Free Trade and Development in Pakistan

The recent budget proposed by Shaukat Aziz presents more evidence of the continuation of neo-liberal, IMF-dictated policies of the current government. It also reflects the ex-banker’s overriding pre-occupation with macro-economic management rather than development of Pakistan. The priorities remain the same, with the highest proportion of the budget spending still going to debt servicing (31%) and the military (20%). The so-called ‘development’ budget increases from 12% to 16%.

However, that there has been a minor increase in the development budget is not the issue. The problem is that complementing this is a set of policies that are in fact ‘anti-development’. By following the neo-liberal, free-trade, begging-for-FDI agenda, neither has any country developed so far, nor will it, ever.

In this respect, Shaukat Aziz would be well-advised to read Dr. Ha-Joon Chang’s recent book, “Kicking Away the Ladder.” Dr. Chang is a lecturer at Cambridge University and a renowned scholar in the history of economic development. His thesis is reflected in the name of his book. Chang provides an in-depth historical analysis of the strategies followed by developed countries, which have managed to climb the development ladder. He then shows how their current policies are not allowing the under-developed countries to follow them up the ladder. This is accomplished mainly through various unequal treaties and international agreements. In the process, Dr. Chang shatters several myths including that of Britain as the original laissez faire economy, and of US as the bastion of free market policies.

As the IMF continues to pressurize countries around the world, including Pakistan to propose foreign investment and free-trade friendly budgets, continuously forcing them to reduce tariffs, Dr. Chang reminds us that countries like the US themselves imposed extremely high tariffs to protect their own industries in their infant stages, as the chart below shows.

Average Tariff Rates on Manufactured Products for Selected Developed Countries in Their Early Stages of Development
(weighted average; in percentages of value)

  1820 1875 1913 1925 1931 1950
Austria R 15-20 18 16 24 18
Denmark 25-35 15-20 14 10 NA 3
France R 12-15 20 21 30 18
Germany 8-12 4-6 13 20 21 26
United Kingdom 45-55 0 0 5 NA 23
United States 35-45 40-50 44 37 48 14

R=Numerous and important restrictions on manufactured imports. Average tariff rates are not meaningful

When developed countries, such as Britain, did decide to follow a unilateralist free trade policy i.e. with zero tariffs on imports, it was always when their domination of the world trade was complete. This is a recurring pattern. As soon as a country reaches the top of the ladder, through protectionist policies, it advises free-trade. Data presented by Chang shows how when the UK, at the height of its industrial and imperial power, called for free trade, the US responded with even higher tariffs to protect its economy from being colonized by the UK.

Significantly, protectionism practiced by the now developed countries was not limited to tariffs. Tariffs are ultimately just one tool. Others included export subsidies, rebates on inputs for exports, monopoly rights, cartel arrangements, credit extensions, investment planning, manpower planning and Research & Development support. Chang has emphasized several times that it is not just the imposition of tariffs but the application of a whole range of protectionist policies, ranging from industrial, trade and technology that allowed these countries to develop their industries. The mix of these policies has changed over time for different countries but the fact remains that the state played a very active role in protecting important industries.

Similarly, intellectual property rights, which are being forced upon the developing countries, were openly flouted by the developed countries when they were in the process of industrializing. Britain, for instance, actively pursued what is now called reverse engineering of the more advanced machinery from Holland in trying to develop its wool industry. This was in defiance of patent laws established at the time.

Moreover, it is worth remembering that while the US industrialism was in nascent stages, its own patent laws were extremely lax. Before an overhaul in 1836, patents were granted without proof of originality. This led in part to the patenting of imported technologies. The patent rights in these countries were actually geared to protecting local innovators and not the rights of foreigners.

Reverse engineering allowed countries like Korea to develop technological understanding and skills to the point that they could start innovating beyond copying. As with everything else one learns by doing. Technological know how does not suddenly dawn on people without an existing infrastructure of universities, research centers, industries, parts suppliers, transport facilities, and above all, real demand from the industry.

Indeed, the only countries that have really benefited from the so-called Internet revolution are ones that were already making headway in this direction because of demand from industry. For others, the IT revolution is likely to pass much like the automobile and telecommunication revolutions passed in the past. Countries like Pakistan, with relatively low level of industrialization, have been relegated primarily to providing the manpower to do manual work like data entry on soft ware designed, marketed and patented by others.

Chang points out that the claim made by IMF and its lackeys that democracy, good governance and transparency are required before a country can develop its industry could not be further from the truth. He states:

“Imagine this: You are visiting a developing country as a policy analyst. It has the highest average tariff rate in the world. Most of the population cannot vote, and vote buying and electoral fraud are widespread. The country has never recruited a single civil servant through an open process. Its public finances are precarious, with loan defaults that worry investors. It has no competition law, has abolished its shambolic bankruptcy law, and does not acknowledge foreigners’ copyrights. In short, it is doing everything against the advice of the IMF, the World Bank, the WTO and the international investment community. Sounds like a recipe for development disaster? But no. The country is the US – only that the time is around 1880…… Despite wrong policies and sub-standard institutions, it was then one of the fastest-growing – and rapidly becoming one of the richest – countries in the world.”

The essential difference between the US of 1880 and the Pakistan of 2003 lies not in the level of institutional development, transparency and democracy, but in the fact that people of United States were much more free to discover and build systems that allowed industrialization with its related advantages. US was not repressed by the dictates of a world trade system that imposed patent rights, tariff limits and limits to public expenditure. It was, in short, not affected by colonialism or neo-colonialism the way we are today.
The institutions of democracy and good governance are not the cause of development. In fact, they are a product of it. Chang also discusses the fact that institution development in the now developed countries took a long time. These institutions faced several setbacks along the way, which they were able to overcome only after a long time. To expect the developing countries firstly to follow the same route of primarily American type institutions, and secondly to do that in the extremely short time frames suggested by the international donor agencies, essentially makes a mockery of the whole process.

All this is not to say that developing countries should not reap the benefits of ideas and institutions now available that were not around when the now developed countries were in the process of establishing themselves. However, we have to face the reality of empirical data that shows us that while the developing countries were pursuing relatively protectionist policies their growth was much higher than when they were forced to change.

Thus, Chang finds that while the developing world grew at the rate of 3.1% p.a. during the 1960-1980 period, between 1980-2000, as the IMF and WTO forced more and more developing countries to open their economies to international competitors, their growth rate slumped to 1.4% p.a.

This flies in the face of one of the main arguments given by the supporters of neo-liberal policies for the opening up to international competition, that these policies promote growth. This line of thinking further postulates that in the short term there will be inequalities but ultimately due to the trickle down effect this growth will lead to an improvement in the standards of most peoples’ lives. What we have seen over the last twenty years is that only the inequalities have grown, without any overall growth at a rate higher than the so-called ‘bad’ policies of activist state management.

Furthermore, as Maddison’s OECD report in 1995 showed, the unprecedented growth in per capita income in several developed countries during the period 1950-1973, was also achieved under activist states. When they followed the ‘bad’ policies of establishing full welfare states with stricter financial market regulations, corporatist wage bargaining institutions, investment co-ordination and in some cases nationalized industries, even the now developed countries saw an exponential increase in their own growth.
As Shaukat Aziz privatizes what remains of our public health and education systems, he needs to be reminded that public systems are not matters of charity but of increasing the productive capacity of the work force. Countries that were able to unleash this productive capacity have reaped significant gains.

A look at the military establishment in Pakistan is instructive in this regard. The military runs a huge network of schools, hospitals, and housing, all available free or at subsidized rates to the military clan – ostensibly, this would free the jawan and officer from the hassles involved in acquiring these services in normal life, and let him get to his job with concentration. The General should consider extending these privileges to the rest of Pakistani population, because obviously the military high command sees definite advantages to the productivity of its workforce through the provision of these benefits.

The purpose of drawing these parallels, of trying to remind ourselves of the strategies pursued by the developed countries is not to follow exactly the same path. If anything, we understand that different developed countries chose different elements of protectionism to promote industrialization in their own country. What this analysis is meant to show is that that there is no master recipe for development of a country, of institutionalizing democracy or ‘good governance’ as the World Bank would now like to call it. It has to emerge from the conditions and aspirations of the people, unhindered by the shackles of neo colonialism and its servile idealogy of free trade. This ideology allows the developed countries to bid the developing countries to do as told, not as they did.

Or are still doing. While the developing world continues to lower barriers to entry to foreign investors, while developing countries revamp all their budget priorities to attract international investment rather than local entrepreneurship, the developed countries continue to play the game with a different set of rules. Over the last two years, the US has raised tariffs to steel imports, increased subsidies to its agricultural sector and unilaterally refused to adhere to a WTO agreement that curtails the patent rights of its pharmaceutical companies.

There is no doubt that trade has an important role to play in any economy. It is the kind of trade that we are forced to carry out that is the problem. Trade is only beneficial to both parties if it is between equals. Trade between un-equal partners is essentially exploitation of one by the other. The sooner our finance minister recognizes this, the better.

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