts. In terms of these life-chance indicators, Korea’s progress is as if Haiti had turned into Switzerland.[6] How has this ‘miracle’ been possible?

For most economists, the answer is a very simple one. Korea has succeeded because it has followed the dictates of the free market. It has embraced the principles of sound money (low inflation), small government, private enterprise, free trade and friendliness towards foreign investment. The view is known as neo-liberal economics.

Neo-liberal economics is an updated version of the liberal economics of the 18th-century economist Adam Smith and his followers. It first emerged in the 1960s and has been the dominant economic view since the 1980s. Liberal economists of the 18th and the 19th centuries believed that unlimited competition in the free market was the best way to organise an economy, because it forces everyone to perform with maximum efficiency. Government intervention was judged harmful because it reduces competitive pressure by restricting the entry of the potential competitors, whether through import controls or the creation of monopolies.Neo-liberal economists support certain things that the old liberals did not – most notably certain forms of monopoly (such as patents or the central bank’s monopoly over the issue of bank notes) and political democracy. But in general they share the old liberals’ enthusiasm for the free market.And despite a few ‘tweaks’ in the wake of a whole series of disappointing results of neo-liberal policies applied to developing nations during the past quarter of a century, the core neo-liberal agenda of deregulation, privatization and opening up of international trade and investment has remained the same since the 1980s.

In relation to the developing countries, the neo-liberal agenda has been pushed by an alliance of rich country governments led by the US and mediated by the ‘Unholy Trinity’ of international economic organizations that they largely control – the International Monetary Fund (IMF), the World Bank and the World Trade Organisation (WTO). The rich governments use their aid budgets and access to their home markets as carrots to induce the developing countries to adopt neo-liberal policies. This is sometimes to benefit specific firms that lobby, but usually to create an environment in the developing country concerned that is friendly to foreign goods and investment in general. The IMF and the World Bank play their part by attaching to their loans the condition that the recipient countries adopt neo-liberal policies. The WTO contributes by making trading rules that favour free trade in areas where the rich countries are stronger but not where they are weak (e.g., agriculture or textiles). These governments and international organizations are supported by an army of ideologues. Some of these people are highly trained academics who should know the limits of their free-market economics but tend to ignore them when it comes to giving policy advice (as happened especially when they advised the former communist economies in the 1990s). Together, these various bodies and individuals form a powerful propaganda machine, a financial-intellectual complex backed by money and power.

This neo-liberal establishment would have us believe that, during its miracle years between the 1960s and the 1980s, Korea pursued a neo-liberal economic development strategy.[7] The reality, however, was very different indeed. What Korea actually did during these decades was to nurture certain new industries, selected by the government in consultation with the private sector, through tariff protection, subsidies and other forms of government support (e.g., overseas marketing information services provided by the state export agency) until they ‘grew up’ enough to withstand international competition. The government owned all the banks, so it could direct the life blood of business – credit. Some big projects were undertaken directly by state-owned enterprises – the steel maker, POSCO, being the best example – although the country had a pragmatic, rather than ideological, attitude to the issue of state ownership. If private enterprises worked well, that was fine; if they did not invest in important areas, the government had no qualms about setting up state-owned enterprises (SOEs); and if some private enterprises were mismanaged, the government often took them over, restructured them, and usually (but not always) sold them off again.

The Korean government also had absolute control over scarce foreign exchange (violation of foreign exchange controls could be punished with the death penalty). When combined with a carefully designed list of priorities in the use of foreign exchange, it ensured that hard-earned foreign currencies were used for importing vital machinery and industrial inputs. The Korean government heavily controlled foreign investment as well, welcoming it with open arms in certain sectors while shutting it out completely in others, according to the evolving national development plan. It also had a lax attitude towards foreign patents, encouraging ‘reverse engineering’ and overlooking ‘pirating’ of patented products.

The popular impression of Korea as a free-trade economy was created by its export success. But export success does not require free trade, as Japan and China have also shown. Korean exports in the earlier period – things like simple garments and cheap electronics – were all means to earn the hard currencies needed to pay for the advanced technologies and expensive machines that were necessary for the new, more difficult industries, which were protected through tariffs and subsidies. At the same time, tariff protection and subsidies were not there to shield industries from international competition forever, but to give them the time to absorb new technologies and establish new organizational capabilities until they could compete in the world market.

The Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state direction. The Korean government did not vanquish the market as the communist states did. However, it did not have blind faith in the free market either. While it took markets seriously, the Korean strategy recognized that they often need to be corrected through policy intervention.

Now, if it was only Korea that became rich through such ‘heretical’ policies, the free-market gurus might be able to dismiss it as merely the exception that proves the rule. However, Korea is no exception. As I shall show later, practically all of today’s developed countries, including Britain and the US, the supposed homes of the free market and free trade, have become rich on the basis of policy recipes that go against the orthodoxy of neo-liberal economics.

Today’s rich countries used protection and subsidies, while discriminating against foreign investors – all anathema to today’s economic orthodoxy and now severely restricted by multilateral treaties, like the WTO Agreements, and proscribed by aid donors and international financial organizations (notably the IMF and the World Bank). There are a few countries that did not use much protection, such as the Netherlands and (until the First