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

policies that have so ill-served it in the past two decades.

My US patent scenario is certainly exaggerated, but US pharmaceutical patents can already be de facto extended up to 28 years through data protection and in consideration of the time needed for FDA (Food and Drugs Administration) approval. The US has made sure that these provisions are written into all its free trade agreements. And, as I discussed in the story of Mickey Mouse in chapter 6, in 1998, US copyright was retrospectively extended.

The reader may find it particularly implausible that China would prematurely open its capital market. But when your economy becomes the second biggest in the world, it is hard to resist the pressure to act ‘responsibly’. This is exactly what happened to Japan when it was made to revalue its currency by three times almost overnight in the 1985 Plaza Accord. That currency revaluation was an important cause of Japan’s huge asset bubble, whose bursting in the early 1990s (and the incompetent management of its aftermath) resulted in economic stagnation for a decade.As for my saying that China would join the OECD to celebrate the 100th birthday of its Communist Party, that was certainly said tongue-in-cheek. But countries can become over-confident when they are very successful, as the case of Korea shows. Until the late 1980s, Korea had skilfully used capital controls to great economic benefit. But, in the mid-1990s, it opened its capital market wide, and without careful planning. This was partly due to American pressure, but also because, after three decades of its economic ‘miracle’, the country had become too full of itself. It decided to join the OECD in 1996 and act like a rich country when it really wasn’t one. At the time, its per capita income was still only one-third that of most OECD member countries and one quarter that of the richest ones (or slightly above the level China is likely to reach by the mid-2020s). The outcome was the 1997 financial crisis. So my imaginary China story is really a combination of what actually happened in Japan in the 1980s and Korea in the 1990s.

Is it really plausible that Brazil would sign up to something like the IAIA? Absolutely not in today’s world, but I am talking about a world in the middle of the Second Great Depression and an economy ravaged by another quarter of a century of neo-liberalism. Also, we should not underestimate how political leaders driven by ideological convictions can do things which are so ‘out of character’ with their countries’ history, if they are there in the right place at the right time. For example, despite the famous British tradition of gradualism and pragmatism, Margaret Thatcher was radical and ideologically driven.Her government changed the character of British politics for the foreseeable future. Likewise, Brazil may have a history of independent-minded and pragmatic foreign policy, but that is not an absolute guarantee against someone like my Alfredo Kim driving it into the IAIA, especially when Brazil does not lack its own supply of free-market ideologues.

So, my ‘alternative history of the future’ is not a total fantasy. It is grounded in reality a lot more strongly than may appear at first. If I have been deliberately pessimistic in painting this scenario, it is to remind the reader how big the stakes are. I really hope that, 30 years from now, I will be proved completely wrong. But if the world continues with neo-liberal policies currently propagated by the Bad Samaritans, many of the events that I ‘document’ in the story, or something very like them, could happen.

Throughout this book, I have made many detailed proposals as to how policies, both nationally and globally, need to be changed in all sorts of areas in order to help poor countries develop and to avert the kind of disaster scenario that I have just described in my ‘history of the future’. In this concluding chapter, I will not repeat or summarize these suggestions, but rather discuss the key principles that lie behind them. In the process, I hope to show how national economic policies and the rules of international economic interactions need to be changed if we are to promote economic development in poor countries and make the world a better place.

Defying the market

As I have constantly stressed, markets have a strong tendency to reinforce the status quo. The free market dictates that countries stick to what they are already good at. Stated bluntly, this means that poor countries are supposed to continue with their current engagement in low-productivity activities. But their engagement in those activities is exactly what makes them poor. If they want to leave poverty behind, they have to defy the market and do the more difficult things that bring them higher incomes – there are no two ways about it.

‘Defying the market’ may sound radical – after all, have many countries not failed miserably because they have tried to go against the market? But it is something that is done by business managers all the time. Business managers, of course, get judged ultimately by the market, but they – especially the successful ones – do not accept market forces blindly. They have their long-term plans for their companies, and these sometimes demand that they buck market trends for considerable periods of time. They foster the growth of their subsidiaries in the new sectors they choose to move into and make up for the losses with profits from their subsidiaries in the existing sectors.Nokia subsidized its fledgling electronics business for 17 years with money from its businesses in logging, rubber boots and electric cable. Samsung subsidized its infant electronics subsidiaries for over a decade with money made in textiles and sugar refining. If they had faithfully followed market signals in the way developing countries are told to by the Bad Samaritans, Nokia would still be felling trees and Samsung refining imported sugar cane. Likewise, countries should defy the market and enter difficult and more advanced industries if they want to escape poverty.

The trouble is that there are good reasons why low-earning countries (or, for that matter, low-earning firms or individuals) are engaged in less productive activities – they lack the capabilities to do more productive ones. A backyard motor repair shop in Maputo simply cannot produce a Beetle, even if Volkswagen were to give it all the necessary drawings and instruction manuals, because it lacks the technological and organizational capacities that Volkswagen enjoys. This is why, free market economists would argue, Mozambicans should be realistic and not mess around with things like cars (let alone hydrogen fuel cells!); instead they should just concentrate on what they are already (at least ‘comparatively’) good at – growing cashew nuts.

The free market recommendation is correct – in the short run, when capabilities cannot be changed very much. But this does not mean that Mozambicans should not produce something like a Beetle – one day. In fact, they need to – if they are going to make progress. And they can – given enough determination and the right investment, both at the firm level and at the national level, in accumulating the necessary abilities. After all, a backyard auto repair shop is exactly how the famous Korean car maker, Hyundai, started in the 1940s.

Needless to say, investment in capability-building requires short-term sacrifices. But that is not a reason not to do it, contrary to what free-trade economists say. In fact, we often see individuals making short-term sacrifices for a long-term increase in their capacities, and heartily approve of them. Suppose a low-skilled worker quits his low-paying job and attends a training course to acquire new skills. If someone were to say the worker is making a big mistake because he is now not able to earn even the low wage he used to earn, most of us would criticize that person for being short-sighted; an increase in a person’s future earning power justifies such short-term sacrifice. Likewise, countries need to make short-term sacrifices if they are to build up their long-term productive capabilities. If tariff barriers or subsidies allow domestic firms to accumulate new abilities – by buying better machinery, improving their organization and training their workers – and become internationally competitive in the process, the temporary reduction in the country’s level of consumption (because it is refusing to buy higher-quality, lower-price foreign goods) may be totally justified.

This simple but powerful principle – sacrificing the present to improve the future – is why the Americans refused to practise free trade in the 19th century. It is why Finland did not want foreign investment until recently. It is why the Korean government set up steel mills in the late 1960s, despite the objections of the World Bank. It is why the Swiss did not issue patents and the Americans did not protect foreigners’ copyrights until the late 19th century. And it is, to cap it all, why I send my six-year-old son, Jin-Gyu, to school rather than making him work and earn his living.

Investment in capacity-building can take quite a long time to bear fruit. I may not go as far as Zhou Enlai, the long-time prime minister of China under Mao Zedong – when asked to comment on the impact of the French Revolution, he replied that ‘it is too early to tell’. But when I say long, I mean long. I have just mentioned that it took the electronics division of Nokia 17 years to make any profit, but that is just the beginning. It took Toyota more than 30 years of protection and subsidies to become competitive in the international car market, even at the lower end of it. It was a good 60 years before it became one of the world’s top car makers. It took nearly 100 years from the days of Henry VII for Britain to catch up with the Low Countries in woollen manufacturing. It took the US 130 years to develop its economy enough to feel confident about doing away with tariffs.Without such long time horizons, Japan might still be mainly exporting silk, Britain wool and the US cotton.

Unfortunately, these are time frames that are not compatible with the neo-liberal policies recommended by