Rethinking Development Through Bashing Thomas Friedman

There has a been a bit of buzz about a talk given by award winning Cambridge economist and CEPR fellow Ha-Joong Chong, at the New America Foundation on his new book Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.

He begins with an example of a small cheap car introduced by Toyota to the U.S. in 1958, essentially an “ashtray on four wheels.” The car bombed and was pulled from the market as critics chided Toyota for trying to go against Japan’s comparative advantage. Japan had lots of labor and not much capital in 1958 so it should have stuck to producing silk. Toyota could not complain that it hadn't gotten help, it had already had 25 years of protection and government subsidies. But the subsidies and protection continued.

Toyota’s Lexus now has been made an icon of free market development by Thomas Friedman who argues that developing countries should put on neo-liberal (privatization, deregulation, reducing trade barriers) “golden straight-jacket,” in his view, the only model of development available. If they would only don the straightjacket they developing countries could produced similar products. (Mr. Friedman seems to find himself in the position of being a punching bag for many an academic.) Mr. Chang believes that using the Lexus as a model for development by free trade is “like writing book on self made man and having the first chapter on Henry Ford II.”

He goes on to point out that Alexander Hamilton applied the idea of protecting small economies before opening to free trade to the U.S. Hamilton was in direct opposition to Adam Smith who argued against the U.S. developing manufacturing in The Wealth of Nations.

By the 1830s U.S. was most protectionist economy in world, it heavily regulated foreign investment and had virtually no intellectual property protections. But the U.S. wasn’t the first to use this model, in fact, Hamilton got his model from Britain’s economic development during the 1700s. Chang believes this model this model has been pursued by all other developed countries with only Netherlands and Switzerland pursuing development through free trade.

This goes to the most fundamental disagreement between the economists of developing and developed countries. This debate raged over the drivers of East Asian growth and causes of the East Asian financial crises in the late 90s. Did East Asia grow because of its governments’ industrial policies or despite of them? And was the crisis cause by imbalances created by these policies or because of the ‘herd mentality’ of investors?

The truth is, macro-issues such as this are impossible to test in any kind of rigorous scientific manner. But Mr. Chang levels a very powerful charge at the supporters of the Washington Consensus and the structural adjustment (i.e. pro-liberalization) programs from the IMF, the charge of hypocrisy.