2.4.3. Comparison with today’s developing countries
Discussions of trade policy by those who are sceptical of activist ITT policies rarely acknowledge the importance of tariff protection in the economic development of the NDCs. [241] Even those few which do so dismiss the relevance of that historical evidence by pointing out that the levels of protection found in the NDCs in earlier times are substantially lower than those that have prevailed in today’s developing countries.
Little et al. argue that ‘[a]part from Russia, the United States, Spain, and Portugal, it does not appear that tariff levels in the first quarter of the twentieth century, when they were certainly higher for most countries than in the nineteenth century, usually afforded degrees of protection that were much higher than the sort of degrees of promotion for industry which we have seen, in the previous chapter, to be possibly justifiable for developing countries today [which they argue to be at most 20 per cent even for the poorest countries and virtually zero for the more advanced developing countries],.[242] Similarly, the World Bank argues that ‘[a]lthough industrial countries did benefit from higher natural protection before transport costs declined, the average tariff for twelve industrial countries ranged from 11 to 32 per cent from 1820 to 1980 … In contrast, the average tariff on manufactures in developing countries is 34 per cent’.[243]
This argument sounds reasonable enough, especially when we consider the fact that tariff figures are likely to underestimate the degree of infant industry promotion in today’s developing countries when compared to those for the NDCs in earlier times. As I pointed out at the beginning of the chapter (section 2.1), limited fiscal capabilities and lack of regulatory power of the state seriously limited the scope for ITT policies other than tariff policy in the NDCs in earlier times. Governments in today’s developing countries tend to use a wider range of policy tools for infant industry promotion, although some of these tools (e.g., export subsidies except for the poorest countries) have been ‘outlawed’ by the WTO.[244]
However, this argument is highly misleading in one important sense. The problem is that the productivity gap between today’s developed countries and developing countries is much greater than that which used to exist between the more developed and less developed NDCs in earlier times. This means that today’s developing countries need to impose much higher rates of tariff than those used by the NDCs in the past, if they are to provide the same degree of actual protection to their industries as that once accorded to the NDC industries.[245] In other words, given the greater productivity gap they face, today’s developing countries need to use much higher tariffs compared to the NDCs in earlier times, just to get the same protective effects.
Before we show this, we must admit that it is not simple to measure international productivity gaps. Per capita income figures are obvious, although rough, proxies, but it is worth debating whether to use incomes measured in current dollars or in purchasing power parity (PPP) terms. Incomes measured in current dollars are arguably better reflections of the productivity gap in the tradeable sector, which is more relevant in determining tariff levels. However, they are subject to the vagaries of exchange-rate fluctuations that may have nothing to do with productivity differentials. PPP income figures are better reflections of a country’s overall productivity, but they tend to underestimate, often greatly, the productivity differentials in the tradeable sector: In what follows, I have used PPP income figures, partly because they provide a better measure of an economy’s overall productivity and partly because the best available historical estimate of NDC incomes by Maddison uses them.[246]
According to Maddison’s estimate, throughout the nineteenth century the ratio of per capita income in PPP terms between the poorest NDCs (say, Japan and Finland) and the richest NDCs (say, the Netherlands and the UK) was about 2 or 4 to 1.[247] Nowhere is this as big as the gap between today’s developing and developed countries. Recent data from the World Bank website show that in 1999 the difference in per capita income in PPP terms between the most developed countries (e.g., Switzerland, Japan, the USA) and the least developed ones (e.g., Ethiopia, Malawi, Tanzania) is in the region of 50 or 60 to 1.[248] Middle-level developing countries like Nicaragua ($2,060), India ($2,230) and Zimbabwe ($2,690) have to contend with productivity gaps in the region of 10 or 15 to 1. Even for quite advanced developing countries like Brazil ($6,840) or Columbia ($5,580), the productivity gap with the top industrial countries is about 5 to 1.
When in the late nineteenth century the USA accorded an average tariff protection of over 40 per cent to its industries, its per capita Income In PPP terms was already about three quarters that of Britain ($2,599 vs. $3,511 in 1875).[249] And this was when the ‘natural protection’ accorded by distance, which was especially important for the USA, was considerably higher than today, as even the above quote from World Bank acknowledges.[250] Compared to this, the 71 per cent trade-weighted average tariff rate that India had just prior to the WTO agreement despite the fact that its per capita income in PPP terms is only about one fifteenth that of the USA – makes the country look like a veritable champion of free trade. Following the WTO agreement, India cut its trade-weighted average tariff to 32 per cent, bringing it down to a level below which the USA’s average tariff rate never sank between the end of the Civil War and the Second World War.
To take a less extreme example, in 1875 Denmark had an average tariff rate of around 15-20 per cent, when its per capita income was slightly less than 60 per cent that of Britain ($2,031 vs. $3,511). Following the WTO agreement, Brazil cut its trade-weighted average tariff from 41 per cent to 27 per cent, a level that is not far above the Danish level, but its income in PPP terms is barely 20 per cent that of the USA ($6,840 vs. $31,910).[251]
Given the productivity gap, even the relatively high levels of protection that had prevailed in the developing countries until the 1980s do not seem excessive by the historical standards of the NDCs. When it comes to the substantially lower levels that have come to prevail after two decades of extensive trade liberalization in these countries, it may even be argued that today’s developing countries are actually less protectionist than the NDCs used to be.
Chapter 3
Institutions and Economic Development:
‘Good Governance’ in Historical Perspective
3.1. Introduction
The issue of institutional development, under the slogan of ‘good governance’, has recently come to occupy the centre stage of development policy debate. During the last decade or so, the international development policy establishment (henceforth IDPE) has come to recognize the limitations of its former emphasis on ‘getting the prices right’ through ‘good policies’. It has now come to accept the importance of the institutional structure that underpins the price system.[1] Particularly following the recent Asian crisis, which has been widely interpreted as a result of deficient institutional structures, the IDPE has begun’ to move its emphasis to ‘getting the institutions right’ and attach what Kapur and Webb call ‘governance-related conditionalities’.[2]
On the offensive these days are those who believe that every country should adopt a set of ‘good institutions’ (unfortunately often implicitly equated with US institutions), with some minimal transition provisions
