Also by Ha-Joon Chang ‘The Political Economy of Industrial Policy (1994) Joseph Stiglitz and the World Bank: ‘The Rebel Within (2001) ~ Kicking Away the Ladder Development Strategy in Historical Perspective Anthem Press London12 Ming Away the Ladder 14, A ‘Health Warning ‘What this book is about ro say will undoubtedly disturb many people, both intellectually and morally. Many of the myths that they have taken for gran or even passionately believed is il be challenged, in the same way that many of my oven assumptions were challenged in the process of reseatching it. Some ofthe conclusions may be morally un Comfortable for some readers. OF couse I claim no moral superiority for the arguments put forward | hope, however, co revel some ofthe ‘complexities surounding these issues which have long been obscured by ahistorical and often moralistic arguments. ~ Chapter 2 Policies for Economic Development: Industrial, Trade and Technology Policies in Historical Perspective 2.1, Introduction : In the previous chapter, I pointed out that there have been surprisingly few atemps wo apply lessons learned fom the historical expesences of developed counties to problems of contemporary development. Alo, 38 wal come clearer Further on the few references t0 these historia ex evinces tend eo be fll of myths that support the orthodox version of the history of economic policy in the NDC, which emphasize the ben- efits of free ade and laisse faire industrial policy. The storys which tundetics vieually all recommendations for Washington Consens ype policies, goes something ike the following" From the eighteenth censury onwatd, the industrial success of lases- ine Britain proved the superiority of free-market and fee-ade policies Through sich polices, which unleashed the entrepreneurial energy of the nation, i overtook interventionist France, its main competitor at the time, establishing itself as the supreme world economic power Brain was then able to pay the role ofthe architect snd hegemion of 4 new ‘Liberal’ world economic order, paccuarly once it had abandoned itedeplorable apricultosl protection Ihe Coen Laws} and othee remnants ‘of old mercantile protectionist measures in 1846, Init quest for this Liberal woud order, Britain's ukimate weapon ‘was ite economic success based on a free matketree trade system; this ‘made other countries realize che limications of thie mercantilit poli cies and star to adopt free (or at last feces) trade from around 1860. However, Briain was also greatly helped i its proect by the works of its classical economists such 3s Adam Smith and David Ricardo, who theoretically proved the ruperiorty of laseefare policy, in particular14 King Away the Ladder free trade. According to Willy de Clercq, the European Commissioner for Exteral Economic Relations duing the early days ofthe Uruguay Round (1985-2) Only as a result of the sheorctica egtimaty of free eade when measured against widespread mercantilism provided by David Ricardo, John Stuart Mil and David Hume, Adam Sith and thers ffom the Scottsh Enlightenment, and as a consequence of the relative stability provided by the UK asthe only and eelaively| benevolent superpower or hegemon during che second half ofthe rinetenth century, was feee trade abe to flourish fr the frst time [in the late nineteenth century] * “This Liberal world order, pesectd around 1870, was based on: lases: rire industal polices at home; low aricts to the internationl flows fof goods, capital and labour, and the macroeconomic stability, both ‘nationally and intetnationaly, which was guaranteed by the Gold Standard and the principle of Balanced badges. A period of unpreesdented prosperity followed ‘Unfortunatly, ccosding co this story, things started to go wrong with the onset ofthe First World Wa In response tothe enstinginsta- bility ofthe word economic and political system, counties once again atte to erect trade barr. In 1930 the USA abandoned fre trade Td enacted the infamous Smoot" Hawley trl, Aeording to de Clercq, {his tan had disastrous elleceon international trade and after a while ‘on American economic growth and employment. Nowadays, some “conomists even believe that she Great Depression was caused prima fly by these tariffs) The likes of Geemany and Japan erected high trade barriers sid also stated eesting powerful cartels which were ‘Closely inked with fascism and these counties’ external aggression in the following decades" The world free trade system finally ended in 1982, when Britany hitherto its champion, succumbed fo temptation tnd teinteodced tariff. The resulting contraction and instability in the world economy, and then the Scond World Was, destroyed the last emnants ofthe fist Liberal world oder, "after the Second World War, a0 the story goes, some significant progress wasmude nal ibrlizstion though heealy GATT (General IRerecmene on Trade and Tals) talks, However dirigste approaches to economic management doininated the policy-making scene until the 1170s inthe developed word, and uatlehe early 1980s in developing ~ Policies for Economic Develop 15 countries (as well a the Communist world uni is collapse in 1989), “According to Sachs and Warner, a number of factoes contributed tthe pursuit of protectionism and inerventionism in developing counties ‘von theories, such a the infant industry argument, the “big psh? theory of Rosenstin Rodan (1983), and Latin American structralism, not to speak of various Marxist shores, prevailed. Protections policies ‘were ao motivate by poliscal requirements, such sthe need fr nation building and the need to “buy off certain interest groups. There were slko legis of wartime contol that persisted ito peacetime Fortunately, is held, imerventionst policies have been largely aban oned across the world since the 1980s with the rive of Neo-beralin, ‘which emphasizes the vires of small government, Lasse aire polis tnd international openness. By the Tate 1970s economic growth had begun to falter in most countries in the developing world, with the exception of those in East and Southeast Asia which were already pur ‘ing good! polices. This growth failure, which often manifested ie {nthe economic exses of the eat 1980s, exposed the limitations of old-style intervention and protectionism, ‘As a result, most developing countries have come to embrace [Neo-Libesl policy reform. The most symbolic of these conversions, according t0 Bhagwati, ae: Brass embrace of Neo-Liberal doctrine lunder the presidency of Fernando Henrique Cardoso, 2 leading. Dependency theoris until the 1940s; she entry of eaditionally ant-US ‘Mexico into the NAFTA (North American Free Trade Agreement); and the move towards an open, liberal economy by Inia, once che Bastion fof protectionism and regutation,* The crowning glory ofthis tend towards liberalization and opening-up was the fll of Communion sa 1989, which finally ended the historical anomaly’ of a closed wor trading system that had prevailed inthe exey postwar years” "When combined with che establishment of new global governance insivations eepeesemed by the WTO, these policy changes atthe na tional level have created a new global economic system, whichis cn parable in its potential prospenity nly to the eadlir “golden age" of Liberalism (1870-1914).* Renato Ruggiero, the frst Director-General ‘of the WTO, argues that thanks to this new world order we now have “the potential for eradicating glabsl poverty in the eaely part ofthe next [te] century — utopian notion even a few decades ago, but a re possibility coday’? [As we shall yee Later, this story paints » powerful but fundamentally16 King Away the Ladder misleading picture. Indeed, it should be accepted that cere are also ome senses in which the late nineteenth cearury can indeed be described team ea of lisse fuire “To begin with, a3 we cam sce in rable 2.1 there was a period inthe late nineteenth cent, abit brief one, when liberal trade regimes prevailed in laege parts of the world economy. Stating in 1846 wi the repeal of the Corn Laws, Britain made a decided shift co 2 unilateral free trade fegme (which was accomplished by the 1860s), lthough his move wat based om its then unchallenged economic Supcciority and was intsicately linked wich its imperial policy Between 1860 and 1880, many European countries reduced tariff protection substantially. At the same time, most of the cest of the orld was forced to practice free trade theough colonialism (see Netion 23:4) and, in the cates of a few nominally “independent Countries (such as the Latin American counties, China, Thailand (then Siam), Iran (then Persia) and Turkey (then the Oxtoman Empic)) unequal treaties (sce section 23.2), OF course, the obvious nception to this was the USA, which maintained a very high tariff Barner even dating this period. However, given that the USA was tills elatvely small part of the world economy, i may not be totally waeasonable 0 say shat this is as cose co free trade as the tworld has ever got (or probably ever will) ‘More importantly, the scope of state intervention before the First ‘World War (and maybe even upto the Second World War) was quite Tinted by modeen standards, For example, Before the 1930s, both the feyemony ofthe doctrine of balanced badget and the limited scope for ‘Slaton given, among asher things, the absence of persona and cor Darts income taxes in most counties) severely limited the scope for Petve bagetary poly. The narrow tax base restricted government nudges, 0 lege fiscal outlays for developmental purposes were diffi- tle cic if the government had the iteaton to make them ~ railways eine am obvious exception in a numberof countries, In most coun oer fly edged central banking did nor exist until che early rwent- ‘Ehcentory, so the scope for monetary policy was also very limited. On the whole, banks were privately-owned and lle regulated by the stare, othe scope for using ‘directed credit programmes’ which were so Widely and successfully used im countries Tike Japan, Korea, Taiwan nd France during the postwar period, was extremely limited Meas tes like the nationalization of instey and indicaive investment pan ning, practices tht seeved many European counties, especialy France, Policies for Economic Develop 17 Austria and Norway, sell inthe eaey postwar years, were reganded as ‘unthinkable outside wartime Before the Second World War. One some- what paradoxical eonsequence of all these limitations was that tani Protection was far mote important asa policy oo! in the nineteenth century than it ein etme eas Ta Rate on Mandar roc for Slzd Deve "Comars n Toe xt Sapo ae (weieed serge presage ote) a ee teen wa Be gout Sore? ea Ne rn) ee he on aR & a f ceo Roe Rise Aenea = bs a Zan t tales en fn Tarn tora on nme ne ee 1 eR, 7 Ee pv sit ae re rg ‘sats oi See oe Howe Wad cua SOIREE Tei teethgoes we umeed mere ne ct freee be cand sce rr aro poe 2 Rar ey mpeg ee ee ct i en Lheltatgee er tents ee {te Tif ed pow at rw 8) re a a ‘Ses me rope Sonia SA The Wed era edn ere Ce Seger enrin taf to Despite thes limitations a Ihave pointed ut in Chapter 1 and will show in more detail in the rest of this chapter, vitally all NDCsta “Thing Away the Ladder actively used interventionist industri trade and technology (ITT) pol fie that are aimed at promoting inane industries during ther catch-up periods’ As we shall te later, there were some apparent excepions ro thus such as Switzerland and she Netherlands, but these were countries thar were either at o¢ very nea te teshaolopial frontier and thas did not, by definition, need much infant industry promotion. Some coun tres used actviet ITT policies even after the eatch-up was successfully Schived (Britain inthe eaely nineteenth century, the USA in che exe twenrieth century). Tariff protection was obviously a very important policy ool in the ITT policy package wsed by the NDCs, but as we hall show ater it was by no means the only one used, or eve neces Sarily the most important ‘On the trade front, subsidies and duty drawbacks on inputs for exported goods were frequent wed to promote exports, Governments ‘uth provided iohsiial subs and ned various publi investment programmes, especially im infrasteuctre but also in manufacturing. ‘They supported foreign technology acquisition, sometimes by legal mneans nice as financing sud tore and =ppsentieships, and somecimmes through illegal measures, which included support for industrial “apionage, smuggling of contraband machinery and refusal co Scknowledge foreign patents Development of domestic technological ‘apabiises was encouraged through financial support for research and ‘Seclopment,edacation and taining. Measures were also taken ro rise fteszenes of advanced technologies (or example, the establishment of Inodel factories, rganisaton of exhibitions, granting offre imported Imachinery to private sector firms). [a addition, some governments ‘Treated institutional mechanisms that facilitated public-private Cooperation (for example, public-private joine vencres and industry SRtocations with close hnks with the government) Ie imporane co ‘hore that many ofthese policies are greatly frowned upon these days, ‘ren wien they have not been made explcil illegal dheough bilateral fd spleateral agreements ‘When they reached the technological frontier, the NDC used a range of policies in order 10 help themselves pull aay fcom thee existing nd potential competitors Briain, given the duration for which i held the portion of"rontier economy’, is most visible inthis respect, but ‘ther countries also used similar measures when they could. Britain sed measures to control transfer of technology ro its potential Competitors (for example, controls on skilled worker migration or machinery export, and put pressure on the less developed counties r0 Policies for Economic Develop 19 open up theie markets, by force if necessary. However, the catch-up Economies that were not formal ur informal colonies di not simply st down and sept these restrictive measures, They employed a wide arity fof measures 1o overcome the obstacles created by these restrictions, ‘even resorting to illegal! means, such asthe poaching of workers and Sonugaling of machinery.” 2.2, The Catch-up Strategies In this section, 1 exami the experiences ofa range of NDCs ~ Britain, the USA, Germany, France, Sweden, Belgium, the Netherlands Switzerland, Japan, Korea and Taiwan ~ and considee what kinds of industrial, cade and technology (ITT) polices they used when they themaclves were developing countris. [show that in most of these ‘countries, the policies that were tsedaee almost the opposite of what the present orthodoxy sya they employed “aad curently recommends that the curently developing counties should alo use 2.2.1, Britain As the inlecual fountain of the modern lise fire docteines, and ‘the only country that can claim to have practised a otal fee trae at ‘one stage in ts history, Britain ir widely regarded as having developed ‘without sigificant state intervention, However, thi could not be Fue ther from the tet, Britain entered its pos-feudal age thirteenth and fourteenth centuris) asa lately backward economy. Belore 1600, it was an importer of technology from the Continent. ie eled on export of raw wool and, toa lect extent, of low-valte-added wool cloth (hat was then known 2 ‘short cloth to the then more advanced Low Countries, especially the towns of Bruges, Ghent and Ypres in Flanders, now part of Belgium. The British nonarchs ofthis time taxed these product siay for revenue reasons, but since cloth was taxed more lightly than aw ‘woal, this encouraged impor substitution in woo! cloth and a certain mount of export success" Edwaed I] (1327-77) is believed to have teen the fist king who deliberately tried to develop loeal wool cloth ‘manufacturing. He wore only English cloth to set an example to the test of the country brought in Flemish weavers, cenealized trade in aw wool and banned the import of woolen cloth.20 eking Away the Ladder “The Tudor monarchs gave further impetus tothe development ofthis industry with what can only be deserib asa deliberate infant industry promotion policy. ‘The eelebrated eightacth-century merchant, poi Pir and nln, Danish Def, dcsribes this policy in his now ast engouten books A Pla of the English Commerce (1728). Init describes Insome detail how the Tudor monarchs especially Henry VI (85-1509) ‘ha Bleabeth 1 (1558-1603), tansformea England from a county rly~ ng heavily on raw wool export tothe Low Counties into the most ot- mmidable wool-manufactaring nation inthe world." According to Defoe, Henry VIL had peor 0 his coronation in 1485, ‘been a kind of 4 Refugee inthe Court of his Aunt the Dutchess of Burgundy [tlie orginal” There, he was deeply impressed by the Deopperity in the Low Countries based on wool manufacterig, and Fron 1489 onwards he putin place schemes to promote Bish wool tmanufatorng, The measuses ted included sending royal missions to lenify locations suted to woo! manufacturing.” poaching skilled ‘norkers fom the Low Counties, increasing duties on, and even tem- Founly banning the export of, raw wool. Ramsay also document the galaton in 1489, 1512, 1513 and 1536, which banned the exports of tunfinished elths, save for coarse pieces below a certain market value ‘This, he obseree, reflected the the “influential view that ie was pre rable o export wool inthe fom of cloth rather than in the aw state then i was likewise better to ship cloth fully dressed and dyed than in 1 sem-manafactured state, "unbarbed and unshorn” 2 “ar Defoe emphasizes, Henry VII realized that, given Britain's techology gap with the Low Countries, this wansformation was going {take a long time, and therefore he took a gradualist approach.” “Therefore, he rased export duties on aw wool only when te industry dias Bett established. As s00n as it Became clear that Briain simpy {Ga nor have the capacity co process al the raw wool st produced, he Grthdvew the ban on rave wool export he had imposed" According to Defoe, i was not unl the time of Ezabeth 1 (1587), nearly a hundred aate ter Henry Vil started his import substitution policy (1489), that Juin was confident enough about ts wool manufacturing industry's tntcntronal competitiveness to ban eaw wool export completely. This tReatally drove the manuactorers inthe Low Counties to rin ‘According to Delors analysis, other factors besides this import substiuson policy helped the achicverent of British victory inthe wool dustry ander Eliabeth 1, Some ofthese factors were foreious, such th dhe migration of Protestant Flemish textile workers following the wat ~, Policies for Economic Develoint 21 of independence from Spain in 1567. However, other elements were ‘eliberately eeated bythe sae. n order to open new makes, Elizabeth 1 dispel rade envoys to the Pope an the Emperors of Rusia, Mog, and Petia, Brain's massive investment i balding ts naval sepremacy Allowed it to break ina new markets and offen to colonise them snd esp them as captive marke" Tr is difficule co esablish che rclative importance of the above mentioned factors in explaining the British success in. wool ‘manufacturing, However, #€ does seem cleat that, without what ean Only be described asthe siateensh century equivalent of modern infant Inuustey promotion strategy put in place by Henry VIL and further pursued by his successors, ft woud have heen very difficult, if not hecessaily impossible, for Britain to achieve this Initial success in industialzation: without this key indastey, which accounted for at least all of Briai’s export revenue ding the eighteenth century is Industrial Revolution might have been ery difficult, co say the leas.” The 1721 reform ofthe mercantile lw inrodase by Robers Walpole, the fre Benish Pam Minister ring the reign of George I (I714-27) Signfied 1 dtamati shift in the focus of British sndustial and tea polices Trio otis the British governs policies were in gone sined a caparing rade (nos importantly through colonaliaton andthe Navzaion Ay which required that sade with Basin had to becom ductal in Brith ships) and at generating government revenve. The promotion of wool manutactringy st dncused above, wae the ost porte exception to thy hur ev thi ws partly moat bythe Sle to generate more government seven In contrat the polices Jnvwoduced after 1721 wre deliberately simed a promoting manufac fing industries. Iteoducing the nes lav, Walpole sated, though the king's address to Paamen: ii evident that nothing so mach utes to promute the pulic well-being ste exportation of tranafacured pods andthe importation of fregh raw materia. “The 1721 lgoltion, adits subsequcne supplementary poy change, inclnkd she Eilovng measure Ft ofl, import dts on material wsed for manulacigrcs were lowered, oF even dropped Sltogether" Second, diy drawbacks on imported raw materials for “Exported manufactures a policy that ad been well evablked in dhe ‘SEBany since the days of Wiliam and Mary ~ woteicreaed." For ‘eample, the duty on beaver skine was reduced and ase of export aPT ciate pani ie 2. Kicking Away the Ladder ~ cowck fbf he dry pid a allows Thi, export des on SE istalacns nce abated" Four, dis on importa Frcen 2efkfitred poodh wee signicaty cated. Filth, export subuides dno ne itn ike ik prods (1722) and cere) IES whe te eting export sue to sath ad ‘eel spar were mctesed fn 1731 and 1733 especie)" Sith Sona nredued tocongolthequaliy of inact rods TRESIP Gate products su that ticraptlow manufacturers could SER ike epucon of rsh prods infor makers” tessa pthc prnie behind this new leghlation a follows “orentSurhad robe poset at home from competion with eearicd reduc fe enpartaon of ished ates had ote ree enter ps encourage Bd 0 Be ven By Boxy SUT tne whan very meres ono here tha he poles Be aad hy she 172 tclor,av wels the pines behind hem seein anlar to thos sed by counts Hk Japan Koes a Teen th posewr eid, swe hl yee Below (ation 2.27, "Yih the dasa Revolution inthe second af of the eigen cea, Bain ated wiening chological led ove other cov SeE"Ylowever crn then i conned ts pole of inst promo- “Toru hem neerth emu, By which cine i eshnologe Sepremacy war everlming” Tei and awn important component ofthis was clear tani ot Aun sf table 2 Bran hal ery high aie on ofeurng procs see 20 some wo pcan fer Mee Elutl Revlas, and we wae iealy ahead BEzghiternaonsmtechoslegsl terme, Measures ober han tif prion wre ho deployed Hee arb nned the imports of speior pods fom some of ts closes i tey happened otheaten Bes indo. {Upp the Woot At promited exports of woolen prodocs from the seen Mii ff te then superor Hab wool ndasty Ge secon STH ons ban was imposed onthe imports of setae Indian cae naa tealeees, deilating whar was then arguably the See at uct conn manufac seston The Idan on GING "wos Suscquenly desroyed by he ending ofthe Eat Ina cess monopoly in nenatnal ade i B13 when Bris had Carer ee en prod than ise section 23) By 187, Pears afer the vet wa ed esate that 40-48% ash coon exe expres went to da” Policies for Economie Develewint 23 By the end of the Napoleonic Wats in 1815, however, dhere were increasing pressures for fee trade in Bata fom the increasingly cont ‘Sens manufacusers y this time, most Beth manufactrees were firmly tstablshed as the most elie in the world in mos industries, excep in ‘ew limita areas where countries ike Belgitm and Switzerland pos Sesse technologie Iade over Britain (ee section 2.26). Although a new ‘Com Lave passed in 11 (Britain had ad numerous Comm Laws dating back co 1463) meant an increase in apricultural protection, the pressure for free trade was building up ‘Although there was a cound of tariff reduction in 1833, the big change came in 196, when the Corn Law was repealed and tariffs on Inany manufacturing goods abolished." The repeal ofthe Corn Law is these days commonly eparded asahe ultimate victory of the Clas fal Liberal economic doctrine over weongcheaded metcantilism. A though we should not underestimate the role of economic theory in this poliy shift, many historians more famvir with the period point fot that it should probably be understood as an act of ‘fee trade Imperialist intended to "hal the move to industialisation on the ‘Continent by enlarging the market for agricultural produce and pri ‘mary materials TIndeed, many key leaders ofthe campaign ro eepeal the Comm Lav such as she politician Robert Cabden and Joba Bowring of the Board (Of Trade, saw heir campaign in precisely such terms" Coben wew ‘on thas clearly reveled nthe fllowing passage: “The factory system would, in all probability, not have taken place in America and Germany. It mest certainly could not have four ished a it has done, bot in these states, and in France, Belgium, land Switzerland, through the fostering bounties which the high priced food of the Brisk artisan has offered to the cheaper fed Imanufacturce of those counties" Symbolic though the repeal of Corn Law may have beens the rea shift to fre tade only happened in she 1850s. I was only after Gladstone’ budgets of the 1850s, and especialy chat of 1860, in conjunction wich the Anglo-French fre tade treaty (the so-called Cobden-Chevalce "Treaty signed that year that moe tariffs were eliminated, The following passage suecinelly describes the magnitude of ctade liberalization that Rappened in Britain during the 1850s In 1888, Briain had 1,146 ducable acess by 1860 she had forty-eight, all but ewelve being reverse dates24 hing Away the Ladder con Tusuties or semiluxuries, Once the most complex in Europe, the Briish tariff could now be printed “on half a page of Whitaker's Almanack” This imporeant to note here that Britain's technological lead that enabled thin sift toa fee trade cegmie had been achieved “behing high Sad long-lasting caf barriers” Hi also important ro note that the ‘verallhberalicaion ofthe British economy that occurced dering the ‘-nineteenth century, of which tade liberalization was just a pat, ‘was highly contrlled affair oversen by the state, and not achieved through 4 lussee fare approach,” It should also be pointed out that Brain ‘adopted Free Trade painfully slowly: eighty-four years from ‘The Wealth of Nations to Gladstone's (860 budget; shirty-one from Waterloo tothe rial victory of 1846." ‘Moreover the feetade egime dil not lst long, By the 1880s, some hankpresed British manufacturers were asking for protection. By the tly ewenith century reintroduction of protectionism was one of the forest snucs in British polit, as the country was rapidly losing ts manufacturing advantage to the USA ad Germany testimony co this ‘war the influence ofthe Tanff Reform League, formed in 1903 under the [eaderhip ofthe chaamatc poltiian Joseph Chambers. The er of fece ade ended when Britain finaly acknowledged thc ic had los its ‘manufaturingeminence and reintroduced tariffsona large scale in 1932." 2.2.2, USA As Lise pointed ut (ce Chapter 1), Britain was the fist coun Ceafally to launch an infant industry promotion strategy. However, its most ardent user was probably the USA ~ the eminent economic histo flan baal Bairoch ance called ithe mother countey and bastion of ‘modern protectionism’ “This fet i rarely acknowledged i the modern literature, however, specially that coming out ofthe USA, and even many oxherise knowl ‘Sleable people dornot seem to be aware of it. No less an economic historian than Clive Trebileock, an authority on-£uropean Industrial Revolution, when commenting on the introduction of 1879 ears in (Germany, sated that taifs were going up allover the world, iscuding “even feerade America! ‘Even when the existence of high tariffs acknowledged, their impor. tance severely downplayed, For example in what was unt recent the Mandan] overview of US economic history, North mentions tanifs once, ( Policies for Economic Develop 25 only to dismiss them as an insigificane factor in explaining US indus: ‘ral development, He argc, without bothering oesablish the ase and by siting only one highy-biased secondary source (ce clasic sty by F'Taussig, 1892), “while aiff came increasingly protective in the years alter the Civil Wat is dob they were very influent in affecting Seriously the spread of manufacturing However amore eateful and unbiased reading of the history reveal that the importance of infant industry preteion in US development ca rot be overemphasized. From the carly days of colonization in wha later became the USA, protection of domestic indstry was a controversial poliy sue, To begin with, Britain did not rant to indastealize the Colonies and duly implemented policies vo that effet (see section 23, foe futher detail). Around the tine of independence, Southern agar ian imeress opposed any protection, while Northern manufacturing interests ~ represented by, Among others, Alexander Hamilton, the frst Secretary ofthe Treasury ofthe USA (1789-95) ~ wanted it.” Indeed, many point out that it was Alexandee Hamilton, in his Reports ofthe Secretary ofthe Treasury on the Subject of Manufactures (G71), and not Fredsch List asin often thought, who fst systematically stout the infane industry argument. Infact 26 Henderson and Reinet point out, List started our asa free trade advocate and only converted {othe infant incdostry argument following his perio of exile in she USA (0825-20), Whikche was there, he was exposed ro the works of Alexander Hamilton and the then leading. US economist and strong advocate of infant industry protection, Daniel Raymond.” Tn his Reports, Hamilton argoed that competion from abroad! and ‘forces of habit” would mean that new industries that could soon become internationally competitive (infant industries) would not be started inthe USA, unless thie initial losses were guaranteed by go Cramcnt aid. This ad, he sai, could take ee fort of import duis or, in are cases, prohibition of impor.” Ie is interesting co note that cece is close resemblance berwsen this view and thar espoused by Walpole fhee section 22.1) ~a point that was not lost on the contemporary “Americans, xpecially Hamilton's political opponents. In ur, it should to be noted that both the Walpolean and the Hamiltonian views ate femackably similar tothe view that lies behind Ease Asia’ postwar industrial policy (eee section 22.7) Initially, the USA did not have a feerallevel tempt to grant the Congress tariff power in 1781 {cquired the power to tax, the Congres passed liberal anf act (178),- 26 Tcking Away the Ladder ‘imposing a five pr cent fa rae aif on all imports, with some excep tons, suchas hemp, ase and nai. Many trfls were increased in 1792 although they sll far shore of Hamilton's recommendations, Which elle for an extensive system of infane industry protection and Subsidies, After thay until the war seth Beitain in 181, the average {aril level remained around 12 per cen, but in order to meet the increased wartime expenses, all anffs were doubled in 18128 'Asigificane shift im policy oecureed in 1816, when, as List noted (Chaprer I), 4 new law was inteoduced to keep the taf level close ro that from wartime asa result of the considerable political influence ofthe infan industries that had grown wp under the ‘acural’ protec fiom accorded by the wat wth Britain, Thi was done despite the fact thatthe revenue was no longer needed ~ specially protected wee cotton, ‘woollen, and iron goods In the 1816 eri law, almost all manufac fured goons were subst to tans of around 39 percent. Table 2.1 Shows that the average tariff level for manufacturing prodvcts in the USA in 1820 was around 40 per eet lniially, this measure was wel omed by everyones inchiding the Souteen states, which hoped that it ‘woul help industries to grow in thee trrtonies. However, the Southern ates soon turned agains «because of dei interests in importing supe foe quality British manufactares and because ofthe failure of the indus tries to emerge inthe owe tersitoris. "The Southern agrarian interests, ith the help ofthe New England {and especially New York) shipper, were able ro defeat bills cling for Higher tiff in 1820, 121 and 1823." However, in 1824, a new, still igher, tan was enacted kr 128 che so-called Tarif of Abominations fortber divided the county. This was becuse this time the octher and ‘wenerh agricultural ioterets were adding high arson the aw mater “bor low value-added manufacrorestha they produced (wool, hemp, flow, far and liquors thus cresting ersion withthe New England mana: facturing stares.” "Yet another tan law was passed in 183. This offered a 40 per cene tariff ate on average for manufactured goods ~ a much lower cut than the Southerners had wanted ~ and particularlyshigh protection was tccotded to iron and textile goods (e4, 40-45 per cent on woollen ‘manufactured goods and SD per cent for clothing). This led to the Sovalled Nullficaion Criss started by South Carolina's refusal to “ecept the law. A‘compromise bill was passed in 183, which offered few immediate eduction but made a provision for gradual reduction ‘over the next ten years, davn to aboot 25 per cent for manufactred Policies for Economic Develoy“%t_ 27 ‘goods and 20 per cent foe all gous, However, as Soom as this tem year eduction ended in 1842, 9 new tariff act was passed, raising duties Back up to about the 1832 levels" Tete was 2 recon in protection inthe 1846 tariff law aluhoogh the average ad valorem duty on the SL most important catepories of imported goods was stil 27 percent Thete was 2 farther reduction in 1857, made possible by the coalition of the Democrats, the cloth manufacturers who wanted aw wool placed onthe" fre lis’ an raleoad interests who wanted tasiffce ion from abroad. Batoch describes the pio between IMG and 1861 as one of modest protectionism." Howes this protectionisn is only “modest by the historical standards of the USA see table 2.1). Ir muse aso be pointed out that, given the high transportation cont ofthe period, which prevailed at leas unt the 1870s US ranffs would have been greater butt eo international sade than ‘he European ones, ese af bh had heen atthe same lve” However, the tension surrounding both the tariff and slave iss persisted berwecn North and South, snd finally culminated inthe Civil ‘War (1861-3). The Civ War is commonly though ro have been fought solely over the ise of slavery but in Fae tails were another impor fant issue, Gartaty and Carnes sate that [a wae against slavery would not have bsen supported by a majority of Norcherers. Slavery was the foot ease of secession but not ofthe North's determination to resist Secession, which resulted from the people's commiment to the won." Given thatthe South had scen tafe 6 the major existing Hablity of the union while the abolition of slavery was sill only a theoretical possibiliy, the importance ofthe tariff sve in causing the secession Eannot be over emphasized. Tincol’s victory in the presidential clstion of 1860 would have been ‘ety dificult not impossible, had the lading protectionist states of Pennsylvania and New Jersey not switehed their allegiance to the Republican Party thanks to its election pledge to maintain increased protection” The pledge (the “twelfth plank’ of the platform) was Eclberately worded ambiguously in such a Way a8 co assuage the free trade clement inthe Paty” At the same time, was still accepable co the protectionist sates, given that Lincoln was "tue Be protections” tnd thas seen a8 someone who would live up tothe spiet ofthe pede, once elected. ‘Ealy in hs political career Lincoln had been a leading member of, the hantlne protectionist Whig party and an enthusiastic fllower of the charismati politian, Henry Clay. Clay advocated the "American2¢icking Away the Ladder System’, which consisted of infane indastey protection (Protection for Home Industries and infrastructural development (Internal Improve rents, in explicit opposition tothe “Bricsh System of free trade, and Linco flly shard his view.” Although during the ampaign Lincoln was compelled co keep quict on most of the controversial issues, Including tacts, in order to hold a diverse and young party together®, he unwaveringly gave assurance of his protectionist belief when it was deemed necessary.” “Although fe was consistently anti-slavery, Lincoln had never before audvocste forceful abolition of slavery; he considered blacks racially inferior, and was against black sulfge. Given this, there was prob ably less to fear forthe South on the slavery frome than on the taiff Front upon hie clction Indeed, even in the early days ofthe Civil Wat, Lincoln made i clear that he was gute willing eo allow slavery in the Southern states in order to keep the Union rogecher. He enacted slave ‘emancipation in the aut of 1862 as a strategic move to win the War father than ou of moral conviction." In 1862, 4 new tariff act was inteoduced. Ie was disguised as ‘compensation’ forthe inereased excise tax and the emergency income tan duting the Civil War, in order thar the previous margin of protection could he maintained, This saised the eats to thie highest Fevel in they years ~ mach higher, in many case, than the new excise tanes warranted’ In 1864, eacfls were cased sill Further, to their highest ever rates, to meet the demands of war expenditure; they remained at thowe levels after the war, although other internal taxes ‘were cepealid.” ln chis way, the wetory of the North inthe Civil War Cnsured that the USA remained the most ardent practitioner of infant Industry protection until the First World War, and even until the Second World War ~ with the notable exception of Russa inthe early ‘wentieth century (see Table 2.0." In 1913, following che previous Democratic elecoral victory, the Underwood Tariff bill was passed, leading to "a large increase in the categories of goods allowed free entry and to a Substantial drop in fverage import duties’ this reduced the average taniff on manufac tured goods from 44 per cent to 25 per ext: However, the onset of the Fest World War made this bil ineffective and a new emergeney tariff legislation was put in place by 1922 following the Republican return to power in 1921, In the 1922 law, although the tariffs did not return to fir high 1861-1913 levels, the percentage effectively paid on manufac tured imports tose by 30 percent Policies for Economic Develo™int 29 Following the start ofthe Grest Depression there came the 1930 Smoot-Havley tariff the most visible and dramaric ac of antstrade falls’ according to Bhagwati" However, this characterization is very tmislesding, While the Smoot Hawley tari provoked an international Caaf war, shavks co ts bad timing especially given the new statis of the USA asthe world's laggestcredivor nation following the Fest World War i dd not constitute a racial departure from the county's ta Aisinal trade policy stance*® Tn fact, the Smoor-Hawley tariff only marginally increased the degiee of prorctionism inthe US economy. As we ean sce from rable 2s the average erff rate for manufactured goods tha resulted fom this ill woe 48 per ent which tl lls within the range ofthe average tates that had prevailed in the USA since he Civil War, albeit the Upper region of this range. It only in eelation to the bret “Liberal interlude of 1913-29 that the 1930 caf bill can be interpreted as increasing protectionism, although even then it was aot by very much Table 21 shows that the average rate of tariff on manufactures in 1925 vas 37 percent and rose to 48 percent in 1931, Te was only after the Second World War that the USA ~ with is industrial supremacy unchallenged ~ finally liberalized is trade and Started championingthe cause of Frc trade. However, should be ned that the USA never practised fre trade ro the ame degre as Britain did ‘during its fretrade period (IRA to 1982) le never had a 2eo-taif regime ike chat of the Uk, and it was much more aggressive in using ‘hidden’ protectionist measures. These included: VERS (voluntary export tecstraints); quotas on textile and clothing (theough the Mult-Fibre ‘Aereement; protection and subsides for agriulere {compare this with the repeal ofthe Cor Laws in Britain); and unilateral rade sanctions (cepeciallythroagh the use of at-dumping duties. In contrast to the attitude of a generation ago, represented by the abovermentioned work of Nort, there ie nove growing recognition Of the importance of protectionism among US economic historians, who used so be extremely wary of saying anything positive abour i “Today, there sem atleast to be a consensus that taf protection was crtial inthe development of certain key industries, such asthe textile industry inthe early nineteenth century and he itn and stel industries in the second Ralf of the nineteenth century.” Although some commentators doubt whether the overall national welfare effect ff protectionism was positive, the US growth records during the36 Ticking Away the Ladder protectionise period make this scepticism look overly cautious, if not Aowneghe bised Baitoch points out tha, throughout the ninetsenth century and up to the 1920s, the USA was the fastest growing economy in the word, espte being the most protectionist during almost all of this period. There is abo no evidence that the only sgnficane eduction of protee- tions in the US economy, berween 1846 nd 1861, had any noticeable positive impact on the country’s development. Most intersting) the fo best 20-year GDP per capits growth performances during the 1830-1910 period were 1970-1890 (2.1 per cent) and 1890-1910 (ewo ‘per cent) ~ both penis of parciculaey high protectionism I is hard {o believe that tis association between the degree of potectionsm and ‘overall growth is purely coincidental. Indeed, O'Rourke shows some Satistcal evidence from ten NDC, inclading the USA, during the lib ral olden age” of 1875-1914, tothe effect that protection (measured by average tariff rates) was positively elated to growth” Of course, a¥ many people point ou, tanff protection for some in dustis certainly outlived is usefulness. For example, despite the con tinuing debate on this issue" ic is widely agreed that by the 1830s, “American cotton textile producers would not have needed protection, particularly in certain lowvalue-added segments of the matket.” I is ho very likely that even some of the necessary taifs may have been Sevat excessively high levels due fo interest-group pressutes and the Complicated horw-trading that has characterised the counte’s policy making. Despite these qualifications ie seems dificul co deny tha, wit fut infant industry protection, the US economy would not have indus Iwialized and developed as fas as ie di in its catching-p peri. Important as it may have been aif protection was not the only policy deployed by he US government in order to promote the country’s e=o- nomic development daring ts catch-up phase. From the Morail Act of 1842, and probably from as carly a8 dhe 1830s, the goverament supported fan entnsve range of agricultural research, Measures used included the ranting of government land to aricltural colleges and the establish- tment of government rescarch institutes, such asthe Bureau of Animal Tncusry and the Bureau of Agricultural Chemise. lathe second half of the nineteenth century, it expanded public educational invesiments~ in 1840, Less than half ofthe oral nvestment in education was publi, whereas by 1500 this figure had risen to amon BD percent ~ and ised ee it crag ratio to 9 per cent by 1900, The roe of the US government in m3 Policies for Economic Develo ‘promoting the development of transportation infrastructure, espectally through the granting of land and subsidies ro railway companies, ws also catia in shaping the country’s developmental pth. Tis important to recognize thatthe role of the US federal govern iment in inussral development has been substantial even inthe post tar eta, thanks tothe large amount of defence-elated procurements ind R&D spending, which have had enormous spillover effets” The Share ofthe US federal government in total R&CD spending. which vas nly 16 per cent in 1930,” remained between one-half and two-thirds luring the postwar years Industries such as computers, aerospace fand the internets where the USA still maintains an international edge despite che decline in ite overall rechnologeal leadership, would not have exised without defence elated R&D funding by the country's federal government.” The eicl ole ofthe US government's National Institutes of Health (NIH) in Supporting R8cD in pharmaceutical and biotechnology indusrcs, thus maintaining the US lead in these indus tres, should als be menioned. Even accoeding to the information pro- vided by the US pharmaccuceal industry association, only 43 percent Of pharmaceutical R&D is funded hy the industry islf, while 29 per ent ie funded by the NIH." ring the nineteenth cernury, the USA was not only the strongest bastion of protectionist police, but was also thir nella! home, A that ime ita widely belleved among US intellectuals that ‘the new county required {new economics, one grounded indifferent polscal insitutions and comomic conditions than chose peeing i the O14 World.” Some of them went so far asco argue that even Sntenatioally competitive US industis shovld have tariff protection because ofthe possibility of predatory dumping by Lage Esropean enterprises, who, affer decimating the American fms, would rever to monopolistic pacing.” "Well into the lst quarter ofthe nineteenth century, most ofthe more coviginal US economist of the period seem to have been strong avates of infant industey protection. The well-known supporters of infant industry promotion, Daniel Raymond (who influenced Friedrich ist) and Mathew Carey were the two leading economists of the early rinctenth century, while American economies during the mid-o late rineteenth century was dominated by Carey's son Henry. Henry Carey twas desribed asthe only American economist of importance’ by Marx ied Engels inthe early 18505" and was one of Lincoln’s (somewhat frasteated) evonomie advisors. Unfortunately, most of these32 Zing Away the Ladder economists have now besn airbrashed out ofthe history of US economic thought, bu i was they, rather than the American Classical economists (then regarded as second-rate by the British standard), who were the Imore prominent intlleceal figures ofthe tie. "Whats especially intresting o note here is that many US intellect als and politicians ding the countey's cate-up period clearly under~ ‘Stood thatthe free trade theory advocated by the British Clasical Economists was unsuited to thee country. Reinert reports that due ro ths concer, Thomas Jefferson tied (in vain) eo prevent the publca- tion of Ricarto's Principles i the USA." Reinert also cites from Liss work the comment bya US Congressman, a contemporary of List, who ‘Observed that English trade theory ‘like most English manulactueed ‘ood is inended for export, not for consumption at home’. ‘As | mentioned earl, Henry Clay, the most prominent protectionist politician of she ealyninetenth century and Abrabam Lincoln's ely Irentor named hs economic policy platform the “American System’ in explicit opponition to whae he called the “Betis System’ of free trade. Somewhat later, Henry Carey even argued that fee tade was part of Briish imperialist system that consigned the USA to a role of primary product exporter Iti lo rporced that during the 1860 election cam: ‘ip in which Carey played a key intellectual roy the Republicans in Some protectionist states refered dsparagingly co the Democrats a8 a "Southern British Anuiaaf-Disonion party [salis added.™ 2 Germany is now commonly known athe home of iafan indsty pro ‘ection, both itlleelly and in tems of policies. However, historically speaking, anf protection actully played a far less important zle i the ‘ronomic development of Germany chan in that of the UK othe US “The tariff protection For industry in Prussia before the 1834 German customs union under is leadership (Zollverein) and that subsequently Seeotded to Getman industry in general remained mild. Trebiock, an {uthorty on Getman instalation of the period categorically states that Zolleerein tariffs were insufficient to provide effecive “infant Industry" protection; een the ison manufacturers went without raeff ‘ties wnt 1888, and lacked succesfal proection well beyond this!” The Prssan state constantly resisted political pressures for higher tanifs by other member states of Zollereim. Although there were increases in ‘aiff in 1848 (on iron) and 1846 (on cotton yarn) these were relatively . Germany Policies for Economic Developm 33 small. After tha, the Zollerin tariff showed a general downward ten tne he late 1870s, witha bilateral fe wade agreement with France in 162 and reduction in stel duties in 1870." In 1879, however, Otto von Bismarck, the German Chancellor in toodaced pret caf increase co cement the political alliance beeen the Junkers landlods) and the heavy industrialists ~the socalled "mar fiage of won and rye" However, even after this, substantial addi tional protection wae accorded only to agriculture and the key heavy industes, especially the iron 8 steel industry, and industrial prot tion in general rained low." As can be seen From table 21, che evel fof protection in German manufacturing was one ofthe lowest among, ‘comparable countries throughout the nineteenth century and the first If of she rwentith century. “The relatively low tatifé protection does not mean thatthe German sate took a Lussee fare approach to economic development. Under Frederick William 1 (1713-40) and Frederick che Great (1740-86), the Prossian state, which eventually unified Germany, pursued a range of polices to promote new industries. The conventional measures sich a+ {arf protection (which was not too significant on ts own, as Ihave Pointed out above), monopoly grants and cheap supplies from royal fleraries were of course used, but more important was the direct involves of the state in key sndusties."" "When Frederick the Great came to power, Prussia was essentially a ‘avemateril exporter, with woollen and linen eles being the only mnanafactured export items. Continuing his father’s mereatilist pol {Gos he promoted a lars numberof indies ~erpecilly textes (nen hove al, metals armaments, poreain silky and sugat refining ~ by providing, among other things, monopoly rights, trade protection, Export subsides, capital investments, and skilled workers from Sbrond."* Fredric alo retsined a number of busines houses ro fu tion as (rkat would today be called) ‘management consultants” in torder to pioneer development of new industries, especially the eulery, Sopat-tening, metals and munitions industeies. These “model facto fies were in any ways hothouse plants that would noc have survived fxposute o full marker competition; however, they were important introducing new technologies and generating ‘demonstration effets "In his ambition to transform the country into a military power, Frederick abo annexed the industrial province of Silesia and began 0 ‘work on is development. In particular, he promoted the steel and en- 34 “Ticking Away the Ladder ‘industries, installing the frst blast furnace in Germany in the province and recruiting skilled foregn weavers by giving them each a fre loom. ‘The development of Silesia 35 the “arsenal of Geemany” was further promoted afer Frederick's death by 4 number of dynamic bueauerat ‘entrepreneurs. "* “The mos important of thee was probably Gaf von Reden, who suc- ‘cesily introduced advanced technologie from the more developed couse ties, especially Butain from which he drew iron-padaling technology, the coke fornace and stcam engin), by means ofa combination of state- ‘supported industrial espionage and the poaching of sled workers dur- ing the late eighteoth ad early nineteenth cenuris. Another significant igure was Pete Beat, who in 1816 became head of the department of ttade and industry in the Minty of Finance. Beuth setup the famous Gowenbeinatin (Craft Intitte) sn 1820 to tain sill workers, subi ‘ied forcgn trips to gather information on new technologies, collected foreign machinery for copying giving the orginal pecs to private sector firms), and provided suppoct for business startups, expecially machinery, the stesm engine and locomorive industries." ‘By 1842, Silesia was considered technologically almost on 2 pac with Britain, and wae cerainly the most developed region on che Continent ‘The success in Silesia was as had been intended, confined to 8 narrow ange of miitary-rclated industries and did not spill over inco other ‘epions easily. However thes an important example of how ina catch Up economy the wate could compensate for the scarcity of enrepre> pari tlene.™ From the early inetcenth century onward, the Prssian state also pionsered a ess dtece and more sophisticated form of interventions than that used in Silesia, One important example is che government financing of road building inthe Rube Another important example js educational reform, which involved not only building new schools and universities but als the reorientation oftheir teaching rom theo ‘ty to sence and tehnology = thi ata ime when science and technol fy was not being aught in Oxford or Cambridge. The quality of German higher education a the time is proven by the fact shat between 1820 and 1920 an estimated 9000 Americans went fo Germany to study. “There were some growth-tetarding effects of Prussian government inervention i the fst half of the nineteenth century, such a8 the ‘opposition tothe development of banking.” However, on the whole, twe cannot but agree with the statement by Milward & Saul that “lo successive industealising countries the attitude taken by early Institutions and Economic Develo ent 35 nineteenth cneury German goveeninents seemed much more nearly incouch with economic reals than the rather iealiaed and fequent]y simplified model of what had happened in Britain or France which conomints presented to then." [Alter the 140s, withthe growth ofthe private sector, the involvement ofthe German sate in industrial development became less pronounce However, this did not mean a withdrawal of the rate But rather a transition from a directive toa guiding role ~ examples of policies of this time include scholarships co promising innovators, subsidies to competent entrepreneurs, and the organization of exhibitions of new ‘machinery and industrial processes." During the Second Reich (1470-1914, further development ofthe pr sate sector sind the strengthening of the Junker element, which was foppored to further iadunral development nthe bareawracy et a8 trosion of tate autonomy and capaci" Trebalcock ares that, ters of industrial development, the German state's role daring this period tras Largely confined to the adinstaton of aif an, infoemally fom the late 1880s and more formally fom the 1920s, to cartel superna (for futher deals on German cartels, see section 3.24. of Chapeer 3. Despite the relative decline sn state capacity and involvement in indastial development during this period, however, the importance of ‘anf policy and cartel policy forthe development of heavy ingusties tthe rime should not be underestimated. Tilly points out tha eas rade cartels more workable in heavy industries, thus enabling the firms to invest and ianovate more agavesivly.™ Moreover, duing this pe flod, Germany pioneered modern social policy, which was important in aitaining social peace ~ and thus promoting investment ~ in a newly-unified country that was politically, religiously and regionally ‘ery divided (social welfe institions are dscusted below, Chapter 3, section 326.4) 2.2.4, France [As with Germany, there isan enuring myth about French economic policy. Thi isthe ew, propagated mainly by British Liberal opinion, that France has always been 2 stateed economy ~a kind of anthesis 10 laierexfare Britin, Thi characterization may largely apply 0 the pre-Revoluionary period and che post Second World War period; it thoes not however apply € the eet of the countzy’s history.- 36 eking Away the Ladder French economic policy the pre-Revolotionary period — often known. 8 Colbertiam after Jean-Baptiste Colber (1619-83) the famous finance Iministr under Louis XIV ~ was certainly highly interventionist. For ‘example, given it elatve technological backwardness visdvis Brain In the early eightonth contury, the French state red wo rer skilled ‘workers fom Britain on alate eae In addition lke other European ‘tates atthe time, the French sate ia the period leading up 10 the Revolution encouraged industrial expionage by offering bounties to hose ‘who procured target technologies, even appointing an official under the cuphemistic vite of Inspector General of Foreign Manufactures, ‘whoue min ask wa to organize industrial espionage (se below section 2.3.) lis party theough these government efforts that France closed the technology gap with Britain, becoming succesfully industrialized bythe cme ofthe Revolution." ‘The Revolution upset this course significantly. Milward and Saul argue that i brought about a marked shift in French government eco- ‘omic policy, because ‘the destruction of absolutism seemed connected in the minds ofthe revolutionarics with the introduction of more lisse fie syste ls he immediate port Revolutionary years, there ‘were some efforts to promote industry, and especialy technological, ‘development by various government, particularly that of Napoleon, ‘This was done through sehemes such asthe orgarization of induseal exhibitions, public competitions for the invention of specific machin- fry and the creation of business associations co facilitate consultation with the government." “Afce the fall of Napoleon, che laisees fare policy regime became firmly exablished, and pessised until the Second World War. The limi- tations of this regime are regarded by many historians as one of the Inajor sources of the counteys relative industrial stagnation during the nineteenth century.” "This canbe bes ilstrated with reference to trade poliy. Challeng ing the conventional wisdom that pitches eetrade Betain against pro- tectionist France ducing the niteenth ccntury, Nye examines detailed fmpital evidence an conclides that ‘France's trade regime was more liberal than that of Geeat Britain throughout mast ofthe ninetenth century, even inthe period from 1840 to 1860 [the alleged beginning of fally-fleged fee trade in Britain Table 22, which comes from Nye, shows that when measured by net customs revenue as a percentage of ret import values (a standard measure of protectionism, especially mong historians), France was always less protectionist than Britain Policies for Economic Devei™™ent 37 between 1821 and 1875, particularly up wi the acy 186052" AS we can se fom the table, the coatrast in the degre of protectionism in plemented by the to counties was particularly lage inthe earlier esis, bu was sl significant inthe decades following Britain's shift orf trade i 1846 wth the repeal ofthe Co Laws." (eaured bret eantoms revere 2 preteen Mp aes) Foes 3 ‘ace fe 19h 26a Ie is interesting ro note that che partial exception to this century-anda hallong period of ibecalism in France, namely, the ule of Napoleon I (848-20), was the only period of economic dynamism in France during this period. Under Napoleon Il, the French rate actively encouraged infrastructural developments and established various institutions of research and teaching, I also contebuted co the modernization of the ‘country’s financial sector by granting limited lability investment in tnd ovetsecing of moder, large-scale fiancialinsitrions lke Crédit Moblin, Crédit Foncie (he Land Bank) and. Crédit Lyonnais ™ ‘On the trade policy font, Napoleon Il signed che famous Anglo-French trade treaty the Cabden-Chealer teary) of 1860, which reduced French ‘ans quite substanally and heralded a perod of trade liberalism on the38 ~Tcking Away the Ladder Gonsncne that Ins unt 1879." Howener, as we ean se from Table 2.2, the deg of protectionism in France was already quite low onthe eve of the ety (ower than in Btn athe time), and therefore the reduction in protectionism that rsuked fom this treaty was relatively ino. "The weaty was allowed to lapse in 1492 and many taf rates, espe- cially the ones on manufactaring, were subsequent ised. However, this had few postive fects ofthe kind experienced by counties lke ‘Sweden during the same period (se section 2.2.5 below), because there was no coherent industrial upgrading strategy behind this tariff increase If anything, the new tariff regime was actually opposed co such a scheme ~ the author ofthe taf regime, the politician Jules ‘Melin, was expltiy against large-scale indastralization, because of his ele hat France should remsin country of independent farmers And small workshops." “The French govesnment was almost as lisez faire in its attitude towards economic matters asthe then very laissez-faire British gover tment especially during the Third Republic. Civen is polit instabil> ityand divisions, France was basically un by the permanent buteavericy, ‘which was sel dominated by the very conservative and technoerati Ministry of Finance The government budget was made up largely of xpenditte in general administration, law and ordet,edueaton, and transport ~ the classe steas of involvement of the ‘minimal state” The eailatory role of the sie also remained minimal” The Minny of Commerce and Industy, the potential centre of industrial policy, mat not created in its modeen fem until 1886; even then ie conoled the smallest budge of any ministre concentrated Iaegely on promoting exports and serting earl and Is industrial peo- motion acts ‘ther than «care subd, consisted largely of organ ising exhibitions, looking after the Chambers of Commerce, gathering ‘economic statistics, and distebuting decorations to businessmen" Even in these imied areas it was not very effective. Moreover, tariffs dloring this period were largely protective of existing industrial tue tures (capectally agrculture) and were not of the proactive kind that ‘was simed at industrial upgrading." = it was only aftr the Second World War thatthe French elite was talameed into eorgaizing thee state machinery m order to addres the problem of the county's relative industal backwardness. During chs es expecily until he late 140s, he French state used indicative plan ring state-owned enterprises and what these days ~ somewhat mis Tealingly termed “East Asiasyl’ industrial policy in onde ro catch Policies for Economic Develownt 39 up with the more advanced countries. AS a result, France witnessed ‘ery sucess structural tansformaton fst economy, and finally over took Briain in terms of Both oust and (in most ares) sechology.™ 2.2.5, Sweden Sweden, despite ite reputation as the ‘small open economy’ during the postwar peiod, didnot enters modern age with a fee trade rep [iter the End ofthe Napoleonic wars ts government enacted a strongly preci taf la (1816), banaing the import and export of sme tems [Rea eesul of the high tails, an outright ban on imported frshed cor ton as, and the deliberately low tanifs on raw cotton, cotton cloth predton was greatly increas" Once ain ts iteresting 9 note he smarty between this aif eogime and hat wsed hy Britain in Cghtcemh century (see section 2.2.1), a8 well a chose used by counties Tike Korea and Taiwan inthe postwar prio (se section 2.2.7). However, from ahout 1830 onward, protection was progressively lowered." A very low taif regime was maintained until the end of the nineteenth century, especially after the 1857 abolition of tariffs on foorstffs, caw materials, and machines." As table 2.1 shows, around 1678 Sweden had one ofthe lowest tasff rates of any of the major conomies listed “This free-trade phase, however, was short-lived: From around 180 Sweden stared sing triffe ata means of protecting the ayriculral Sector from the newly-emerging American competition. After 1892 {anil when je had been bound by many commerealteaties) it aso provided tariff prorection and subsidies co the instil sector, espe aly the newly-emerging engineering sector" As we can see from fable 2:1 by 1913 ie average eanff rate on manufactured products ‘was among the highest in Europe. Indeed, according to one study Conducted in the 1930s, Sweden ranked second after Russia among, the If Eoropean countries studied, in terms ofits degree of manfac- turing protecion."* ‘Ara raul ofthis switch co protectionism, the Swedish economy performed exttemely well inthe following decades. According to one alelation Sweden va, after Finland, the second fastest-growing (i terms of GDP per work-hout) of the 16 major industrial economies between 1690 ane 1900, andthe Fastest growing beeen 1500 and 1913. “The tcf protection ofthe late ninercenth century was particultly successful because ie was combined with industrial subse a well asing Away the Ladder supports for R&D aimed 3¢ encouraging the adoption of new Technologies Economic historians generally agree that the promotional forts of thr time provided an anportant impetus to the development of certain infant industries, although one negative vide elfet was to Create the proliferation of relatively inefficient small firms." “Tarif protection and subsidies were not the only tools that Sweden used to promote industrial development. Mote interestingly, during the late nineteenth cencury, Sweden developed a tradition of close pub- Tie private cooperation ro an extent chat is unparalled in other trict during this period, including even Germany with its Fong tradition ‘of public-private partnership (see section 2.23) ‘This cooperative relationship fist developed out of state involve ‘ment inthe agricultural iergation and drainage schemes. This same pattern was then applied tothe development of railways from the 1850s, To conterventon of the then dominant model of private-sectorled de ‘elopment of railways (notably in Briain), the government built the trunk lines (completed by 1870) sad allowed the private sector to on Struct branch lines, The constuction and operation ofthe branch lines twere subject to government approval and, after 1882, price contol. In 1913, the state-owned railway company accounted for 33 percent of the eallway mileage ae 60 per cent of goods transported." ‘Similar methods of public-pevate cooperation were applied to the development of other infrasteactures ~ telegraph and telephone in the 1850s nd hydroeleiic energy in the 1890s Te is aso often argucd sha this longcserm technical cooperation with state-owned enterprises i the insstroctural industries was instrumental in making companies like Ericsson (telephones) aad ASEA (now par ofthe Soreish- Swiss firm ABB, which manufactures railway equipoent and eletsical engi neering ngo world-class firms." Public-pivae collaboration also existed outside ce infrastructural sector in 177, semirautonomious Ion Office was created. Is direc: tors were eleced by the Awociation of Iroamasters (the employers” ‘sociation and it maintained a price cate, disbursed subsidized loans, provided technological and geological information, gave out travel Feipends for the sourcing of technology, and promoted metallurgical research. The industry ws liberalized inthe mid-nineteenth century, ‘aring withthe Mberalization of trade in pig iron within the country {1835} and achieving the removal of most restrictions by 1858. Even after thin, howerer, the employers" association continved to collabo fate with the government in fostering better technical standards and ~ Policies for Economic Develop" a higher skills. ei interesting that all of these inkaivessesemble the patterns of public-peivate collaboration for which she East Axion Economics later became famous." The Swedish state made grea efforts ro fatate the acquisition of| advanced foreign tecnology Gilding ehrough industrial epionagss for SGncusion of which sce section 2.3), However its emphasis on the Sccumlaion of what the morn erate calls technological eapabi the was more noxable sil!” In order to encourage technology aequs- ‘om the Swedish government provided stipends and travel grants for adics and teseatch, A Ministry of Education was established in. 1809, din primary education had already been made compulsory bythe 140s “The People’ High Schools were established im the 1840s, anda sb yeae eval of compulsory edncaion was inreduced in 1879. Ar high esl fhe Swedish state helped the exablishment of technological research nscute, the most famous being the Chalmers Insate of Technolo Jn Gothenburg, and provided industry ~ particularly metallurgy and Mtoodtelated infuses with diveteesatc funding” Swedish economic policy underwent e significant chang following the ‘Seceoralvcery of the Socialist Party in 1932 (which since that date has frecn out office for les shan en years) and dhe signing ofthe “isto: Cl'pact’ Between the unions and the employers association in 1936 (the Salsjobaden agseenvent). The policy rege tha emerged after the 136 pac inal focsed on dhe conseaction ofa stein ich the ruployers would fiance a generous welfare stare and bh investment in rewen for wae madration from the union. Ir the Second World War, se was made ofthe regime's potential for promoting industrial upgrading, In the 1950s and 1960s, the cen feallued teade union, LO (Landsorganistioneni Sverige) adopted the Sovealled: Rehn-Meidner Plan," This introduced the so-called idarec wage policy, which explicitly aimed 1 equalize wages across indents forthe same ype of workers was expected that this would tnnerate pressure onthe capitalist in low-wage sectors to upgrade thet opt eck or shed labour, while allowing the capitalists in high-wage sarcts to retain exta profit and expand faster than would otherwise fave been ponble. Ths was complemented by the active labour-mar tet policy, which provided retraining and eelocaton support to the trorkers daplaced inthis proces of sndustval upgrading. Mis widely epeed thar this strategy contributed ro Sweden's suecessfal indus teal upgrading i the early postwar years."42 ching Away the Ladder Swedes postwar industrial upgrading strategy bascd on the combi ration of soldariatic wage bargaining and activeabour-matket policy Aiffrs quite consieeably from the stratepes adopted by other cou tries discussed here. Despite thei differences, both types of strategy ae jn fact based on sinilar understandings of how real world economies work, They share the belie that shift o high value-added activities is ‘racial fora nation’s prosperity and shat, if lef co market Forces, this shife may not happen st rate which is socaly desirable 2.2.6, Other Small European Economies A. Belgium ‘We have already talked about the dominance of the fiftenth-century wool industey by the Low Countries. The industry, conceateated in ‘what later became Belgium, subsequently went into relative decline, not lest because ofthe compeiion from protected British prodoces However, Belgium mantainal its industrial strengths and was the = ‘ond nation ~ after Britain ~ to start an Industeial Revolotin, By the early ninerenth century Belgium was one of che most indus tnalized parts of Continental Europe, although it was sigoiiandy dis sudvantaged by its elaivly small size nd politial weakness vis-a-vis France and Germany. At the time it was the word's technological leader in certain industries, particularly wool manufacturing. Although some ‘of it technological edge had been lost to is competitors by the middle fof the tinecenth centry, i remained one ofthe most industrialized land richest countries inthe world, specialising in industries like textiles, sel, non-ferrous metals, and chemicals. Nor last because of this technological superiority, Belgium remained ‘one ofthe less protected economies throughout most ofthe nineteenth land carly twentieth centuries (able 21) Hens and Solar argue that the ‘county remained an arden fee rade’, pariculasly Between the 1860s land the First World Wae"* However before this period, Belgium was considerably more po: tectionist than the Netherlands or Switzerland (ste below), During the first dhice quarters ofthe cightenth century, the Austrian government, ‘which then ruled what was ater to become Belgium, protected strongly from British and Dutch competition and invested in industil infra structure” During the eaey nineteenth eentary it was subject co active ITT pois ax part ofthe United Kingdom of the Netherlands (1815-30) Policies for Economic Developwic 43 under William I fee below). Morvover, until the 1850s, some indus: tres were quite heavily protected ~ earls reached 30-60 per cent for Corton, woullen and ncn yar, and 8S percent on ion. Is Comm Law ‘was only abolished in 1850." B. The Netherlands During the seventeenth century the Netherlands was the world’s dominant naval and comercial power; during this period, is "Golden ‘Century, the Dutch East India Company outshone even the British East India Company. However its naval and commercial strength Showed a marked decline in the eighteenth century, the so-alied ‘Periwig Period” (Praikentiid, with is defeat in the 1780 Fourth Anglo-Dutch War symbolically marking the end of its international supremacy.” Tis not easy to explain why the Netherlands failed to eranslte its aval and commercial strengths into sadasteal and overall economic tlomination. Part ofthe reason must have been that it was simply the fatural thing to do ~ when you have a world-lss commercial hiss like, s2y, Hong Kong today, why bother about industey? However, the Britsh goreenment exploited similar strengths tothe full in developing its industries (fr example, i passed various Navigation Acts that made it compulsory to ship goods in and out of Britain on Bish vessel). So ‘why dil the Netherlands not do the same? Thac they didnot expe ally puczlngs given thae the Dutch state had not been shy of using figcesive'mereanils”regulations on navigation, fishingy and inter- rational wade when twas trying to establish Ws commercial supremacy inthe sinteenth and eal sevententh centuries." ‘Many explanations for this have been offered: high wages due co heavy consumption taxes; lack of coal and iron deposits; the deine of cnttepreneurhip and the rie of & rentier mentality; and conspicuoss Constimprion, to name just a few. Some historians have aso sugested that Belgium's industrial strength was always an obstacle 0 neighbouring Netherland industrial development.™” Mose nterestingly, is suggests that che Netherland’ elaive decline was due ois Fire to construct the set of public policies and institutions necessary for industrial development; Weight meanwhile proposes that low caf Ihampeced the development of Dutch industies.™ "Whatever the enact case was, the Netherlands filed co industialze to the same extent a ts competitor countries, Britain, Germany’ and44 Seking Away the Ladder Belgium, Nevertheless, thanks tothe strengths ofits commercial net work, it mained one ofthe richest countries inthe world until the aly twentieth century.” ne exception ro the policy paralysis that seemed to have gripped the [Netherlands between the late sventeemth and eary twentieth centuries ‘was the effort made by King Wilkamn 1 (815-40) William I established ‘many agencies providing subsidized industrial Gnancing, the most ine portant of which was the Netherlands Teading Company (Nederlandsche HandelMaatschappi) setup in 1824. The Company uppored Dutch industries by means of targeted procurement policies {especially im sugar refining, shipbuilding and textes), using the prof its om its monopoly trade with the colony of Java, which from 1831 onward was forced to produce cash crops such a5 coffe, sugar and indigo.* Willam I also founded the Fund forthe National Industry (GH2}), the Amortstion Syndicate (1822), andthe General Society for Furthering the Nationa Indasery (1822) Daring the 1830s, strong tate support ws also provided for the development of modern cotton tex tile indasey, especialy in the Twente region." “However, frm the lite 180s, the country reverted to laze fare egime, which lasted uni the First World War, and to an extent uot the Second World War. Fest ofall, as we can sec in table 2.1, the [Netherlands remained the lest protecied economy among the NDC, ‘except for Britain inthe late nineteenth century and Japan before the festoratjon of tariff autonomy. Second, in 1869 the country abolished patencw (which was fre introduced in 1817) on the grounds dat ie rested an artificial monopoly. This move was partly inspited by the ftepatent movement that was sweeping Europe atthe time, which fact had strong sssocaton withthe fee trade movement (se section 3.238 for further desis). Despite incernational pressures, the country refused to reintroduce the patent law until 1912 tore on hi ace). ‘Thied, the Dutch government deliberately created a private sector compan in oder to compete with two existing private sector companies in managing the nacional railway, which it organized and financed." ‘This practice was hardly head ofa the sme, and alehough iis scaly speaking not a lusserfare policy itis nevertheless a precursor of ‘modern pro-compentive activist industal policy During this extreme lissea-faire period, the Dutch economy ‘remained on the whole eather sluggish, and ts indusralization rela- tively shallow. According to the authoritative estimate by Maddison, Policies for Economic Develop. 45 measured in 1990 dollars, the Nethelands was sil he second richest ‘country in the world én 1820 after the UK, even after a century of felative decline ($1,756 es. $1,561) A century later (1913), however, it tad been overtaken by no fewer than sx counctes ~ Australia, New Zealand, the USA, Canad, Switzerland and Belgium ~ and almost by Germany. Germany's per capita income was only about 60 percent that of the Netherlands i 1820 ($1,561 as opposed to $1,112), but by 1913 was only a shade below i ($5,950 vs $5835-for detailed income figute, eee table 37 in Chapter 3). Te was largely for this reason thatthe ed of the Second World Wat saw the introduction of more inerventonist policies. An active indus tral policy was practised, especially inthe years up to 1963. This included measures like nanetal supports for two lage firms (one in Stel the other in soda), subsidies to industialze backward areas, the Encouragement of technical education, promoting the development of the aluminium industry through subsidized gas, and the development of key infasructaes."™ . Switzerland Switzerland was one of Europe's eatliestindustealizers. Biucchi argues that Switzerland's Industrial Revolution stared bacely 20 years later than Britain's did. By 1850 Switzerland, like Belgium, was one ofthe nos industrialied economies inthe world, alehough the heterogenous Gnd decentralized naure of the county meant that the degree of indus Italzation remained uneven across different cantons.” “The cotton industy in particular experienced increible development uring the 1820 and 18308, According to Milward and Saul, “between tne think and one-half ofthe cotton yarn woven in Swicedand in 1822 tras imported from Britain, Yet by 1835 imports of Botish yarn had most ceased" Switerand was wold technological leader ina number tf importan: insti, expecially inthe coton exile industry, wherein tnany areas it was deni technologically more advanced than Brtain."* ‘Given this very small technologies! pap (fay) with che leader eo infant indastey protection was nor very necesay for Switerand. Alo, {Sven itssmall ste, protection would have been mote cost for Switerand than for bigger countries, Moreover, given the country's highly ‘eceatalized politcal stuctue and very small sie, there was lite oom for centralizes infane indstry protection.” Biucchi angus that free trade was the most important aspect of Swiss“ 16 Wicking Away the Ladder ‘economic policy a early asthe sinteenth century. He admits, however, thatthe natural” protection from British competition accorded by [Napoleon's interveton provided the Swiss textile industry with a ci cal breathing space, pariculely in view of the technological gap that ‘was emerging as a resule of Briush succes in mechanization inthe tex- tile industry a the tine!™ Moreover, Switzerland's laiesexfore policy did not necessarily mean tha its government had no sense of satexy in its policy-making. Is cefusal co introduce a patent law unc 1997, ‘despite strong interational presut, is such an example. This sntipatent policy i argued to have conbuted tothe development of a number of Industries. Especially affected by this were the chemical and pharmaceu- teal indsenes, which actively stole technologies fom Germany, and the food industry. in which the absence of patents atally encouraged direct, foreign investment (more on this in sections 2.33 and 3.23.8). fe betel een ar artes Policies for Economic Develop 47 industries ~ notably in shiphwiing, wining, rexies (cotton, woo tnd sll), and mlitary industries Although most ofthese were soon Sold olf tothe private sector at discounted prices, this id not mean the end of state involvement in dhe industry. In the 1870s and 180s, for instance; most state shipyards were privatized, but were sil given large subsidies even after privatization. Together with the related smerchont marine industey, the shipbuilding industry claimed between 50 and 90 percent ofall state subsidies before 1924. The fist modern Steel mill fhe State Vawata Tron Works) was also established by the {government in 1901.” ‘State involvement in largescale projets, however, di not stop with model factories bur extended co infrastrectural development. The Mei fate bil the county’ fist ei ne 188. Ie had 0 provide massive Concessions to private investors to saterest them in railways" and ‘hrowghout the 1880s and the 180s subsidized the private sector rai ‘ommpanies indeed in the 180s 36 per conto al tate subsidies went to falways In 1906, the major funk lines were ationalze. The Japanese fovernment also seared building telegraph infrastructure in 1869, and by 1880 al major cis wer linked inthis way! How do we evaluate the role of state-owned enterprises in industry and infrasteucture in early modern Japan? Many commentators ate hot very postive about them, given that they were mostly unprofi Uble!™ However, other acholars see more postive aspects. For xan plein his casi sy, Thomas Saih sums up his verdict on che role ‘Of Japanese state-owned enterprise ithe carly Mei perio in the Following way ‘what did government entesprise accomplish berween 1686 and 1880? Quantitativey, ot mich; a score oF so of modern faco ries few mines, a telegraph syst, es than a hundred mils of failway. On the other hand, sew and dificule ground had been broken managers and engncers had heen develope, 2 small but rowing industial labour force trained, new markers found: per flaps most important, going enterprises had been developed to serve ava base for further sndustial growth." In addition, the Japanese government implemented policies intended to facilitate the transfer of advanced foreign technologies and Institutions. For example, it hed many foreign technical advisers thle number peaked at 527i 1875 but fell quickly co 1 by 1885,48 ching Away he Ladder suggesting 2 rapid absorption of knowledge on the part of the Japanese The Minisey of Education was established in 1871; by the {turn of the century it claimed @ 100 per cent iteaty ratio. ‘Moreover, the Mei state tried to import and adapt fom the more advanced countries those institutions chit trepirded as necessary for industrial development. Ie is nor easy to ascribe exactly the "template? for diferent Japanese institutions ofthe vm to particular Foci cou tries, but iti clear that what emerged initially was an instutional patchwork.""The criminal law was inflanced by che French la while the commercial and ii laws were largely German, with some Bish ements. The ary ea bi nthe German mould (with sone French influence) andthe nay inthe Brita. The central Bank was modelled fn the Belgian onc and the overall banking system on the America, The unwersitis were American, and the schools iniially American but icky changed tothe French and German model, and so on [Necles to sy, it tok time for these inition take ros. However, the speed with which the Japanese assimilated and adapeed them is regatded by historians as remarkable. Various isiutonal innovations, such 35 feume employment and durable subcontracting networks, hich ‘merged during the postwar prio, abo deserve atetion, Following the ending of the uneyalereatics in 1911, the post Mei Japansse state steed inteodocing a range of tariff reforms intended to protect infant industries, to make imported raw materials more Mlordable snd to control laxury consumer goods." Once agin we fan see prea simatic: between thee polices and thore previously ‘aed by ober counerics during ther developmental periods ‘Ase can ace in table 21, by 1913 Japan had become one ofthe more protectonst countries although i ws sil es protective of ts manu facturing inosties than the USA. In 1926, anifs were raised for some new industries, such as woollen textiles, Despite chi, ran was “never ‘more than secondary weapon in the armeatry of economic polisy’!™ although some key inlustries were ined heavily protected (eg on Sad ste, sugar, copper, dyestuffs, and woollen textes), Here we can find some parallel between Japan after 1911, og the one hand, and Germany and Sweden inthe lite nineteenth and early twentieth centu- fies, on the other hand. All of them used “focused arff protection, ‘whereby the overall aif eegime remained moderately protective but ftrong protection was accorded to some key industries, rather than the “blanker” protection used by countries such as the USA, Rusia sad Spin a the time Policies for Economic Develop 49 Daring the 1920s, under strong German influence, Japan began to encourage the rationalization of key industries by sanctioning cartel fangements and encouraging merges, which were aimed at restrain ing ‘wasteful competition’, achiewing sale economic, standardization and the introduction of scietific management” These efforts were intensified, and government control over cartels was strengthened, in the 1930s in response to the workd economic eis following the Great Depsession and the war efforts, especially withthe enactoent of the 1931 Important Industries Contol Lav. Ths dhe base pattern of post war industrial policy was established. As in many other NDCs, Ja. Dan's military buldup during the 190s is bcieved to have contributed fo the development of heavy industries (slehough with an ultimately dlsasrous plical outcome) by simlatng demand and crating tec nological spillover." Despite all these developmental efforts, during the fist hal of che twentieth century, Japan war not on the whole the economic superstar that i became afer the Second World War. According to the author tive study by Maddiron, Japan's per capita income growth rate was only fe per cent per annum berween 1900 and 1950. This was somewhat below the average forthe 16 largest now-OECD economies that e stad itd, which wa 13 per cent per annum, alehough it must be noted that past of this rather poor performance was dv to the dramatic collapse in ‘output following Japan's defeat in the Second World War.” Ace the Second World War, however, Japan's growth record was “anvalled partcuaey unt the 1970s Bewcen 1950 and 1973,per capita GDP in Japan grew ata staggering & percent per annum, more than double the 3.8 percent average achieved by the 16 NDCs mentioned hove the 3.8 percent average includes Japan. The next best peeormers mong the NDCs were Germany and Austra (both a 49 pet cet) and Tealy (88 per cen); even the Ease Asian “miracle developing countries like Taiwan (6:2 pee cent) or Korea (3.2 percent) came nowhere neat Japan, despite the bigger ‘convergence’ effect that they could expect, piven thee greater backwardness. "= “There has long been an ideologically-charged debate about the causes ofthe economic "mitacle’ in postwar Japan and East Asian NICS over the las two to the decades. Despite rome lingering disagreement there is now a broad consensus that the spectacular growth ofthese countries, withthe exception of Hong Kong is fundamentally due 10 fcivise industrial rade and technology (ITT) policies by the state."50 “Thing Away the Ladder Surveying the postwar experiences ofthe East Asia counties, we ate ‘once agai struck bythe similarities between their ITT polices and those ted by ether NDC before them, starting from cightenthcentiry Bet tin, through to ninetenth entry USA, and late nineteenth and ealy ‘Seatithcentury Germany and Sweden. However, i also important to note chat the East Asian countries have not exactly copied the policies thatthe more advanced countries had used earlier. The ITT polis thar they, and some other NDC like France, used daring the postwar period ‘were far more sophisticated and fine-tuned than their historical equiva- lens. The East Asian countries used more substantial and beter designed export slide (both diect and indies) and infact imposed very few Export taxes in comparison so the caer cases" As T have repeatedly Poined out, tarilscbates for imported raw materials and machinery for Export industries were widely employed ~ method that may NDC, notably Britain had themscves used to encourage export ‘Coordination of complementary investments, which had previously been done ina rather hapharard way, fever, was systematied through indicative planning and government investment programmes. Regulations of firm entry, exit, investments and pricing were implemented in order to ‘manage competition” in such a way 350 reduce ‘wastefl competition’” Once agai, these regulations in part reflected the late nineteenth and early ewentith-century eartel policies, but Uisplayed far more awaceness than thie historic counterparts of the dangers of monopolist abuse, and more veniiviy to its impact on fxport marker peformance. There were also subsidies and eestitions ‘on competition intended to help technology upgrading and a simooth ‘winding down of declining indus ™ “The Esse Asian governments also integrated human-capital-related and leseningtlated policies into their industal policy framework far ‘more tightly than theie predecessors had done, through ‘manpower planning! Technology censing snd foreign direc investments were Fegulated in an attempt to maximize technology spillover in a moze fystematic way There were serious acempts to upgrade the coun- tuys sil base and technologialeapabiliies through subsidies co (and peblie provision of) education, taining and R&D." [With the recent criss in Korea and the prolonged recession in Japan, it has become popula to argue that actviee ITT polices have been proved to be mistaken, While this isnot the place to enter this debate, afew points may be made First ofall, whether or not we believe thatthe Policies for Economic Develop 51 recent troubles in Japan and Kores ate due to activist ITT polis, we mot deny shat these policies weee behind their'miracl Second, Taiwan, ‘despite having usd activist IT polices, i not experience any financial br macroeconomic etisis. Thitd, all informed observers of Japan, eprles of ther views, age that he counte'scutene recession cannot be tributed to government industrial poly ~ it has more co do with factor like stuctoral savings sueplus,iFtimed financial iberaization {whic led tothe bubble economy) and macroeconomic mismanagement. Fourth, in the cas of Korea industrial policy had been largely dismantled bythe mid-1990, when the debe build-up tha led tothe recent crisis rtd, 0 ic cannot be blamed forthe css. Indeed, it could be angucd that if anything the demise of industrial policy conebuted vo the making ofthe eri by making “duplicative investmens” easier. 2.3, The Pulling-Ahead Strategy by the Leader and the Responses of the Catching-up Countries ~ Britain and its Followers ‘Once a county gets ahead of other countries, it has a natura incentive to use its economic and polities! powers to pull ahead even further. Britain's pois, especially those of the eighteenth and nineteenth cen tures, are the best examples ofthis, What disconcerting is that these policies have so many parallels with those pursued in our time by Aeveloped countries clation to thei developing counterpart 2.3.1. The Colonies Britain instituted a stcong,set of policies intended co prevent the evelopment of manufacturing ia the colonies, especially America Lise reports that in 1770, Willa Pitt the Elder (then the Earl of Chatham), sade uneasy by the first manufacturing attempts of the ‘New Englanders, declared thatthe colonies should not be permitted fo manufacture. so much as a horseshoe nail’ Brisco's Characterization of the colonial policy under Walpole describes the fst of this strateny By commercial and industrial regulations attempts were made co restrict the colonies to the production of raw materials which- 52. eking Away the Ladder England was to work wp, to discourage any manufactures that ‘would any way compete withthe mother county, and to confine their markers to the Englsh grader and manufacturer. “The policies deployed by Britain include the following, Fist policies were deployed to encourage primary production in the colonies. For ‘ramp, in the 1720» Walpole provided export subsidies Choantis) to fnd abolished British impocr duties on raw materials produced inthe ‘American colonies (such as emp, wood aod timber). This was done in the lc hat encouraging the production of raw material would ‘divert, them from carrying on manufactures which interfered with those of England’. Note that this i exactly the same logic that Cobden wsed in justiffing the epel ofthe Corn Law, which he thought was unwittingly jing continental Europe and the USA to industalize by making thet agneultral exports more dificil (ce section 22.1 above Second, some manulaturing actives were oulawed. For example, the constuction of new rolling and siting stel mills America was Dutlawed, which forced the Americans to specialize in the low-value 1d pi, ae bar iron, rather than high-valve-added steel products” Some historians argue that this kind of policy did nor actually damage the US economy sgnficanaly at the time, asthe country did not have Comparative advantage in manufacturing.” Ie seems reasonable co “raue, however that such policy would have become a major obstacle, ito an insurmountable bacer, 40 US induseal development if the ‘country had remained a Bish colony beyond the caly (aly aar- ian and commercial) stages of development. “Third export rom the colonies that competed with British products were Banned. We have alsady mentioned thatthe cotton tet industry tt tndia was dealt a heavy blow inthe eighteenth century bythe Bish ban on cotton tentile imports from India (calioes', even when the Tavter’s proucte were superior co the British ones (see section 22.1 above) 2® Another example of this came in 1688, when Briain banned the export of woollen cloth from its colonies wo other counties (the ‘Wool Act), essentially destroying the Irish woolen industry. This Act also stifled the emergence of the woollen manufacturing industy in the ‘American colonies. Iv yee another example, a lw was introduced in 1732, which mainly targeted the beaver-skin hat industry that had grown tp in America; ths law banted the exports of hat fom colonies either to foreign countries oto other colonies ** Foucth, the use of tariffs by colonial authorities was banned of if lowoe 53. Policies for Economic D they were considered necessary for revenue reasons, countered in 2 hnumber of ways. When in 1859 the Betish colonial government in India imposed small import duties om textile goods (between three an ten per cent) for purely fiscal reasons, the focal producers we {ned tothe same extent in order to provide a ‘level playing Feld. Even with this ‘compensation’, che British cotton manufacturers put constant pressure onthe governinent forthe repeal ofthe duties, which they finally obtained in 1882. In the 18905, when the colonial gov feniene in India once again tied co impose tariffs on cotton prod: tts = this time inorder to protect the Indian cotton industry, rather than for revenue reatons~ the cotton textile pressure groups thwarted the attempe. Uno 1917, ehere was no earff on cotton goods imports ico India? 2.3.2, Semi-Independent Countries (Outside the formal colonies, she British (and other NDC’) atemps so impede the development of manufacturing i less developed counties mainly took the form of imposing free teade theough so-called “Unequal reais” dung the nineteenth century. These weaies normally involved the imposition of taf clings, typically atthe five percent flat rte, and the deprivation of trff autonomy" Te is extremely daconcertig to note thatthe binding of cari a 9 ow, aniform rate (although not necessarily below five per cen) is cxavily what modern-day free-trade economists recommend 10 ‘Seveloping countries. The classic work by Lite etal. argues thatthe sppropdate level of protection is at most 20 percent forthe poorest Countries and vietually zero for the more advanced developing Countries. Workd Bank argues that ‘[ejidence suggests the merits of Phasing out quanstaive estctions rapidly, and reducing taeffs co Feasonably low and uniform levels, such as a range of 15-25 percent [emphasis added)’ Britain frst used unequal treaties in Latin Americas starting with Brazil in 1810, as the countries the continent aeqited politcal inde pendence. Starting with the Nanking Treaty (1842), which followed the (Opium War (183942), China was forced to sign a series of unequal treaties over the next couple of decades. These eventually resulted in 9 ‘complete los of tariff autonomy and, symbolically, a Briton being the head of customs for 58 year, from 1863 co 1908, From 1824 onwards, Siam (now Thailand signed various unequal treaties, ending with the54 “"cking Away the Ladder most comprshensive one in 1855, Persia signed unequal eeties in 1836 and 1857, a8 did the Otoman Empire in 1838 and 1861." Even Japan lost its aiff autonoayy following the unequal treaties ined afie tr opening up in 1454 (ace section 2.27 above) Ie was eventually able o end the uneql treaties, but that did wot happen until 191. In ‘his conten, itis alo ncresting to note that when Japan forcefully opened ‘up Kors in 1876 i exactly imeatd the Western countries, forcing Korea fo sgn an unegual ereaty that deprived the latter oft aif autonomy — despite the face that Japan isl stil dd not have caf autonomy ise ‘The larger Latin American countees were able to eegain tariff au- tonomy from the 1880s, blore Jspan did. Many others regained i only fer the First World War, but Turkey had ro wait for anf autonomy ‘an 1923 (despite the unequal teaty having been signed as eatly as 138) and China enti 1929.2" Amsden shows how industealization in these countries was only able to begin ia earnest when they regained theieeanff and other policy) autonomy. 2.3.3. Competitor Nations In relation to other competitor nations of Europe (and later the USA), Britain could not use the blatant measures mentioned above in order ‘pull away. Rather, i concentrated mainly on preventing the out Flow of it superior technologies, although such measures were not always effective = ‘Until che mid-nineteenth century, when the machinery came 10 ‘embody key technologies, the most important means of techsological Teanafer wa the movement of riled workers, in whom most techno- logical knowledge was then embodied. As a result, the less advanced ‘countries tried to recruit skilled workers from the more advanced ‘counties, especially from Briain, and also to bring back nationals who were employed in establishments in these counties. This was fften done through a concerted effort orchestrated and endorsed by ‘heir governments ~ while the governments ofthe more advanced coun- tres tried their best to prevent such migration.« [As mentioned above (section 2.2.4), it was thanks to France’, and other European counter attempts to recruit skilled workers on 2 large scale that in 1719 Britain was finally galvanied ito introducing alban on the emigration of skilled worker, partielaly on suborning’, fr atcempting to recruit such workers for jabs abroad. According 0 {his law, suborning was punishable theough fine or even imprisonment Policies for Economic DevelopwAit 55 Emigrant workers who did not etwen home within six months of being warned to do so by an acceedited British official (usually 2 diplomat stationed abroad) would in effec lose thee right to lands Sid goods in Britain and have their cittenship withdrawn. The law Specifically mentioned industces such az wool, ste, ion, brass and ther metas, as well as watchmaking m practice, however, it covered fll industries The baw on the emigration of skilled labour and Suborning lasted until 1825. Subsequently, as increasing amouots of technologies became embod: ied in machines, machine exports eame under government contol. In 1750, Brain introduced # new act banning the export of ‘cools and ‘tens in wool and sik industries, while strengthening the punish ments for suborning skilled workers. This ban was widened and ‘Srengthened through subsequent legislations. In 1774, another act was introduced to control machine exposts inthe cotton and linen indus: tees, In 1781, the 1774 Act was tevied and the wording “tols and tenis! changed to ‘any machine, engine, tol, press, pape, utensil or implement whatsoever reflecting the increasing mechanization of the industries, In 1785, the Tools Act was introduced in order to ban txports of many different types of machinery, which also included a ban on suborning. This ban was loosened i 1828 under the President of the Board of Trade Wilham Huskisson, a prominent freeader, 40d finaly abolished in 1812." ‘Up unt he seventeenth century, when it wa one of work's techno logical leaders, the Netherlands took 2n extremely open attitude towards foreigners acces to its technologies. However, with is tech: nological edge constantly being eroded, is articude, both atthe firm tnd government levels, changed, and in 1751 the government finally introduced law prohibiting the export of machinery and the emigration of sill! workers Unfortunatly, the lw was much less sucessful chan Beiain’s, and the outflow of skilled workers and machinery continued ™ Inthe face of these measures to prevent technology outflows by the vanced countries, the les developed ones deployed all sors of “ile: timate? means to gain access to advanced echnologis. The enrepre: fers and the technicians ofthese countries, often with explicit state Consent or even active encouragement by their governments (inhaling bffers of bounty for securing specific technologies), were routinely engaged in indusal espionage Landes, Harris and Broland, among, fthers, document an extensive range of industial espionage directed atNE NE An EO OS - 5. “Kicking Away the Ladder Britain by countries such a5 France, Russia, Sweden, Norway, Denmark, the Netherlands, and Belgium 2 Many stats also organized andlor backed the tecritment of workers fom Britain and other more {advanced countries. Frances atempe under John Law (se section 22.4) And Prassa’s attempt under Frederick the Great (se section 2.2.3) are just some ofthe beter known examples, Despite all these efforts, legitimate and illegitimate, technological catching-up was nor easy. As the recent literature on technology ttans- fer shows, technology contains a lo of tacit knowledge that cannot cenily be transferred, Thie problem could not even be solved by the Importation of skilled workers, even in the days when they embodied mont ofthe key technologies. These people faced language and cultural Barres, and move importantly didnot have access to the same techno logical infeastractuce as they had at home. Landes documents how it took decades for the Continental European countries to assimilate Brit- Ish technologies even working as they did by importing some skilled workers and perhaps 2 key machine” “Therefore, as the case with modern-day developing counties, these technology transfers were most effective when backed by the policies intended to enhance what the modern economics of technology calls, ‘technological capabilities’ 2® As Ihave mentioned in vaious places in the preceding ection, many governments se up institutions of teach ing (es technical schools) and of research (eg, various non-teaching teademits of sciences). Ihave also pointed out that they took measures {o raiwe awareness of advanced technologies by setting up museums, ‘organizing international expositions, bestowing new machinery on Pr Wate firms and establishing ‘model factories’ that wsed advanced tech nologies. Government financial incentives fr fimsto we more advanced technology, especially through rebates and exemptions of duties on imports of indstral equipment, were also widely used. Ii interest ing to note cae tariff rebate or exemption on certain imported capital ‘goods (which, interestingly, coexisted with restrictions on the importa- tion of certain other capital goods) was until recently one of the key tools of the Fast Asian industrial policy. + By the mid ofthe nineteenth century, the Key technologies had become ‘So complex thatthe importing of skilled workers and machinery was not ‘ough to achieve command over 3 technology. Reflecting this, the Bish bans om shilled worker emigration and machinery exports Rad by that pine been abolished. From then on, an active transfer by the owner of ~ Policies for Economic Develop 57 technological knowledge through the Hcensng of patents emerged 35 2 ey channel of technology transfer in 2 umber of industries. This made the policies and institutions regarding the protection of intellectual property rights (henceforth IPR) alot more important than they had previouny been. ‘This eventually culminated in the emergence of the [tccrnatinal IPR regime, following the 1883 Pris Convention on patents fd the Berne Convention of 1886 on copyrights under presse fom thetechnologally more advanced couottes, especialy the USA and France. ‘Between 1790 snd 1850, most NDC established thei patent laws (ce section 3238 of chapter 3for desis). However, ll these evr patent Taws were highly deficient, judged by the modern standards demanded tren from che developing countries ser the TRIPS (wade-eated ine Teesal propery rights) ageeemet in che WTO." Particularly with eegard to one main iterest in dis capers it mist be pointed out that these les accorded only very inadequate protection to the IPR of foreign vitzens" In most countries, including Britain (before the 1852 reform), the Netherlands, Austria and France, the patenting of imported lavcations by thee nationals was often explicitly Slowed. In the USA, before the 1836 overhaul of patent lw, patents ‘nere granted without any proof of originality, thus enabling the patenting of imported technologies. AS we have aleady mentioned, Switzerland di ot have a paent system untl 1907, and although che Netherlands introduced 2 patent law in 1817, ¢ was abolished in 1869 and war nor rvintroduced un 197 ‘What is notable i that, despite the emergence of an international IPR regime in the lst years of the nineteenth century, even the most vanced countries svere still routinely violating the IPR of other undies citigens well nc the twentieth century. AS mentioned above, Switeerland and the Netherlands did not have patent law unl 1907 nd 1912 respectively. Even the USA, alceady a strong advocate of patentee sights, didnot acknowledge foreigner copyeights until 1891.2" [Ar teas the last decades of the ninctenth century, when Germany tras about to overtake Britain technologically, there was great concer IiBaieain over the widespread German violation of is sademarks.*® [At the same time, the Germans were complaining about the absence of {patent law in Switzerland and the consequent theft of German intellectual property by Swiss fens, notably in the chemical industy ‘Although Britain did not have a trademark law until 1862, Kindleberger notes that ‘a early as the 1830s a number of Briish manufacturers were continuously engaged in litigation to protect58 “Teking Away the Ladder trademarks ln 1862, it introduced a tademark la (the Merchandise Mark Ac), which banned commercial thivery’ sich asthe forging of trademarks andthe labelling of false quantities In the 1887 revision of the act mindful of foreign, particularly German, infringement ofthe Bash eademark aw, the Bash Patiamene specifically added the place for the countey of manufacture as part of the necessary ‘trade ‘description’. This revised act banned not only patently fle descriptions but also misleading descriptions ~ suchas the chen widespread German practice of selling counerfcic Shellid culery with fake logos. According to this at,‘ (was penal offence to sll an arile made abroad which has upon it any word or mark leading the purchaser to believe that i is ‘made in England, i he sbrence of other words denoting the el place of ‘ngin'” According to Kindleberget, the lw also made specific provision eating that foceign goods marked with the name of an English dealer ‘at indiation or place same of their foreign origin as well.™ However, the German firms employed a range af measures to get around this act. For example, they placed the country of orig’s stamp ‘om the packaging instead of the individual articles, so that once the packaging was removed cistomets could not tl the county of oigia of the prodct (a techn said to have been common amongst the imports ‘of watches and ils) Altematively,chey woul Send some articles over in pees and have them asemble in England (a method apparently common for pianos and bicycles, of would place the stamp forthe country of ‘origin where i was practically invisible. Williams documents: ‘One ‘German fin, which export to England large numbers of sewing machines, ‘onspicvounly Labeled *Singes” and *North-Beish Sewing Machines”, places the Made in Germany stamp i smal ltrs undemeath the eae Hala dozen seamsteses might combine thei stent totam the machine bottomipmrands, and read the legend otherwise ie would go unread” 2.4, Policies for Industrial Development: Some Historical Myths and Lessons In this chapter, Ihave examined the history of fndustial technological {ITT) policies in a number of NDCs when they were Geveloping countries ~ Britain, che USA, Germany, France, Sweder Belgium, the Netherlands, Switzerlond, Japan, Korea, and Taiwan ‘The picture that emerges From this historical review is fandamentally at odds with the picture held by Neo-Liberal commentators, and indeed by many of thei eis Policies for Economie Develop 59 In this final section of the chapter, [fst summarize my review of the tole of ITT polices inthe development of a number of key ind ‘dual NDC¢ (ection 24.1). then das an overall picture from these Country profiles and conclade that, while vitally all countries esd Infant rnustey promotion measures, thete Was considerable diversity ttross counts in tem of the exact policy mix (section 24.2). I then Compare the ITT policies of the NDCS in earlier times with those of today's developing counties and argue that once we consider the pro ‘uctiviy gap they need to overcome, roday’s developing countries are fscevally fa less protestonise chan the NDCs themselves were in the pst (action 243) 2.4.1. Some historical myths and facts about policies In earlier times A. Almost every successful country used infant industry protection ond other ‘ectivist ITT policles when they were ‘catching-up’ ‘My discussion in this chapter reveals cat almost all NDCs had adopeed Some form of infant industey promotion strategy when shey were in {atchingup positions, In many counties, caf prosetion was a key “Component ofthis strategy, but was niter the only nor even neces the most mmportane component in the strategy. Inttesting), i was the UUK and the USA, the supposed homer of fee trade policy, which used tariff protection ios aggressively (sce sections B and C below) "The apparent exceptions to this historical patern among the cou twigs I have reviewed are Switzerland, the Netherlands and co a lesser fxtent Belpum,alehough even in there cares some qualifications need tobe made. Switzerland benelited from dhe ‘maura’ proecion accorded by the Napoleonic Wars ata crcl juncture in its industrial dvelop- ment. The government of the Netherlands on the one hand used Tegresive polices to establish is naval and commercial supremacy in the sintenth and seventeenth centuries, and om the other setup indus teal financing agencies and promoted cotton textiles industry in the 1830s Belgiam may havc had slow average tariff ate in the nineteenth ‘entury, bot the Austrian goverement that ruled it during most ofthe tighteenth century was 2 Tot more protectionist, and certain sectors ‘weve heavily protected uncil the mid-aineteenth Century. Having std- 60. ching Away the Ladder allthis itis sill easonable ro describe these thre economies, or atthe ‘ery last Switzerland and the Netherlands, a8 having developed under broadly liberal ITT polices. Tr may be argued that these two economies refained from adopting protectionist ade policies because oftheir small sie and hence the {eloively large cows of protection, However, this nota persuasive txplanation. For one thing Sweden, another small coustey, used infant industry protection soccesfully between the late nineteenth and early ‘hentith centuries, whe ie was eying to catch up withthe more devel ‘oped countries in a number of heavy industries. A moce plausible rea> Son forthe absence of inlaneindusty protection ia our tzio of small Eucopean countries i that, unlike Sweden, they were already highly technologically advanced by the early nineteenth century. They stood ‘ery close o the world’s technologial frontier throughout the period (Of European Industrial Revolution, which meant that they simply did ‘nor need mach infant industry peotecton (ee section 2.2.6 for deal). ‘Of course, agaist all these argurnents, it may be said that the NDC were abl oindustaliz independently of or even despite, activist TT polices, Many historical events are “over-determined’ nthe sense that there is more than one plausible explanatory factor behind them; i is inherently difficult to prove that activs ITT polices, of for that mat ter any other factor in particular was the key 10 the success ofthese Countries: However it acems to be a fematkable coincidence that so many counties thot have used such polices, From ighteenth-entury Britain go twentieth-century Korea, have been industrial successes, ‘especially when such polices ate supposed to be very harmful accor ing tothe orthodox argument. 8. The myth of Britain as a free-trade, CConirary to popular myth Britain had been an aggressive wer, and in certain areas a pioncer, of activist ITT policies intended ro promote Infant industries until established sts industnia-hegemony so cleanly inthe mid-ainetoech century and adopted fee trade Such polices, akhough lited in scope, date back vo the fourcenth century (Edward Il) and the ftecath century (Henry VID) in relation to the wool trade, the lading industry of the time. Between Walpole’s ttade policy reform of 1721 and the eepea ofthe Corn Laws in 1846, Brain had implemented the kinds of TTT policies that became famous ar 6 Policies for Economic Develoy foc their use in the East Asian “ndustial policy state’ of Japan, Korea and Taiwan after the Second World War. Many policies that we fre- {Quenty think of as East Avian inventions ~ such as export subsides and impor ran rebates on ius ed Fr exporting ~ were widely used in Betain during this prio. In dion, should be noted that even Bri ain’ fre trade policy was mosivated in pare by is deste co promote is industries, Many of the strongest campaigners for free rade, inciading their leader Richard Cobden, believed that fee imports of agricultural preduts by Brain would dicourage manulactuting in competitor coun tes that would not have developed without the presence ofthe British Corn Laws . The USA as “the mother country and bastion of modern protectionism’ le was the USA, and not Geemany 23 commonly believed which fist tysematized the logic of infant indasty promotion that Britain had Used 50 effectively in order to engineer its industrial ascent. The fist Systematic arguments for infant industry were developed by American thinkers such as Alexander Hamilton and Daniel Raymond, while Friedrich List the supposed intellectual father of the infant sndustey protection argument, fst learned aout i ding his exile the USA. “The US government put this logic into practice more diligently than any other country for aver a centary (1816-1945). During this period, the USA had one ofthe highest average taniff rates on manufactoring imports in the wold, Given that the country enjoyed an excepionally high degre of ‘natura’ protection due to igh transportation cost at least until the 1870s, it cems reasonable eo say that throughout its indusral eatching-up the US industries were the most protected in the ‘world, When the maverick American right-wing populist poiisian Pat Buchanan says that frce trade isan "un-Ameriean’ thing, he docs i a way have 4 point Tes certainly true that dhe US industries didnot necessarily nee all the tariff protections that were pu in place, and that many trill even tually oulved thir usefulness. However cis also clear thatthe US ‘eonommy woul not have gor where i today without ston tani, protection atleast in vome key infant industries. The role of the US Eovernment in infrastructural development and supporting R&D, which ontinues to this day, also needs to be noted.62 STeking Away the Ladder D. The myth of France as the dirigiste counterpoint to laissez-faire Britain “The pretevolationary French state was actively involved in industrial promotion. However, sis ‘Colbertis ration was largely suppressed ‘oe tothe libertarian ideologies of the French Revolution and dhe ensuing politial stalemate that over che next century and Palf produced 3 series Of weak and vsioalese (foc actively backwardlooking)povernmens. “Thus. despite its publicimage san hereon digite countey, France can a policy regime in many ways more lise fire than ether atin for expecially che USA throughout most of che ninetenth century and the fie half ofthe twentieth century. For example, between the 1820s tnd the 1860s, che degree of protectionisn acwally cemained lower in France than an Briain “The Lsetfire prio in ronch history was largely associated with the country’s relative industrial and technological stagnation ~ a fact thacindrecly proves the validity ofthe infan indostry argument. Ii largely because ofthe country’s iutrial success through the decidedly interventionist strategy pursued afice the Second World War that it has ome to acquire ss current image 2s inherently interventions. E. The limited ure of trade protection In Germany Despite its Frequent identification as the home of infant industey pro tection, Germany never cally used eaff protection extensively. Until the late nineteenth century chad one ofthe most Hera eadetepimes inthe world although some key heavy industries did reeive substan tal earif protection However, ths does not mean thatthe German state was lasex fare inthe way that ite French counterpoint was during most of the nine= teenth and the first half of the ewonteth centuries. As the ealy Pru sian experince from the eightcenth century onwaeds bes ilustrtes, Infant industries could be ~ and were ~ promoted through means other than taf, inching state investment, public-private cooperation and various subsidies. ‘Although the subsequent devslopment ofthe private sector, partly due to the success of such attempts, made direct state intervention lannecestary and unpopular the state sil played an important ‘gud ing’ role. This we particularly the ease in telation to some Policies for Economic Develop ~wk 63 industries in the late nineteenth and early twentieth cenuties (which daring this vime were also given strong tariff prosection). This was tho the period when the German tate pioneered the establishment of Social wellice institutions ia an atempe co defuse revolutionary agi {ation and establish social peace (see section 3.2.6.8 in chapter 3 for farther detail). “Therefore, while Germany can hardly be desribed asthe same kind of laissez-faire state a8 France in the nineteenth and eatly wentieth ‘enuris state intervention in Germanys man catcing-up period vas tot as extensive at some people think, particularly in relation to tai protection. F, Sweden was not always the that it later came to represent. small open economy’ Although its does not require as dramatic revision as the eases dis: fussed above, the Swedish experience also contains some myths that eed dispelling Th general, Sweden’ tariff protection daring its catch-up perio was sot extensive, despite dhe countey’s economic backwrardnes. However. the Swedish sae sects to have used tail protection stratepeally ~ 0 promote textile indasty inthe early minccenth century and to bolster the mechanical and electeica ast later inthe nineteenth century. Tris ineerenting to note that ts tariff eogime forthe textile industry in the ealyninetecnth century was fact lassie late twentieth-century "Bast Aslan’ (and abo an eightcenth-entary Briss) promotional tac ap, involving a tdi high tans on final products and low tans on faw auateral impor’. “Another point sor noting is that from an early tage Sweden also developed interesting forms of public-private cooperation in inftaserctaral development and in some Key industries, especially iron ‘This collaboration is remarkably similar to that which we find in East Asia doring the postwar period. The ealy emphasis it paced on edve tion shill formation and research is also notable G. State activizm in early modern Japan was limited due to external constraints When it first opened up and embarked on its modern industrial development, Japan could not ase tariff protection to promote new~~ 64 Kicking Away the Ladder industries because of the unequal treaties that it was forced c0 sign, which bound its tariff rate ro below five per cent. Other means for Jndustal promotion had to be found, and so the Japanese state sct up ‘model factories in ke industries (which were soon privatiad fr revenue And efficiency reason), provided subsidies to key industries and invested in infrastructure and education. However, given the importance of ifs a4 tool for industrial promotion atthe time (when other policy fouls had nor yet been invented and/or were considered “too radial), fn lack of tariff autonomy was a considerable handicap. Iwas only in the early wenrieth century, with the termination of the unegoal eaties in 1911, that Japan was able co establish a more Comprehensive industrial development steategy that included easiff pro: fection ay key element. Japan's vastly superior performance during the pottwar period, when i came wp with an impressive array of “nno- vations” in FET polity tools, abo shows how the ability ro use a wider Tange of poly tools can make state intervention more effective. H. ‘Poachers turned gamekeepers’: policies shift with development (One important fact shat has emerged from my discussion inthis chapter fe that the NDC shifted their policy stances according to thee relative postion in the international competitive struggle. Par of this deliber- re ladder kicking’ but it also scems to be due to natural hurman. Tendenty to reinterpret the past From che point of view of the present. "when they were in eatching-up positions, the NDCs protected infant industries, poached skilled workers and smuggled conteaband tnachines from more developed countries, engaged in industrial “apionage, and wilfully violated patents and trademarks. However, Sake they joined the league of the most developed nations, they began foadvocate free tad and prevent the outflow of skilled workers and fechnologies; they also became strong protectors of patents and trademarks, In this way, the poachers appear to have turned famekecpers with disturbing regularity. 7 ‘Nineweenth-century Britain upset many counties, in particular Germany and the USA, which regarded Britain's preaching of virtues of foceteade as hypocrisy, piven that during the eighteenth century Briain ted infant industry protection measures more strongly than any other “County, The sme sentiment might be expressed today, when American feade negotiators preach the virtues of free trade to the developing Policies for Economic Deve “Waent 65 countries, or when Swiss pharmaceutical firms argue for strong, protection of intellectual property rights. 2.4.2, ‘Not by tariff alone’: diverse models of infant Industry promotion [As has been shown above, virtually all successful NDCs used infant industey protection during their catshing-ap periods, OF cours, this docs not allow us to conclude that such policies therefore automat Cally guarantee economic success, We know of too many examples from history and contemporary experience chat contradict such a naive propo- tition, However, thee is remarkably persistent historical pattern, Stretching from eighteenth-century Betain to Tate wentiethcentury Korea, in which succesful economic development was achieved through infant industry protection measures. This patern is simply too stone, to be damssed as 2 fluke. Therefore, those who believe in the virtues ff fre trade and lites fore ITT polices fr curently developing coun tries need to explain why they believe this istorial patter is no longee felevant more on this in chapter 4) Tmportant as tariff protection may have been in the development cof mont NDCs, it was ~ | repeat ~ by no means the only, nor even ecesarily the most important, policy tool used by these counties in Promoting infant industries. There were many other took, such as Export subsidies, tarif rebates on inputs used for exports, conferring ‘fmonopoly rights, cartel arrangements, directed credits, iavestment Flanninge manpower planning, R&CD supports and the promaxion of Institutions that allow public private cooperation. Taciffs were nots land are not, the only policy tool available toa state intent on develop ing new industries or upgrading old ones. In some counties such as (Germany up to the late nineteenth century or Japan before the resto ‘ation of its tariff autonomy in 1911, cariff protection was not even the most important tool for infant industry promotion, ‘ndced, there was a considerable degree of diversity among the NDC in terms of their policy mix, depending on thee objectives and the con ditions they faced. For example, the USA used tariff protection more Sctively than Geemany, bue the German state played a much more txtensive and direct role in infant industry promotion than its US coun- part. As another example, Sweden relied upon public-private joint tctvty schemes far more than, say, Britain did Thus, despite some remarkably strong hist eal patterns, there i66 1g Away the Ladder also considerable diversity in the exact mix of policy tools used for Industrial promotion across countries. This, in uea, implies that there fino ‘onesze-fitsall’ model for industrial development ~ only broad ‘guiding principles and various examples from which to lac 2.4.3. Comparison with today’s developing countries Discussions of trade policy by those who are sceptical of activist ITT polices rarely acknowledge the importance of tariff protection inthe economic development of the NDC." Even those few which do 40 dismiss the relevance of that historical evidence by pointing ft thatthe levels of protection found in the NDCs in earlier times fre substantially lower than those that have prevailed in today's developing countries. Tittle eta. argue that [alpae from Russia, che United States, Spain, and Portugal, it does not appeae that tariff levels in the fist quarter of the twentieth century, when they were certainly higher for most coun tres than in the ninctenth century, usally afforded degrees of protec tion thar were much higher than the sort of degrees of promotion for industry which we have seen, in the previous chapter t0 be possibly iustfiable for developing counties today [which they argue to be at ‘most 20 per cent even for the poorest couatries and virwally zero for the more advanced developing counties)" Similarly, the World Banke Argues thar “[allthouh industeal countries did benefit from higher fatural protection before transport costs declined, the average tariff for twelve industial counties ranged from 11 10 32 percent from 1820 to 1980 ... In contrast, the average tariff on manufactures in develop- ing counties is 34 per cent" “This argument sounds reasonable enough, especially when we con- sider the fact chat tavff figures aee likely to underestimate the degree of infane industry promotion in today’s developing countries when ‘compared to those for the NDCs i earlier times. ASI pointed out at the Beginning of the chapter (section 2.1) limited fiscal capabilities land lack of regulatory power ofthe state seriously limited the scope for ITT policies other than tariff policy in the NDCs in eatlier times. Governments in today’s developing countries tend to use a wider range of policy tools for infant industry promotion, although some ofthese tools (e.g, export subsidies excepr for the poorest countries) have been “outlawed? by the WTO.™ en 67 Policies for Economic Devel ent i argument is highly misleading in one impor ‘The problem is that the produetivity gap between today’s developed countries and developing countries is much greater than that which ned 10 ext between the more developed and less developed NDC in tarlicr times. This means that today’s developing countries need to impose much higher rates of tariff than chose used by the NDC inthe pawn if they arc to provide the same degeee of actual protection to their Fndusties as that once accorded to the NDC industries." In other words, tdven the greater productivity gap they face, roday’s developing coun- {tie need to use much higher tariff compared to the NDCS in earlier times, just © get the same protective effects Before we show this, we must admit that i is not simple to measure imernational prodactivty gaps Pee capita income figures are obvious Uthough rough, proxies, bur itis worth debating whether to use Incomes measured in current dollars or in purchasing power party (PD) terms, Incomes measured in curren dollars are arguably better feflstions ofthe productivity gap in the tradcable sector, which is more felevane in determining tariff levels. However, they are subject to the ‘agaris of exchange rae fluctuations that may have nothing to do with predocivigy differentials. PPP income fies are beter reflections of a county's overall productivity, but they tend to underestimate, often trcatly, che productivity differentials inthe sadeable sector, In what Fallows; have used PPP income figures, partly because they provide & beiter measure of an economy’s overall productivity and partly because the bert available historical estimate of NDC incomes by Maddison tases them. “Accowding to Madison's estimate, throughout the ninetenth entry the rato of per capita income in PPP texms between the poorest NDCs (aay, Japan and Finland) and the richest NDCs (say, the Netherlands ind the UK) was about 2 or 4 to L” Nowhere i this as bigs the gap berween today's developing and developed countries. Recent data from the World Bank website show that in 1999 the difference in pee capita Income in PPP terms between the most developed counties (8 ‘Switzerland, Japan the USA) snd the least developed ones (6. Ethiopia, ‘Malawi, Tanzania) isin the region of 50 or 60 01. Maddle-level developing countries ike Nicaragsa ($2,060), India ($2,230) and Zimbabwe (82.690) have to contend with productivity gaps in te reion Of 10 oF 15 to I. Even for quite advanced developing countties like Brazil ($6,840) ot Columbis (85,80), che productivity gap with the top industrial countries is about $ 01.- 68 nicking Away the Ladder Chapter 3 hen in the late ainetenth century che USA accorded an averse an eotetion of over AO pet cent cits industries it per Sas tail ror rem was already about dhtce quarters that of Bea Institutions and Economic inom Yo ay an ths wa whe he ara rs 0.39 ee ane which as expesly portant fo he USA, : Development: Le co higher han eday, seven the bore ote fom Worl Good Governance’ in Historical wa ce Spaeth the prez waded Persecive Bank eke rae tha india ha jot prior tothe WTO agen SISO deta thac tee capita income PRP vers only 260° PO ipa ofthe USA ~ rakes the country ook ike ver ae at fe eae, Following the WTO agement Indico champion off snerape aif to 32 percent bringing down 3 eve trade ws a USA's average tal cate never sank beween the end fhe Civil War and che Second World War aoe te less extreme example in 1875 Denmark had am average cand ke Je around 15-20 percent when its pet eapita incor We sa than pr cen ha of Britain (2,031 S351), Foor si recent, Brac cw is wrade-weighted average tant 100) to Ty per cena eel that ot a above he Dah ae 4 ec PPP cee is barely 20 pr cen that of he USA (86.540 vs, $31,910)" 3.1, Introduction “The issue of insittional development, ender the slogan of 00d Tee ine Sree come to ocspy te cent age of development ae During these decade o hemes deeopmet ra aeeishment (henceforth IDPE) has come so recognize the rsa former emphasis on aeting the posh though “Bou atu nw comet aca he pra arora pelstnrgtare that underpins the price aye! Partly in an cia which as been wey tested aH tans Slat inmiatonal suctres, the TDPE has began £0 move se ang the nstons right and atach what Kapur and ‘Paabealgpvernancerelatd condones’? oo ae env these days ae thor who bite that every county ana Scere of ood tastaions anfounacly fen impicly se ot US nneton) wh some minal eanstion powsions caw forthe poorer countries ~ various agreements in the tt ac example ofthis Backing wy ths clam 3 apy Tees eat of ttcratere expecially from the World Bank 2 its Sth iu eel eon ee eee its and economic development, with the supposed

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