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

Despite their key role in promoting ‘free’ trade in the late 19th and early 20th centuries, colonialism and unequal treaties hardly get any mention in the hordes of pro-globalisation books. [9] Even when they are explicitly discussed, their role is seen as positive on the whole. For example, in his acclaimed book, Empire, the British historian Niall Ferguson honestly notes many of the misdeeds of the British empire, including the Opium War, but contends that the British empire was a good thing overall – it was arguably the cheapest way to guarantee free trade, which benefits everyone.[10] However, the countries under colonial rule and unequal treaties did very poorly. Between 1870 and 1913, per capita income in Asia (excluding Japan) grew at 0.4% per year, while that in Africa grew at 0.6% per year.[11] The corresponding figures were 1.3% for Western Europe and 1.8% per year for the USA.[12] It is particularly interesting to note that the Latin American countries, which by that time had regained tariff autonomy and were boasting some of the highest tariffs in the world, grew as fast as the US did during this period.[13]

While they were imposing free trade on weaker nations through colonialism and unequal treaties, rich countries maintained rather high tariffs, especially industrial tariffs, for themselves, as we will see in greater detail in the next chapter.To begin with, Britain, the supposed home of free trade, was one of the most protectionist countries until it converted to free trade in the mid-19th century. There was a brief period during the 1860s and the 1870s when something approaching free trade did exist in Europe, especially with zero tariffs in Britain. However, this proved short-lived. From the 1880s, most European countries raised protective barriers again, partly to protect their farmers from cheap food imported from the New World and partly to promote their newly emerging heavy industries, such as steel, chemicals and machinery.[14] Finally, even Britain, as I have noted, the chief architect of the first wave of globalization, abandoned free trade and re- introduced tariffs in 1932. The official history describes this event as Britain ‘succumbing to the temptation’ of protectionism. But it typically fails to mention that this was due to the decline in British economic supremacy, which in turn was the result of the success of protectionism on the part of competitor countries, especially the USA, in developing their own new industries.

Thus, the history of the first globalization in the late 19th and early 20th centuries has been rewritten today in order to fit the current neo-liberal orthodoxy. The history of protectionism in today’s rich countries is vastly underplayed, while the imperialist origin of the high degree of global integration on the part of today’s developing countries is hardly ever mentioned. The final curtain coming down on the episode – that is, Britain’s abandonment of free trade – is also presented in a biased way. It is rarely mentioned that what really made Britain abandon free trade was precisely the successful use of protectionism by its competitors.

Neo-liberals vs neo-idiotics?

In the official history of globalization, the early post-Second-World-War period is portrayed as a period of incomplete globalization.While there was a significant increase in integration among the rich countries, accelerating their growth, it is said, most developing countries refused to fully participate in the global economy until the 1980s, thus holding themselves back from economic progress.

This story misrepresents the process of globalization among the rich countries during this period. These countries did significantly lower their tariff barriers between the 1950s and the 1970s. But during this period, they also used many other nationalistic policies to promote their own economic development – subsidies (especially for research and development, or R&D), state-owned enterprises, government direction of banking credits, capital controls and so on. When they started implementing neo-liberal programmes, their growth decelerated. In the 1960s and the 1970s, per capita income in the rich countries grew by 3.2% a year, but its growth rate fell substantially to 2.1% in the next two decades.[15]

But more misleading is the portrayal of the experiences of developing countries. The postwar period is described by the official historians of globalization as an era of economic disasters in these countries. This was because, they argue, these countries believed in ‘wrong’ economic theories that made them think they could defy market logic. As a result, they suppressed activities which they were good at (agriculture, mineral extraction and labour-intensive manufacturing) and promoted ‘white elephant’ projects that made them feel proud but were economic nonsense – the most notorious example of this is Indonesia producing heavily subsidized jet aeroplanes.

The right to ‘asymmetric protection’ that the developing countries secured in 1964 at the GATT is portrayed as ‘the proverbial rope on which to hang one’s own economy!’, in a well-known article by Jeffrey Sachs and Andrew Warner.[16] Gustavo Franco, a former president of the Brazilian central bank (1997–99), made the same point more succinctly, if more crudely, when he said his policy objective was ‘to undo forty years of stupidity’ and that the only choice was ‘to be neo-liberal or neo-idiotic’.[17]

The problem with this interpretation is that the ‘bad old days’ in the developing countries weren’t so bad at all. During the 1960s and the 1970s, when they were pursuing the ‘wrong’ policies of protectionism and state intervention, per capita income in the developing countries grew by 3.0% annually.[18] As my esteemed colleague Professor Ajit Singh once pointed out, this was the period of ‘Industrial Revolution in the Third World’.[19] This growth rate is a huge improvement over what they achieved under free trade during the ‘age of imperialism’ (see above) and compares favourably with the 1–1. 5% achieved by the rich countries during the Industrial Revolution in the 19th century. It also remains the best that they have ever recorded. Since the 1980s, after they implemented neo-liberal policies, they grew at only about half the speed seen in the 1960s and the 1970s (1.7%). Growth slowed down in the rich countries too, but the slowdown was less marked (from 3.2% to 2.1%), not least because they did not introduce neo-liberal policies to the same extent as the developing countries did. The average growth rate of developing countries in this period would be even lower if we exclude China and India. These two countries, which accounted for 12% of total developing country income in 1980 and 30% in 2000, have so far refused to put on Thomas Friedman’s Golden Straitjacket.[20]

Growth failure has been particularly noticeable in Latin America and Africa, where neo-liberal programmes were implemented more thoroughly than in Asia. In the 1960s and the 1970s, per capita income in Latin America was growing at 3.1% per year, slightly faster than the developing country average. Brazil, especially, was growing almost as fast as the East Asian ‘miracle’ economies. Since the 1980s, however, when the continent embraced neo-liberalism, Latin America has been growing at less than one-third of the rate of the ‘bad old days’. Even if we discount the 1980s as a decade of adjustment and take it out of the equation, per capita income in the region during the 1990s grew at basically half the rate of the ‘bad old days’ (3.1% vs 1.7%). Between 2000 and 2005, the region has done even worse; it virtually stood still, with per capita income growing at only 0.6% per year. [21] As for Africa, its per capita income grew relatively slowly even in the 1960s and the 1970s (1–2% a year). But since the 1980s, the region has seen a fall in living standards. This record is a damning indictment of the neo-liberal orthodoxy, because most of the African economies have been practically run by the IMF and the World Bank over the past quarter of a century.

The poor growth record of neo-liberal globalization since the 1980s is particularly embarrassing. Accelerating growth – if necessary at the cost of increasing inequality and possibly some increase in poverty – was the proclaimed goal of neo-liberal reform. We have been repeatedly told that we first have to ‘create more wealth’ before we can distribute it more widely and that neo-liberalism was the way to do that. As a result of neo-liberal policies, income inequality has increased in most countries as predicted, but growth has actually slowed down significantly.[22]

Moreover, economic instability has markedly increased during the period of neo-liberal dominance. The world, especially the developing world, has seen more frequent and larger-scale financial crises since the 1980s. In other words, neo-liberal globalization has failed to deliver on all fronts of economic life – growth, equality and stability. Despite this, we are constantly told how neo-liberal globalization has brought unprecedented benefits.

The distortion of facts in the official history of globalization is also evident at country level. Contrary to what the orthodoxy would have us believe, virtually all the successful developing countries since the Second World War initially succeeded through nationalistic policies, using protection, subsidies and other forms of government intervention.