Posts Tagged ‘ha joon chang’

In ‘Bad Samaritans’, Ha-Joon Chang takes a historical approach in attempting to answer the question, how do poor countries become rich? Chang provides his answers  by looking closely at how today’s rich countries constructed and managed their economic and industrial policy. He traces the history of the UK, US, the Scandinavian countries, and other more recent rich countries, such as Japan and Chang’s native South Korea. The result is an important work with conclusions that sharply contradict the current neoliberal free market orthodoxy peddled by rich countries and international organizations today.

 

It should be stated right from the outset that Chang is no ideologue: he is no diehard lefty, no commie fundamentalist, no anti-capitalist iconoclast. He simply calls it as he sees it, and is refreshingly honest – and entertaining – in his commentary on the current of the economic ideals prescribed by the rich countries, and how they differ so starkly from the policies that they themselves pursued in their infancy.

 

Chang challenges orthodox policy recommendations in a number of different areas. He looks at tariffs, subsidies and protected industries, and the idea that they should not be tolerated in the name of free trade; he looks at the destructive tendencies of unregulated capital flows and foreign direct investment, and finds that the benefits they provide are often incidential and modest, far outweighed by the damage they usually cause; he examines the idea that public enterprise is inferior to private and finds the evidence to be wanting, and in certain important circumstances contrary; he looks at the concept of intellectual property, and how it has often been taken too far, leading to a stifling of creativity; and so on.

 

Chang’s conclusions, as mentioned, frequently and consistently go against neoliberal doctrine. He argues that free trade is antithetical to a poor country’s development. He details the history of how rich countries used such trade barriers as tariffs and subsidies for key industries liberally, and were crucial to their development of industries that could compete at the international level. Without them, he states, these rich countries would not be where they were today. He also tackles the almost religious obsession we see today about private enterprise at all costs (see my earlier post on this topic, inspired by Chang’s chapter on this in the book).

 

One particularly interesting chapter is on intellectual property rights. While not against them in principle (or even in practice), Chang warns of the dangers of over-protection, and how a scenario has arisen in the developed world where the criss-crossing of property rights has actually led to a stifling of creativity. An important innovation may often involve the violation of a number of very simple processes that have nonetheless been copyrighted. He also argues that poor countries are impeded by international copyrights – and that the rich countries all violated or did not protect international copyrights in their development.

 

Ha-Joon Chang writes in a style that is both understandable to the layman, yet thorough and comprehensive enough to be convincing for non-economists and economists alike. He makes important examples using humor, such as the idea that his son should not go to school but rather enter the job market at the age of six, because free trade demands it.

 

Chang has written an illuminating and important book, and I cannot recommend it strongly enough. Through simple, historical examples and balanced and non-ideological language, he tells the story of how rich countries developed, and how the game has changed today to deny today’s developing countries the opportunities to develop in the same way. Nonetheless, I have a number of criticisms of Chang’s work.

 

– There is a growing recognition amongst serious economists that GDP is a limited measure of economic well-being, and reliance on this measure obscures other important elements of economic prosperity. Chang recognizes this limitation of GDP in this book…and promptly forgets about it. Throughout the book, he compares GDP growth rates of countries under different policies and regimes as proof of their success or failure. His main metric in the book, consistently and throughout, is GDP. While it does not significantly detract from his arguments – we all know that rich countries by and large have lower poverty and inequality than their poorer counterparts – but we will never move beyond GDP as the main measure of prosperity of important economists such as Chang if do not chip away at its superiority in their works.

 

– Chang paints a picture of industrial policy as being central to development, as opposed to more ‘micro’ elements as health, education, and credit for the poor. He acknowledges their importance, but dismisses the idea that they alone will magically lead to development. And he’s right, without doubt, that a country needs overarching economic objectives, such as investing in research in certain strategic sectors. But nonetheless, and related to the point above, I would have liked to see a greater discussion of greater health and education and better individual outcomes as an ends unto itself. A detailed discussion is probably beyond the scope of the book, however.

 

– Ha-Joon Chang does not discuss the environmental importance of a proper development strategy, and this is important. He contrasts how the rich countries developed with the options open to the poor countries today, but does not look at the changing ecological realities today. He advocates a policy of manufacturing and industry, but does not provide solutions, or even suggestions, of how this may be possible without us trashing the environment (as the rich countries did over the decades and centuries) and pushing the world over the precipice. This is important: it’s all well and good arguing that the poor countries should be allowed the same developmental opportunities as the rich had, but we have to be responsible. Economics as a discipline has consistently failed to recognize humanity’s place in the world and its role in maintaining ecological balance; this has to change. Development policy must be formulated with the ecology and the environment in mind. If this means a new paradigm of development, then so be it. Ha-Joon Chang does not touch on this.

 

Despite these criticisms, this book is a must-read for pretty much anyone. If for no other reason, read this book and understand that mainstream economics does not have all the answers. Neither does Chang, but after reading this book, a non-economist would have a better appreciation of economics as a discipline (and that it is not a science, but rather, has evolved to serve certain interests).

9.5/10

 

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Privatization, in a broad sense, refers to the transfer of a business, enterprise, or social function from public control to private ownership. It has been a cornerstone of the neoliberal economic mantra that has gripped policymakers for the last 3-4 decades, alongside private property, intellectual property rights, and the free market. In this time, hundreds of state-owned enterprises (SOEs) have been fully or partially privatized, in the belief that doing so would make them more efficient, and as a result serve to promote economic growth, and by highly questionable extension, prosperity.

Economists of the current orthodoxy will tell you that the theory is solid, and that the case for privatization is well grounded. The theoretical idea supporting privatization rests on three main pillars:

1) The Principal-Agent Problem: This broadly refers to the situation where the owners of an enterprise are disconnected from its operations. Instead, managers are hired to run them. The owners are the ‘principals’, and the managers are the ‘agents’. While it is in the interest of the owners to have the enterprise run as efficiently as possible, it is in the managers’ interest to work as little as possible while picking up a wage. Thus, the enterprise is inefficiently managed. With SOEs, the citizenry/taxpayers are the owners and so by privatizing, as the theory goes, the principal-agent problem will cease to exist.

2) Free Rider Problem: Individual citizens will not bother themselves with the day-to-day monitoring of hired managers, since they only own a fraction of the enterprise. If everyone owns a fraction and nobody is monitoring, then inefficiencies will arise. Since everyone is trying to ‘free ride’ but nobody is doing any actual monitoring, poor performance will result.

3) Soft Budget Constraint Problem: since SOEs are government owned, they are often available to work outside their budgets since they can rely on government assistance or bail-outs if they make losses or face bankruptcy. Therefore, they are able to get away with lax and inefficient management.

These are the arguments made against SOEs and in support of privatization. But do they hold on closer examination?

1) With regards to the principal-agent problem, it does appear to hold true for SOEs, but there is nothing in the theory to say that it does not also hold true for private firms! Most large corporations are held by varied and dispersed owners – think of the stock market, and how many different individuals, groups and organizations have ownership of a company. Private enterprises are thus also owned by a large number of shareholders, and management is delegated to a group of managers that are hired. Thus, there is little difference in ownership structure that would alleviate the principal-agent problem.

2) Similar to the above point, with diverse and widely spread ownership, the free-rider problem will exist for large, privately-held corporations as well. If I own 10 shares in Microsoft, I will not expend my time and effort to dilligently ensure that operations are being managed effectively – I leave it to someone else to do.

3) Politically generated soft budget constraints are not confined to just SOEs, as large, ‘important’, or politically influential companies can obtain funding and support from governments in times of trouble. We need not look further than the infamous bank bailouts in the US to know that this is just as true for private enterprises as SOEs.

So it seems that all the arguments made for privatization are in fact nothing of the sort. True, they are all valid arguments of pitfalls that can arise in public corporations, and should be kept in mind in their management. But they are also just as valid when it comes to private companies, and there is plenty of empirical evidence to back this up. Regardless, the conception is that SOEs are generally inefficient, after all we always hear about examples of bad state companies on the news, right?

What we rarely hear about are the well-run, highly effective SOEs that exist and operate all around the globe. To give just one example, Singapore Airlines is often talked of as one of the most highly regarded airlines in the world, and yet it is an SOE – 57% owned by Singapore’s Ministry of Finance. In fact Singpore – widely touted as one of the successes of the free market ideology – has an SOE sector that is four times larger than that of Argentina, widely cited as a state that has failed in its development due to the overextension of the state*.

So what gives? Why do only ever hear about bad SOEs, when there are in fact many, many good ones? Part of the reason is the sad nature of reporting. The news tends to focus on bad things: war, famine, sex scandals, and the like. Nobody cares about the ordinary decent citizen living out her life. And nobody cares about the silent, successful SOE, providing water or electricity or anything else to its customer base.

While these arguments do not strictly support state ownership, they make clear that the case against state ownership is highly misleading. The arguments made are, in fact, arguments in favor of effective systems of governance and regulation. The choice between private enterprise and SOE will always depend on many factors that are unique to the country, the industry, the time and the place. But there are specific situations where having an SOE is in fact the right choice:

1) When there are low short-term profitability prospects: the nature of private money is that it seeks a quick buck. As students are taught in economics 101, money now is worth money later, and so no investor will be willing to wait 15 years just to see a return on investment, even if the long-term prospects are sound. Such industries may be set up as SOEs, especially if they are in the strategic interests of the country.

2) ‘Natural Monopoly’: A natural monopoly exists when, due to technological conditions, having only one supplier is the most ideal way to serve a market. Such industries include water provision, or railroads (in the 19th century in the US, different railroad companies used to set up parallel tracks leading to the same places, a horrible inefficiency and waste of money). The main cost of production in these industries is building a distribution network. When there is a natural monopoly, especially in the case of a key service or product such as water, enterprises can charge whatever they want and customers must pay that price, as they have no other choice. This generates a social loss, as the item is priced so as to extract maximum profit, and at the same time, consumers are served less than they would ideally want. Introducing competition has no effect, as the incumbent has all the power. In natural monopolies, SOEs are strictly the best form of ownership.

3) Questions of equity: If left to the private sector, many essential services would not be delivered to those who are not profitable. For example, water provision to the poor, or delivering mail to those in rural locations. In this case, a SOE is necessary to provide these services, as the profit motive is overruled by the equity motive.

In conclusion, there is a time and a place for private enterprise. Only strict ideologues would, in today’s world, propose the strict outlawing of private enterprise. At the same time, only strict ideologues – like those at the World Bank, the IMF, and many academic institutions – would call for privatization at all costs, empirical evidence and common sense be damned. SOEs can often be inefficent and perform badly – but so can SOEs. The solution in both cases is effective regulatory structures, which take incentives into account. It is also crucial to accurate identify and prioritize objectives.

SOEs are often a very useful tool for governments, particularly developing country governments, in the industrial development of a country. Dogmatic ideology that insists at privatization at all costs is both ill informed and harmful to the prosperity of nations.

*in terms of its share of national income, not absolute terms.

** the ideas and data in this article are heavily drawn from Ha-Joon Chang’s excellent book “Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.” Go read it now.