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

World War) Switzerland. But they deviated from the orthodoxy in other ways, such as their refusal to protect patents. The records of today’s rich countries on policies regarding foreign investment, state-owned enterprises, macroeconomic management and political institutions also show significant deviations from today’s orthodoxy regarding these matters.

Why then don’t the rich countries recommend to today’s developing countries the strategies that served them so well? Why do they instead hand out a fiction about the history of capitalism, and a bad one at that?

In 1841, a German economist, Friedrich List, criticized Britain for preaching free trade to other countries, while having achieved its economic supremacy through high tariffs and extensive subsidies. He accused the British of ‘kicking away the ladder’ that they had climbed to reach the world’s top economic position: ‘[i]t is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him [italics added]’.[8]

Today, there are certainly some people in the rich countries who preach free market and free trade to the poor countries in order to capture larger shares of the latter’s markets and to pre-empt the emergence of possible competitors. They are saying ‘do as we say, not as we did’ and act as ‘Bad Samaritans’, taking advantage of others who are in trouble.* But what is more worrying is that many of today’s Bad Samaritans do not even realize that they are hurting the developing countries with their policies. The history of capitalism has been so totally re-written that many people in the rich world do not perceive the historical double standards involved in recommending free trade and free market to developing countries.

I am not suggesting that there is a sinister secret committee somewhere that systematically air-brushes undesirable people out of photographs and re-writes historical accounts. However, history is written by the victors and it is human nature to re-interpret the past from the point of view of the present. As a result, the rich countries have, over time, gradually, if often sub-consciously, re-written their own histories to make them more consistent with how they see themselves today, rather than as they really were – in much the same way that today people write about Renaissance ‘Italy’ (a country that did not exist until 1871) or include the French-speaking Scandinavians (Norman conqueror kings) in the list of ‘English’ kings and queens.

The result is that many Bad Samaritans are recommending free-trade, free-market policies to the poor countries in the honest but mistaken belief that those are the routes their own countries took in the past to become rich. But they are in fact making the lives of those whom they are trying to help more difficult. Sometimes these Bad Samaritans may be more of a problem than those knowingly engaged in ‘kicking away the ladder’, because self- righteousness is often more stubborn than self-interest.

So how do we dissuade the Bad Samaritans from hurting the poor countries, whatever their intentions are? What else should they do instead? This book offers some answers through a mix of history, analysis of the world today, some future predictions and suggestions for change.

The place to start is with a true history of capitalism and globalization, which I examine in the next two chapters (chapters 1 and 2). In these chapters, I will show how many things that the reader may have accepted as ‘historical facts’ are either wrong or partial truths. Britain and the US are not the homes of free trade; in fact, for a long time they were the most protectionist countries in the world. Not all countries have succeeded through protection and subsidies, but few have done so without them. For developing countries, free trade has rarely been a matter of choice; it was often an imposition from outside, sometimes even through military power. Most of them did very poorly under free trade; they did much better when they used protection and subsidies. The best-performing economies have been those that opened up their economies selectively and gradually. Neo-liberal free-trade free-market policy claims to sacrifice equity for growth, but in fact it achieves neither; growth has slowed down in the past two and a half decades when markets were freed and borders opened.

In the main chapters of the book that follow the historical chapters (chapters 3 to 9), I deploy a mixture of economic theory, history and contemporary evidence to turn much of the conventional wisdom about development on its head.

• Free trade reduces freedom of choice for poor countries.

• Keeping foreign companies out may be good for them in the long run.

• Investing in a company that is going to make a loss for 17 years may be an excellent proposition.

• Some of the world’s best firms are owned and run by the state.

• ‘Borrowing’ ideas from more productive foreigners is essential for economic development.

• Low inflation and government prudence may be harmful for economic development.

• Corruption exists because there is too much, not too little, market.

• Free market and democracy are not natural partners.

• Countries are poor not because their people are lazy; their people are ‘lazy’ because they are poor.

Like this opening chapter, the closing chapter of the book opens with an alternative ‘future history’ – but this time a very bleak one. The scenario is deliberately pessimistic, but it is firmly rooted in reality, showing how close we are to such a future, should we continue with the neo-liberal policies propagated by the Bad Samaritans. In the rest of the chapter, I present some key principles, distilled from the detailed policy alternatives that I discuss throughout the book, which should guide our action if we are to enable developing countries to advance their economies. Despite its bleak scenario, the chapter – and therefore the book – closes with a note of optimism, explaining why I believe most Bad Samaritans can be changed and really made to help developing countries improve their economic situations.

CHAPTER 1 The Lexus and the olive tree revisited

Myths and facts about globalization

Once upon a time, the leading car maker of a developing country exported its first passenger cars to the US. Up to that day, the little company had only made shoddy products – poor copies of quality items made by richer countries. The car was nothing too sophisticated – just a cheap subcompact (one could have called it ‘four wheels and an ashtray’). But it was a big moment for the country and its exporters felt proud.

Unfortunately, the product failed.Most thought the little car looked lousy and savvy buyers were reluctant to spend serious money on a family car that came from a place where only second-rate products were made. The car had to be withdrawn from the US market. This disaster led to a major debate among the country’s citizens.

Many argued that the company should have stuck to its original business of making simple textile machinery. After all, the country’s biggest export item was silk. If the company could not make good cars after 25 years of trying, there was no future for it. The government had given the car maker every opportunity to succeed. It had ensured high profits for it at home through high tariffs and draconian controls on foreign investment in the car industry. Fewer than ten years ago, it even gave public money to save the company from imminent bankruptcy. So, the critics argued, foreign cars should now be let in freely and foreign car makers, who had been kicked out 20 years before, allowed to set up shop again.

Others disagreed. They argued that no country had got anywhere without developing ‘serious’ industries like automobile production. They just needed more time to make cars that appealed to everyone.

The year was 1958 and the country was, in fact, Japan. The company was Toyota, and the car was called the Toyopet. Toyota started out as a manufacturer of textile machinery (Toyoda Automatic Loom) and moved into car production in 1933. The Japanese government kicked out General Motors and Ford in 1939 and bailed out Toyota with money from the central bank (Bank of Japan) in 1949. Today, Japanese cars are considered as ‘natural’ as Scottish salmon or French wine, but fewer than 50 years ago, most people, including many Japanese, thought the Japanese car industry simply should not exist.

Half a century after the Toyopet debacle, Toyota’s luxury brand Lexus has become something of an icon for globalization, thanks to the American journalist Thomas Friedman’s book, The Lexus and the Olive Tree. The book owes its title to an epiphany that Friedman had on the Shinkansen bullet train during his trip to Japan in 1992. He had paid a visit to a Lexus factory, which mightily impressed him. On his train back from the car factory in Toyota City to Tokyo, he came across yet another newspaper article about the troubles in