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Things they don’t tell you about capitalism


Ha-Joon Chang is a development economist with a special interest in economic history. His most recent book, “23 Things They Don't Tell You About Capitalism”, as well as previous books, have critiqued neoliberalism and laissez-faire economics. I interviewed him by telephone on August 9.

Justin Podur (JP): Thanks for doing this interview. It's a good day to talk to an economist. There is a series of questions I want to ask you, but I thought we should start with some talk of the “debt ceiling” and austerity policies everywhere.

Ha-Joon Chang (HJC): The debt ceiling is completely manufactured by the Republicans. The ceiling was introduced in 1917 in relation to the financing of World War I and has been raised close to 100 times over the years. The idea that this is a major constitutional constraint that we simply now have to reckon with is completely bogus. It's basically an attempt to bring back their small-state, anti-social welfare agenda under the guise of responsible fiscal policy.

It's a miracle that Obama gave in so much. He could have called the Republicans’ bluff, pointed out that this is something the Congress has routinely raised, that it's an irrelevant historical legacy, that the Republicans are picking up that skeleton and disingenuously saying it's the most important thing in the country when millions of people are unemployed, have their houses underwater. It's the failure of Obama's political leadership that has generated this phony budget crisis.

In the buildup to all this, the more important problem has been the deregulation and upward income redistribution of the last three decades, which have created the society where most people can only get by borrowing huge amounts of money. The other problem was creating this uncontrolled financial system, which has destroyed the economy. The debt ceiling is an irrelevance. The financial industry, helped by free-market ideologues, lobbied hard – it basically bought up most of the politicians – and create an environment where you could lend and borrow with no risk. Then when things went wrong a few years ago the financial industry got the money from the government, and now it and its supporters are using the deficit created by the bailouts and the fall in tax revenue due to the resulting recession to say poor people should accept cuts in welfare spending. I know that the players are slightly different – I know that it's not Wall Street bankers that led this political coup – but it's basically the same coalition.

JP: What do you think the international implications are that all the rich countries seem to be intent on destroying their own economies through austerity at the worst possible time?

HJC: The international implications are huge. The export-led countries are exporting to the rich countries. China's economy is driven by exports to the US and EU. Korea and Japan make a lot of money by selling machines and intermediate inputs to China to make those things that China exports. Latin America and Africa have benefited from China's need for imported raw materials. When China can't export, all those countries will go down together. All of their economies are linked.

Another problem: China is the biggest holder of US treasury bills. If US treasury loses value – at the moment it's gaining, as a ‘safe haven’ asset, which people seek in times of trouble – but if it does lose value, China will also lose. So this decline does not signify the “decline of the west” or the “rise of emerging economies”, because the latter economies will also suffer.

JP: Your work uses the economic history of the developed countries to show that no country has ever developed through neoliberal-type policies of free trade, privatization, and a minimal role for the state. Reading your work, it might seem as if development was a technical matter and not a political one – choose the right policies, and development will follow. What role does politics play in the economic history of the developed world? Are there political conditions for development?

HJC: If I gave the impression through Kicking Away the Ladder and Bad Samaritans that I don't think about political background it's mainly because I'm not an expert on political economy on all those countries I was talking about in those books. But I do believe that politics is one of the keys. The US basically fought a civil war over protectionism vs. free trade. Many argue that land reform in East Asia after WWII created the political basis for industrialization by getting rid of the landlord classes who were, for obvious reasons, against industrialization. I emphasize in my theoretical work that markets are political constructs. The view that you can neatly divide our lives into technical economic area and a more messy political area is mistaken.

Having said all that, I do talk about the political setup in a few countries like Japan and the US, which I know a few things about. I don't know as much about other countries – say, Belgium in the 19th or Switzerland in the early 20th – so in those cases I basically listed policies they've done. I didn't mean to imply that policies can be transferred anywhere without consideration of political factors nor do I believe in a politics-free economic toolkit.

JP: Do you think it's a good research program to look for the politics that go along with successful development?

HJC: Yes, but it's quite difficult to generalize. Understanding politics of different societies requires detailed and nuanced knowledge about that country and society. We should try to look for these things – politics usually involve a lot of messy and unexpected context-specific alliances and compromises and therefore it is difficult to draw general conclusions or recommendations that apply across countries. You can say general things like, you have to have some representation to the population, maybe through formal democracy or informal democracy. Beyond that, it's difficult to say whether it's better to have a presidential system, European parliamentary system, and if it is the latter whether it is best to have the British-style first past the post electoral system, or continental-style proportional representation system. I don't have the competence to discuss political institutions at that level. But we do have to come to grips with it or we become like those IMF economists who believe there is one theory which you apply everywhere and if people in some countries don't like it, the army should shoot the dissenters. So it is partly in recognition of my own lack of competence that I don't push these issues.

JP: At the end of 'Bad Samaritans', you argue that developed economies are more environmentally efficient than poor economies. But is environmental conservation merely a matter of efficiency? Is it possible that economic expansion always comes, to a greater or lesser extent, at the expense of other species' habitats and ecosystems? In other words, how do the various environmental crises (climate change, habitat loss, depletion of non-renewable resources, pollution) change the task of development economics?

HJC: Short of deliberately lowering living standards or reducing population, I think the only solution to make our economic growth more, if not completely, compatible with environmental concerns and regard for other species is to have better technology. In Bad Samaritans I tried to use differential energy efficiencies per dollar of income to argue this, when I gave the example that China produces ten times more CO2 gas than Japan per dollar of income. I realize it doesn't work like this, but if Japan could transport its technology to China tomorrow, China's emissions would be cut by 90%, which is a lot more than we could achieve by changing our consumption patterns.

Having said that, we have a unique problem with this global warming issue, because in many cases I believe technology usually comes up with some solution – we have solved most previous environmental problems through technology. With global warming it's not clear whether technology can solve it because we have a ticking bomb. It could be that someone comes up with the technology in 10 years, but it might take 300 years before it comes up. Technological progress is uncertain. If it comes up 300 years, it will be too late.

So we have to do the other things, but that shouldn't include forcing the less developed countries not to develop. First there's the history of injustice. 75-80% of all greenhouse gases were pumped into the atmosphere by the rich countries. The rich countries have the excuse that they didn't know, but the burden still falls on their shoulders in moral terms. On top of that because the technological solutions will have to form a part of the solution if not necessarily the main part, the rich countries have a responsibility because only they have the capabilities to generate these technologies.

It shouldn't lead to suppression of growth and living standards in developing countries. People have come up with estimates of what will be the impacts of poor country growth and come to the conclusion that, when it comes to countries with less than $8000-9000 per capita income, economic growth adds very little to the global warming problem, while growth will significantly – with appropriate redistribution – raise the living standards of people in those countries. In Canada, or even Korea, we would have to adjust our consumption patterns and maybe even reduce growth, but not in Guinea-Bissau.

JP: Some environmental or ecological economists (for example, Peter Victor in Managing Without Growth) argue for a zero-growth economy. What do you think?

HJC: I haven't read systematically on zero-growth economics, but I'm not against it for industrialized countries. Countries with $30,000 or 40,000 per capita income have enough to make everyone comfortable with income redistirbution, redesign of living spaces, and so on. That's just a gut feeling, I'm sure there's more systematic research.

JP: In '23 things…' you argue that 'capitalism is the worst system except for all the others', but you argue for a kind of mixed economy, with a heavy role for the state. To Marxists, capitalism inevitably implies class division and oppression, and they strive to find an economic system that is dynamic and creative without the competition and class hierarchy of capitalism. Do you think such a system (like Albert & Hahnel's Participatory Economics) is theoretically impossible? Or does your statement about capitalism refer mainly to historical examples?

HJC: I am looking at what happened in the former socialist countries. In theory, socialist countries could have much more rational use of resources but in practice because of the difficulties involved in planning complex modern economies, there were shortages and other structural problems. In theory socialists could have been better at environmental conservation, but in the USSR and China the environmental results were shocking. In theory socialist countries should be more equal, but they had systems of privilege and corruption. So in the future maybe someone will come up with a more rational and egalitarian system, maybe technologies will make things so plentiful that we don't have to fight over them, but given the record of previous experiments I conclude that we should make capitalism work better and improve its workings. I would rather live in Sweden or Finland than the USSR, even as a socialist. I don't have any ideological hangups about any particular system, just looking at it empirically.

JP: One thing that most of the developed countries didn't have to suffer was imperialism – certainly not at the level that Africa has had to suffer. Powerful opposition in the West to independent development in the poor countries goes beyond bad advice, and includes everything from powerful financial threats to military coups and invasions. How much does this opposition change the strategic equation for poor countries?

HJC: Of course I agree. Especially in Latin America in the 1970s there were a lot of coups engineered by the US that destroyed progressive governments. The same story with parts of Africa in relation to British, French, and US government. Unofficially there are quite a lot of shocking stories about the head of the IMF calling an African president into his hotel room and giving him a dressing-down, etc..

But let's put this into context. Compared to the days of colonialism and unequal treaties, the powerful countries at least have to pretend that they are taking the poor countries seriously as sovereign states. The global institutions, admittedly highly biased towards the interests of the rich countries, cannot be as blatant as the unequal treaties of the 19th. In that sense, developing countries have quite a bit more room to maneuver. It has been clear that their economic performance has vastly improved after they regained independence.

Of course it is true that the structural constraints have to be taken seriously. Even so, you can do a lot of things. I have written extensively how the WTO rules have become obstacles to the conduct of trade and industrial policies by developing countries. But on the other hand there are gray areas to exploit, things that you can do under the radar, and so on. It's not as if S. Korea when it was rapidly growing in the 1960s and the 1970s didn't have any global rules to abide by. The rules were much more lenient and slightly more favourable to developing countries in those days, but you had to kind of cheat a lot to do exactly what you wanted because the rules are never going to be in your favour. You have to abide by rules partly because you have a duty as a global citizen, partly because you will be punished if you didn’t, but when the rules were written by a bunch of powerful countries almost entirely for their interest and heavily influenced by corporate lobbies – there are some absurd rules that you should not follow if you can get away with it.

JP: Many NGOs and activists work on issues of debt, which they argue is a major hindrance to development. You have argued that many of the 'structural' issues that are often decried, from corruption to ethnic conflicts, are effects rather than causes of a lack of development, and that poor weather and soils become a bigger problem because of a lack of development, rather than being the principal barrier to development. You emphasize that bad policy is mostly to blame, but what about some of the other structural considerations, like debt, military spending, and colonial legacies? Do you think these too could be overcome with good policies?

HJC: I think there are some levels of debt that will make development impossible. Mathematically speaking if you have to spend the bulk of your export earnings repaying debts you can't develop your economy – you have to import machines and intermediate imports in order to grow. So there's got to be this level, I don't know exactly what that level is, but there must be some threshold.

As for military spending, it would be interesting to know. Being the frontier states of the cold war, S. Korea and Taiwan had to spend 5-6% of their GDP on military spending when the international average was 2-3%, while they were developing successfully. So it probably is possible to have growth even with a high level of military spending. But if you are spending 20% of your GDP like North Korea does, it's probably impossible. Above a certain level these things will be totally detrimental, though again, it's not clear what that level is.

JP: Do you think that the economically successful former colonies experienced a “lighter” colonial footprint than the unsuccessful ones? I was just comparing the levels of development in Kenya and the DRC.

HJC: It's hard to analyze how heavy or light the footprint was, but I understand what you mean. For Korea and Taiwan the footprint was “lighter” because colonialism was shorter, but heavier in that there was more penetration of every nook and cranny of the existing societies and probably more systematic repression. It is difficult to judge what these things mean and what they do to a society and an economy. Some believe that Korea and Taiwan benefited from being colonized by the Japanese more than the British or the French because the Japanese needed and wanted to develop their colonies industrially and so on. How much that is relevant is debatable because A) the level of industrial development in those countries was not exceptionally high under Japanese rule and B) in the case of Korea, most of the development was in what is now North Korea rather than South Korea, because North Korea had more hydroelectricity, minerals, and proximity to China (which was Japan’s main quarry in those days), and until the 1960s North Korea was richer than South Korea.

It is difficult to figure out how these things interact and how they influence subsequent history, but it would be silly to deny that these things do not leave any mark. When it comes to cases like the DRC, which as far as I know was one of the worst treated colonies in human history, it would be silly to argue that current development problems have nothing to do with the Belgians. Pronouncing judgments on these require a proper understanding of a country's history and economy.

JP: I was just teaching a course on 'Globalization and Development' at a university in Bukavu, in South Kivu, in the eastern DRC, where I used one of your lectures, 'Lessons for Africa'. It occurred to my students that the DRC isn't at the point where it has a government that could take the advice you offer from the past. What do you think a country or a government needs in order to get to the point where it could follow good advice?

HJC: Yes, I agree that some countries do not have a state, effectively. Whatever policies you can recommend would be pointless because you don't have anyone to implement them. You need a process of state-building and nation-building before you can launch any kind of development strategy and even if you want to follow the American model, you need an effective state.

The reason why even people in those countries need to look at other experiences and think about the kind of policies that they might want to adopt one day, is because in building the state itself you want to have in mind the kinds of policies that you eventually want to implement. If you believed (I don't) that controlling inflation through monetary policy is the most important foundation of economic growth then you will build a very strong independent central bank. If you don't think like that, then why should you waste your time and energy doing that? The point is that the kind of state that you want to build is not independent of the policies that you want to follow. So when you are in a position like in DRC and quite a few other African economies where you have to build the state almost from scratch, you actually want to have some ideas what you want to do with that state. If you build an American-style state, it will be hard to implement a Scandinavian style welfare state or a Japanese industrial policy.

JP: Thanks very much.

HJC: Thank you. 
 

Justin Podur is a Toronto-based writer.

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