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Kicking Away the Ladder

Good Policies and Good Institutions in Historical Perspective1


Ha-Joon Chang, Faculty of Economics and Politics, University of Cambridge

1. Introduction There is currently great ressure on develo ing countries from the develo ed countries, and the international develo ment olicy establishment !"#PE$ that they control, to ado t a set of %good olicies& and %good institutions& to foster their economic develo ment' (s )e are all familiar )ith, the %good olicies& that they )ant are basically conservative macroeconomic olicy, liberalisation of international trade and investment, rivatisation, and deregulation' The em hasis on %good institutions& is more recent' This has come about because of the recognition on the art of the "#PE that )hat they see as %good olicies& have failed to roduce good economic results in most develo ing countries because of the absence of su orting institutions' *o, for e+am le, it is said that, if rivate ro erty rights are not )ell rotected, rice deregulation )ill not lead to greater investment and higher gro)th, because the otential investors cannot be sure of rea ing the gains from their investments' (s a result of this ne) thin,ing, increasingly, the "F"s and many donor governments are attaching %governance-related conditionalities& to their loans and grants' The ,ey institutions they recommend include democracy, %good& bureaucracy, an inde endent -udiciary, strongly rotected rivate ro erty rights !including intellectual ro erty rights$, trans arent and mar,et-oriented cor orate governance and financial institutions !including a olitically inde endent central ban,$' (s )e all ,no), there have been heated debates on )hether these recommended olicies and institutions are a ro riate for develo ing countries' This a er is a summary of my ne) boo,, Kicking Away the Ladder Development Strategy in Historical Perspective !(nthem Press, .ondon, /00/$' 1eference in this a er is ,e t to the minimum' Further details, including bibliogra hical sources, can be found in the boo,'
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Ho)ever, curiously, even many of those )ho are sce tical of the a licability of these olicies and institutions to the develo ing countries ta,e it for granted that these )ere the olicies and the institutions that )ere used by the develo ed countries )hen they themselves )ere develo ing countries' Ho)ever, this cannot be further from the truth' (s )e shall sho) later in the a er, )hen they )ere develo ing countries themselves, the develo ed countries used virtually none of the olicies and institutions that they are recommending to develo ing countries'

. History o! "cono#ic Policy .1. $!!icial History o! %apitalis# (ccording to )hat " call the %official history of ca italism& that informs our debate on develo ment and globalisation, the )orld has develo ed in the follo)ing )ay over the last fe) centuries' From the 12th century, the industrial success of laissez faire 3ritain roved the su eriority of free mar,et and free trade olicies by beating interventionist France, its main com etitor at the time, and establishing itself as the su reme )orld economic o)er' Es ecially once it had abandoned its de lorable agricultural rotection !the Corn .a)$ and other remnants of old mercantilist rotectionist measures in 1245, it )as able to lay the role of the architect and hegemon of a ne) %.iberal& )orld economic order' This .iberal )orld order, erfected around 1260, )as based on7 laissez faire industrial olicies at home8 lo) barriers to the international flo)s of goods, ca ital, and labour8 and macroeconomic stability, both nationally and internationally, guaranteed by the 9old *tandard and the rinci le of balanced budgets' ( eriod of un recedented ros erity follo)ed' Unfortunately, according to this story, things started to go )rong )ith the First :orld :ar' "n res onse to the ensuing instability of the )orld economic and olitical system, countries started to erect trade barriers again' "n 1;<0, the U*( also abandoned free trade and raised tariffs )ith the infamous *moot-Ha)ley tariff, )hich the famous free-trade economist Jagdish 3hag)ati called %the most visible and dramatic act of anti-trade folly& !3hag)ati, 1;2=, ' //, f'n' 10$' The )orld free trade system finally ended in 1;</, )hen 3ritain, hitherto the cham ion of free trade, succumbed to the tem tation and re-introduced tariffs' The resulting contraction and

instability in the )orld economy and then finally the *econd :orld :ar destroyed the last remnants of the first .iberal )orld order' (fter the *econd :orld :ar, so the story goes, some significant rogress )as made in trade liberalisation through the early 9(TT !9eneral (greement on Trade and Tariffs$ tal,s' Ho)ever, unfortunately, dirigiste a roaches to economic management dominated the olicy-ma,ing scene until the 1;60s in the develo ed )orld, and until the early 1;20s in the develo ing )orld !and the Communist )orld until its colla se in 1;2;$' (ccording to *achs > :arner !1;;=$, a number of factors contributed to the ursuit of rotectionism and interventionism in develo ing countries ! ' 11-/1$' There )ere %)rong& theories, such as the infant industry argument, the %big ush& theory, and .atin (merican structuralism, not to s ea, of various ?ar+ian theories' There )ere also olitical dividends to rotectionist olicies such as the need for nation building and the need to %buy off& certain interest grou s' (nd there )ere legacies of )artime control that ersisted into eacetime' Fortunately, it is said, interventionist olicies have been largely abandoned across the )orld since the 1;20s )ith the rise of @eo-.iberalism, )hich em hasised the virtues of small government, laissez faire olicies, and international o enness' Es ecially in the develo ing )orld, by the late 1;60s economic gro)th had begun to falter in most countries outside East and *outheast (sia, )hich )ere already ursuing %good& olicies !of free mar,et and free trade$' This gro)th failure, )hich often manifested itself in economic crises of the early 1;20s, e+ osed the limitations of oldstyle interventionism and rotectionism' (s a result, most develo ing countries have come to embrace % olicy reform& in a @eo-.iberal direction' :hen combined )ith the establishment of ne) global governance institutions re resented by the :TA, these olicy changes at the national level have created a ne) global economic system, com arable in its !at least otential$ ros erity only to the earlier %golden age& of .iberalism !1260-1;14$' 1enato 1uggiero, the first #irector-9eneral of the :TA, argues that than,s to this ne) )orld order )e no) have %the otential for eradicating global overty in the early art of the ne+t B/1stC century D a uto ian notion even a fe) decades ago, but a real ossibility today& !1;;2, ' 1<1$'

Table 1. Average Tariff Rates on Manufactured Products for Selected Developed Countries in Their Early Stages of Development
(weighted average; in percentages of value)1 18202 18752 Austria R 15-20 Belgium4 6-8 9-10 Denmark 25-35 15-20 France R 12-15 Germany5 8-12 4-6 Italy n.a. 8-10 Japan6 R 5 Netherlands4 6-8 3-5 Russia R 15-20 Spain R 15-20 Sweden R 3-5 Switzerland 8-12 4-6 United Kingdom 45-55 0 United States 35-45 40-50 Source: Bairoch (1993), p. 40, table 3.3.
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1913 18 9 14 20 13 18 30 4 84 41 20 9 0 44

1925 16 15 10 21 20 22 n.a. 6 R 41 16 14 5 37

1931 24 14 n.a. 30 21 46 n.a. n.a. R 63 21 19 n.a. 48

1950 18 11 3 18 26 25 n.a. 11 R n.a. 9 n.a. 23 14

Notes: R= Numerous and important restrictions on manufactured imports existed and therefore average tariff rates are not meaningful. 1. World Bank (1991, p. 97, Box table 5.2) provides a similar table, partly drawing on Bairochs own studies that form the basis of the above table. However, the World Bank figures, although in most cases very similar to Bairochs figures, are unweighted averages, which are obviously less preferable to weighted average figures that Bairoch provides. 2. These are very approximate rates, and give range of average rates, not extremes. 3. Austria-Hungary before 1925. 4. In 1820, Belgium was united with the Netherlands. 5. The 1820 figure is for Prussia only. 6. Before 1911, Japan was obliged to keep low tariff rates (up to 5%) through a series of "unequal treaties" with the European countries and the USA. The World Bank table cited in note 1 above gives Japans unweighted average tariff rate for all goods (and not just manufactured goods) for the years 1925, 1930, 1950 as 13%, 19%, 4%.

(s )e shall see later, this story aints a fundamentally misleading icture, but no less a o)erful one for it' (nd it should be acce ted that there are also some senses in )hich the late 1;th century can indeed be described as an era of laissez faire' To begin )ith, there )as a eriod in the late-1;th century, albeit a brief one, )hen liberal trade regimes revailed in large arts of the )orld economy' 3et)een 1250 and 1220, many Euro ean countries reduced tariff rotection substantially !see table 1$' (t the same time, most of the rest of the )orld )as forced to ractice free trade through colonialism and through uneEual treaties in the cases of a fe) nominally %inde endent& countries !such as the .atin (merican countries, China, Thailand Bthen

*iamC, "ran Bthen PersiaC, and Tur,ey Bthen the Attoman Em ireC, and even Ja an until 1;11$' Af course, the obvious e+ce tion to this )as the U*(, )hich maintained a very high tariff barrier even during this eriod' Ho)ever, given that the U*( )as still a relatively small art of the )orld economy, it may not be totally unreasonable to say that this is as close to free trade as the )orld has ever got !or robably ever )ill$' ?ore im ortantly, the sco e of state intervention before the *econd :orld :ar !or at least before the First :orld :ar$ )as Euite limited by modern standards' *tates at the time had limited budgetary olicy ca ability because there )as no income ta+ and the balanced budget doctrine dominated' They also had limited monetary olicy ca ability because many countries did not have a central ban,, and the 9old *tandard restricted their olicy freedom' They also had limited command over investment resources, as they o)ned or controlled fe) financial institutions and industrial enter rises' Ane some)hat arado+ical conseEuence of all these limitations )as that tariff rotection )as far more im ortant as a olicy tool in the 1;th century than it is in our time' #es ite these limitations, as )e shall soon see, virtually all no)-develo ed countries !@#Cs$ actively used interventionist industrial, trade, and technology !"TT$ olicies that are aimed at romoting infant industries during their catch-u eriods' ?oreover, )hen they reached the frontier, the @#Cs used a range of olicies in order to hel themselves % ull a)ay& from their e+isting and otential com etitors' They used measures to control transfer of technology to its otential com etitors !e'g', controls on s,illed )or,er migration or machinery e+ ort$ and made the less develo ed countries to o en u their mar,ets by uneEual treaties and colonisation' Ho)ever, the catch-u economies that )ere not !formal or informal$ colonies did not sim ly sit do)n and acce t these restrictive measures' They mobilised all ,inds of different %legal& and %illegal& means to overcome the obstacles created by these restrictions, such as industrial es ionage, %illegal& oaching of )or,ers, and smuggling of contraband machinery'

"n cha ter / of the boo,, " e+amine the historical e+ eriences of a range of no)-develo ed countries !@#Cs$ in relation to their %catching-u & and % ullinga)ay& e+ erience and see )hat ,inds of industrial, trade, and technology !henceforth "TT$ olicies they had used at the time' The countries " loo, at are 3ritain, the U*(, 9ermany, France, *)eden, 3elgium, the @etherlands, *)itFerland, Ja an, Gorea, and Tai)an' This e+amination reveals a lot of myths that misinform todayHs olicy debate, but there are articularly many myths about the economic olicies of 3ritain and the U*( D the t)o su . . &ritain Contrary to the o ular myth that de icts it as a country that develo ed on the basis of free mar,et and free trade, 3ritain had been an aggressive user, and in certain areas a ioneer, of activist olicies intended to romote infant industries' *uch olicies, although limited in sco e, date bac, from the 14th century !Ed)ard """$ and the 1=th century !Henry I""$ in relation to )oollen manufacturing, the leading industry of the time' (t the time, England )as an e+ orter of ra) )ool to the .o) Countries, and Henry I"" tried to change this by, among other things, ta+ing ra) )ool e+ orts and oaching s,illed )or,ers from the .o) Countries' (nd bet)een the 16/1 trade olicy reform of 1obert :al ole, 3ritainHs first Prime ?inister, and the re eal of the Corn .a) in 1245, 3ritain im lemented a most aggressive "TT olicies' #uring this eriod, it actively used infant industry rotection, e+ ort subsidies, im ort tariff rebates on in uts used for e+ orting, e+ ort Euality control by the state D all olicies )hich are ty ically associated )ith Ja an and other East (sian countries' (s )e can see from table 1, 3ritain had very high tariffs on manufacturing roducts even as late as the 12/0s, some t)o generations after the start of its "ndustrial 1evolution, and )hen it )as significantly ahead of its com etitor nations in technological terms' 3ritain moved significantly, although not com letely, to free trade )ith the re eal of the Corn .a) in 1245' The re eal of the Corn .a) is these days commonly regarded as the ultimate victory of the Classical liberal economic doctrine over )rong-headed mercantilism !e'g', see 3hag)ati, 1;2=$, but many historians see it as an act of %free trade im erialism& intended to %halt the move to industrialisation on the Continent by enlarging the mar,et for agricultural roduce and rimary materials& !Gindleberger, 1;62, ' 1;5$' "ndeed, this is e+actly ho) many ,ey leaders of the osed homes of free mar,et D free trade ca italism'

cam aign to re eal the Corn .a), such as the olitician 1ichard Cobden and John 3o)ring of the 3oard of Trade, sa) their cam aign'/ "n short, contrary to the o ular belief, 3ritainHs technological lead that enabled this shift to a free trade regime had been achieved %behind high and longlasting tariff barriers&, as the eminent economic historian Paul 3airoch once ut it !3airoch, 1;;<, ' 45$' (nd it is for this reason that Friedrich .ist, the 1;th-century 9erman economist )ho is !mista,enly D see belo)$ ,no)n as the father of modern %infant industry& theory, argued that the 3ritish reaching for free trade is eEuivalent to someone )ho has already climbed to the to %,ic,ing a)ay the ladder& )ith )hich heJshe climbed' He is )orth Euoting at length on this oint' %"t is a very common clever device that )hen anyone has attained the summit of greatness, he kicks away the ladder by )hich he has climbed u , in order to de rive others of the means of climbing u after him' "n this lies the secret of the cosmo olitical doctrine of (dam *mith, and of the cosmo olitical tendencies of his great contem orary :illiam Pitt, and of all his successors in the 3ritish 9overnment administrations' (ny nation )hich by means of rotective duties and restrictions on navigation has raised her manufacturing o)er and her navigation to such a degree of develo ment that no other nation can sustain free com etition )ith her, can do nothing )iser than to throw away these ladders of her greatness, to reach to other nations the benefits of free trade, and to declare in enitent tones that she has hitherto )andered in the aths of error, and has no) for the first time succeeded in discovering the truth Bitalics addedC& !.ist, 122=, .'. ()A "f 3ritain )as the first country to successfully launch a large-scale infant industry romotion strategy, its most ardent user )as the U*( D Paul 3airoch once Cobden argued7 %The factory system )ould, in all robability, not have ta,en lace in (merica and 9ermany' "t most certainly could not have flourished, as it has done, both in these states, and in France, 3elgium, and *)itFerland, through the fostering bounties )hich the high- riced food of the 3ritish artisan has offered to the chea er fed manufacturer of those countries& !The Political ritings of !ichard "o#den, 1252, :illiam 1idge)ay, .ondon, vol' 1, ' 1=08 as cited in 1einert, 1;;2, ' /;/$'
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called it %the mother country and bastion of modern rotectionism& !3airoch, 1;;<, ' <0$' "ndeed, the first systematic arguments for infant industry )ere develo ed by (merican thin,ers li,e (le+ander Hamilton, the first Treasury *ecretary of the U*(, and #aniel 1aymond, )hile Friedrich .ist, the su osed intellectual father of infant industry rotection argument, first learned about the argument during his e+ile in the U*( during the 12/0s' ?any U* intellectuals and oliticians during the countryHs catch-u eriod clearly understood that the free trade theory advocated by the 3ritish Classical Economists )as unsuited to their country' .ist raises the (mericans for not listening to influential economists li,e (dam *mith and Jean 3a tiste *ay, )ho had argued that infant industry rotection )ould be a disaster for the resource-rich U*(, and follo)ed %common sense& and %the instinct of )hat )as necessary for the nation& and roceeded to rotect their industries, starting from the ne) tariff act of 1215 !.ist, 122=, ' ;;-100$'< 3et)een 1215 and the end of the *econd :orld :ar, the U*( had one of the highest average tariff rates on manufacturing im orts in the )orld !see table 1$' 9iven that the country en-oyed an e+ce tionally high degree of %natural& rotection due to high trans ortation costs at least until the 1260s, )e can say that the U* industries )ere literally the most rotected in the )orld until 1;4=' Es ecially after the Civil :ar, rotectionism became very strong' Unli,e )hat is commonly ,no)n, the Civil :ar )as not fought only on the issue of slavery D tariff )as an eEually, if not more, im ortant issue'4 "t )as only after the *econd :orld :ar, )ith its industrial su remacy unchallenged, that the U* liberalised its trade !although not as uneEuivocally as 3ritain did in the mid-1;th century$ and started cham ioning the cause of free trade D once again roving .ist right on his %ladder-,ic,ing& "n his ealth of $ations, (dam *mith )rote7 %:ere the (mericans, either by combination or by any other sort of violence, to sto the im ortation of Euro ean manufactures, and, by thus giving a mono oly to such of their o)n countrymen as could manufacture the li,e goods, divert any considerable art of their ca ital into this em loyment, they )ould retard instead of accelerating the further increase in the value of their annual roduce, and )ould obstruct instead of romoting the rogress of their country to)ards real )ealth and greatness& !*mith, 1;6< B1665C, ' <46-2$' 4 .incoln thought the 3lac,s racially inferior, )as against giving them votes, and thought abolition of slavery is an unrealistic ro osition' "n res onse to a ne)s a er editorial urging immediate slave emanci ation, .incoln )rote7 %"f " could save the Union )ithout freeing any slave, " )ould do it8 and if " could save it by freeing all the slaves, " )ould do it8 and if " could do it by freeing some and leaving others alone, " )ould also do that& !9arraty > Carnes, /000, ' 40=$'
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meta hor' The follo)ing Euote from Ulysses 9rant, the Civil :ar hero and the President of the U*( during 1252-1265 clearly sho)s ho) the (mericans had no illusions about ladder-,ic,ing on the 3ritish side and their side' %For centuries England has relied on rotection, has carried it to e+tremes and has obtained satisfactory results from it' There is no doubt that it is to this system that it o)es its resent strength' (fter t)o centuries, England has found it convenient to ado t free trade because it thin,s that rotection can no longer offer it anything' Iery )ell then, 9entlemen, my ,no)ledge of our country leads me to believe that )ithin /00 years, )hen (merica has gotten out of rotection all that it can offer, it too )ill ado t free trade'& !Ulysses *' 9rant, the President of the U*(, 1252-65, cited in ('9' Fran,, "apitalism and %nderdevelopment in Latin America, @e) Kor,, ?onthly 1evie) Press, 1;56, ' 154$'=

.*. $ther %ountries .eaving the interested reader to find out about other countries in the boo, itself, )e may say that the follo)ing oints emerge from our historical e+amination' First of all, almost all @#Cs had used some form of infant industry romotion strategy )hen they )ere in catching-u ositions' The e+ce tions to this historical attern are *)itFerland and the @etherlands' Ho)ever, these )ere countries that stood very close from !or even at$ the )orldHs technological frontier and therefore did not need much infant industry rotection' (lso, even these countries do not conform to modern day @eo-.iberal ideal, as they did not have atent la)s until the early /0th century and allo)ed their firms to freely %steal& technology from abroad' *econd, it )as the UG and the U*( D the su osed homes of free trade olicy D and not countries li,e 9ermany, France, or Ja an D countries )hich are usually associated )ith state activism D that used tariff rotection most aggressively' Tariff rotection )as relatively lo) in 9ermany !see table 1$, and Ja anHs tariff )as bound " am grateful to #uncan 9reen for dra)ing my attention to this Euote' Unfortuantely, this ha ened only after the boo, )ent to the rinters, so this Euote does not a ear in the boo,'
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belo) =L until 1;11 due to a series of uneEual treaties that it )as forced to sign u on o ening in 12=<' Af course, tariff figures do not give a full icture of industrial romotion efforts' 9ermany and Ja an actively used non-tariff measures to romote their industries' Ho)ever, France, des ite the fact that it is usually ortrayed as the interventionist counter oint to free-trade 3ritain, had lo)er tariff rotection than that of 3ritain during the first three Euarters of the 1;th century, and also maintained a very non-interventionist stance throughout the 1;th century and the first half of the /0th century' Third, tariff rotection )as in many countries a ,ey com onent of this strategy, but )as by no means the only, or not even necessarily the most im ortant, com onent in the strategy' There )ere many other tools, such as e+ ort subsidies, tariff rebates on in uts used for e+ orts, conferring of mono oly rights, cartel arrangements, directed credits, investment lanning, man o)er lanning, 1># su orts, and the romotion of institutions that allo) ublic- rivate coo eration' These olicies are thought to have been invented by Ja an and other East (sian countries after ::"" or at least by 9ermany in the late 1;th century, but many of them have a long edigree' Finally, des ite sharing the same underlying rinci le, there )as a considerable degree of diversity among the @#Cs in terms of their olicy mi+, suggesting that there is no %one-siFe-fits-all& model for industrial develo ment' .+. Pulling,Away "-ercises (s mentioned earlier, )hen they reached the to , the @#Cs used all ,inds of tactics to % ull a)ay& from the follo)er countries' Policies de loyed )ere, of course, different according to the latterHs olitical status D colonies, semi-inde endent countries bound by uneEual treaties, and inde endent com etitor countries' 3ritain )as articularly aggressive in reventing industrial develo ment in the colonies' First, rimary roduction in the colonies )as encouraged through e+ ort subsidies !%bounties&$ and im ort duties on ra) materials roduced in the colonies )ere abolished' *econd, high-value-added manufacturing activities )ere outla)ed in the colonies' Third, e+ orts from the colonies that com eted )ith 3ritish roducts )ere banned' For e+am le, 3ritain ut a ban on cotton te+tile im orts from "ndia !%calicoes&$ in 1600 and a ban on the e+ ort of )oollen cloth from its colonies !e'g', "reland and the U*($ to other countries in 15;;' Fourth, the use of tariffs by colonial

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authorities )ere banned or, if they )ere considered necessary for revenue reasons, countered in a number of )ays' For e+am le, )hen in 12=; the 3ritish colonial government in "ndia im osed small im ort duties on te+tile goods !<-10L$ for urely fiscal reasons, the local roducers )ere ta+ed to the same magnitude in order to rovide a %level laying field&' (s mentioned earlier, %uneEual treaties& )ere used in order to de rive nominally inde endent )ea, countries of their tariff autonomy, )ith their tariff bound at a very lo) level !ty ically <-=L$' (ll .atin (merican countries, starting )ith 3raFil in 1210, China, Thailand !then *iam$, Persia, the Attoman Em ire, and even Ja an until 1;11 )ere in this category' (gainst the com etitor nations, olicies focused on restricting the outflo) of su erior technologies through olicies li,e ban on s,illed )or,er migration or ban on e+ orts of ,ey machinery' The com etitor nations countered these moves )ith industrial es ionage, %illegal& recruitment of s,illed )or,er, violation of atents and other intellectual ro erty rights' ?ost of these countries accorded only very inadeEuate rotection of the intellectual ro erty rghts of foreign citiFens !e'g', allo)ing the atenting of imported invention$' *)itFerland did not have a atent system until 1;06, and the @etherlands, although it introduced a atent la) in 1216, abolished it in 125; and did not re-introduce one until 1;1/' (nd as late as in the late 1;th century, )hen 9ermany )as about to overta,e 3ritain technologically, there )as great concern in 3ritain over the )ides read 9erman violation of its trademar,s' ... %o#parison with /oday0s 1eveloping %ountries Those fe) @eo-.iberal economists )ho are a)are of the records of rotectionism in the @#Cs try to avoid the obvious conclusion !namely, it can be very useful for economic develo ment$ by arguing that, )hile some !minimal$ tariff rotection may be necessary, most develo ing countries have tariffs rates that are much higher than )hat most @#Cs used in the ast' For e+am le, :orld 3an, !1;;1$ argues that %BaClthough industrial countries did benefit from higher natural rotection before trans ort costs declined, the average tariff for t)elve industrial countries5 ranged from 11 to </ ercent from 12/0 to 1;20 M "n contrast, the average tariff on manufactures in develo ing countries is <4 ercent& ! ' ;6, 3o+ ='/$' They are (ustria, 3elgium, #enmar,, France, 9ermany, "taly, the @etherlands, * ain, *)eden, *)itFerland, the UG, and the U*('
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This argument sounds reasonable enough, but is actually highly misleading in one im ortant sense' The roblem )ith it is that the roductivity ga bet)een todayHs develo ed countries and the develo ing countries is much greater than )hat e+isted bet)een the more develo ed @#Cs and the less develo ed @#Cs in earlier times' This means that the currently develo ing countries need to im ose much higher rates of tariff than those used by the @#Cs in earlier times, if they are to rovide the same degree of actual rotection to their industries as the ones accorded to the @#C industries in the ast' For e+am le, )hen the U*( accorded over 40L average tariff rotection to its industries in the late 1;th century, its er ca ita income in PPP terms )as already about <J4 that of 3ritain' (nd this )as )hen the %natural rotection& accorded by distance, )hich )as es ecially im ortant for the U*(, )as considerably higher than today' Com ared to this, the 61L trade-)eighted average tariff rate that "ndia used to have -ust before the :TA agreement, des ite the fact that its er ca ita income in PPP terms is only about 1J1= that of the U*, ma,es the country loo, li,e a cham ion of free trade' Follo)ing the :TA agreement, "ndia cut its trade-)eighted average tariff to </L, bringing it do)n to the level belo) )hich the U* average tariff rate never san, bet)een the end of the Civil :ar and :orld :ar ""' To ta,e a less e+treme e+am le, in 126=, #enmar, had an average tariff rate around 1=-/0L, )hen its income )as slightly less than 50L that of 3ritain' Follo)ing the :TA agreement, 3raFil cut its trade-)eighted average tariff from 41L to /6L, a level that is not far above the #anish level, but its income in PPP terms is barely /0L that of the U*(' Thus seen, given the prod&ctivity gap, even the relatively high levels of rotection that had revailed in the develo ing countries until the 1;20s do not seem e+cessive by historical standards of the @#Cs' :hen it comes to the substantially lo)er levels that have come to revail after t)o decades of e+tensive trade liberalisation in these countries, it may even be argued that todayHs develo ing countries are actually even less rotectionist than the @#Cs in earlier times'

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'. Institutional 1evelop#ent in Historical Perspective (s mentioned at the beginning, there is a great ressure on develo ing countries to im rove the Euality of their institutions to conform to the %global standards&' @aturally, there is a lot of unease about this attem t' Ane obvious reason is that the "F"s and the donor governments do not have the mandate to intervene in many of these areas !democracy, cor orate governance, etc'$' Ta,en to the e+treme, the ush for the ado tion of institutional global standards amounts to neo-im erialism' (nother is that the standards demanded from develo ing country institutions seem to be too high D many develo ing countries, often -ustly, say that they sim ly cannot %afford& the high-Euality institutions that are demanded of them' They have an im ortant oint to ma,e, but in the absence of some idea as to )hich institutions are necessary andJor viable under )hat conditions, they are in danger of -ustifying )hatever institutional stat&s '&o that e+ists in develo ing countries' Then )hat is the alternativeN Ane obvious alternative is for us to find out directly )hich of the %best ractice& institutions are suitable for articular develo ing countries by trans lanting them and seeing ho) they fare' Ho)ever, as the failures of %structural ad-ustment& in many develo ing countries and of %transition& in many former Communist economies sho), this usually does not )or, and can be very costly' (nother alternative is for the develo ing countries to )ait for s ontaneous institutional evolution' "t may be argued that the best )ay to get the institutions that suit the local conditions is to let them evolve naturally' Ho)ever, such s ontaneous evolution may ta,e a long time, and there is no guarantee that the outcome )ill be o timal, even from the local oint of vie)' The third, and my referred alternative, is to learn from history by loo,ing at institutional develo ment in the develo ed countries )hen they )ere %develo ing countries& themselves' Therefore, in the belo) " try to dra) lessons from the history, as o osed to the c&rrent state, of the develo ed countries in terms of institutional develo ment' '.1. /he History o! Institutional 1evelop#ent in the 1eveloped %ountries "n this section, " discuss the evolution of 5 categories institutions that are )idely regarded as essential com onents of a %good governance& structure in the develo ed countries during the eriod bet)een the early 1;th century and the early /0th

1=

century' They are7 democracy8 bureaucracy !including the -udiciary$8 ro erty rights8 cor orate governance institutions8 financial institutions !including ublic finance institutions$8 and )elfare and labour institutions' .et us summarise the main findings' '.1.1. 1e#ocracy There is currently a lively debate on )hether democracy is good for economic develo ment' :hatever oneHs osition is in this regard, it is clear that the @#Cs did @AT develo under democracy' "t )as not until the 1;/0s that most no)-develo ed countries had ado ted even universal male suffrage for the ma-ority )hite o ulation !see table /$' 9enuine universal suffrage )as ado ted in all @#Cs only during the late /0th century !* ain restoring democracy only in the 1;60s8 votes to ethnic minorities in (ustralia and the U*( in 1;5/ and 1;5= res ectively8 votes to )omen in many countries after the second )orld )ar and in *)itFerland as late as 1;61$' ?oreover, until the *econd :orld :ar, even )hen democracy formally e+ited, its Euality )as e+tremely oor' *ecret balloting )as introduced only in the early /0th century even in France and 9ermany, and corru t electoral ractices !such as vote buying, electoral fraud, legislative corru tion$ lasted in most countries )ell into the /0th century' '.1. . &ureaucracy and 2udiciary *ales of offices, s oils system, and ne otism abounded in early bureaucracies !some countries even had official rice list for government -obs$' ?odern rofessional bureaucracies first emerged in Prussia in the early 1;th century, but much later in other countries' Even 3ritain got a modern bureaucracy only in the mid-1;th century' Until 122<, none of the U* federal bureaucrats )ere com etitively recruited, and even at the end of the 1;th century, less than half of them )ere com etitively recruited' Judiciaries often lac,ed rofessionalism and inde endence' For e+am le, in "taly, at least until the late 1;th century, -udges did not usually have a bac,ground in la), and, according to one historian, %could not rotect themselves, let alone anyone else, against olitical abuses& !Clar,, 1;;5, ' =4$' Until the early /0th century, the -udiciary in many countries )ere rone to dis ense %class -ustice&'

15

/a3le . Introduction o! 1e#ocracy in the 41%s


Country (ustralia (ustria 3elgium Canada #enmar, Finland France 9ermany "taly Ja an @etherlands @e) Oealand @or)ay Portugal * ain *)eden *)itFerland UG U*(
1

Universal ?ale *uffrage 1;0<1 1;06 1;1; 1;/0/ 124; 1;1;< 1242 124;/ 1;1;4 1;/= 1;16 122; 12;2 n'a' n'a' 1;12 126; 1;12= 1;5= !1260$P

Universal *uffrage 1;5/ 1;12 1;42 1;60 1;1= 1;44 1;45 1;45 1;45 1;=/ 1;1; 1;06 1;1< 1;60 1;66 !1;<1$PP 1;12 1;61 1;/2 1;5=

*ources7 Kicking Away the Ladder, cha ter <, table <'1 :ith racial Eualifications8 / :ith ro erty Eualifications8 < Communists e+cluded 4 :ith restrictions8 =(ll men and )omen over <0 PUniversal male suffrage )as introduced in 1260, but reversed bet)een 12;0 and 1;02 through the disenfranchisement of the blac,s in the *outhern states' "t )as only restored in 1;5=' PPUniversal suffrage )as introduced in 1;<1 but reversed by the military cou of 9eneral Franco in 1;<5' "t )as only restored in 1;66, follo)ing FrancoHs death in 1;6=' *ee the te+t for details'

'.1.'. Property rights (n attem t to chart the evolution of ro erty rights regimes is not made in this section, since it involves an im ossibly )ide range of institutions !e'g', contract la), com any la), ban,ru tcy la), inheritance la), ta+ la), land la), urban lanning regulations, etc'$' 3ut one observation that needs to be made is that the current em hasis on strong rotection of ro erty rights is mis laced, as sometimes the reservation of certain ro erty rights roved harmful for economic develo ment' There are many historical e+am les )here the violation of certain e+isting ro erty rights !and the creation of ne) ro erty rights$ )ere actually beneficial for economic develo ment !3ritish encloure, sEuatting in U* mid)est in the 1;th century, East (sian land reform, nationalisation in ost)ar (ustria and France$' *o in this section, " e+amine only one element of the ro erty rights system that is most easily tractable, namely that of intellectual ro erty rights institutions' (s

16

mentioned above !section /'4$, intellectual ro erty rights institutions in the @#Cs fell acutely short of modern standards until )ell into the /0th century' '.1.*. %orporate governance institutions Aur study sho)s that, even in the most develo ed countries !the UG and the U*$, many ,ey institutions of )hat is these days regarded as a %modern cor orate governance& system emerged after, rather than before, their industrial develo ment' Until the 1250s or the 1260s, in most countries limited liability, )ithout )hich there )ill be no modern cor orations based on stoc, o)nershi , )as something that )as granted as a rivilege to high-ris, ro-ects )ith good government connection !e'g', the 3ritish East "ndia Com any$, and not a standard thing' Until the 1;<0s, there )as virtually no regulation on com any audit and information disclosure' Until the late 1;th century, ban,ru tcy la)s )ere geared to)ards unishing the ban,ru t businessmen !ty ically involving a s ell in a debtorsH risonQ$ than giving them a chance to have a ne) start' Com etition la) did not really e+ist in any country until the 1;14 Clayton (ct in the U*( !there )as the 12;0 *herman (ct, but this )as mainly used against trade unions until President Theodore 1oosevelt used it again J'P' ?organ in 1;0/$' '.1.+. 5inancial institutions ?odern financial systems )ith )ides read and )ell-su ervised ban,ing, a central ban,, and a )ell-regulated securities mar,et did not come into being even in the most develo ed countries until the mid-/0th century' For e+am le, until the early /0th century, countries such as *)eden, 9ermany, "taly, *)itFerland, and the U* lac,ed the central ban, !see table <$' "n the case of the U*(, its central ban,ing system, the Federal 1eserve *ystem )as established in 1;1<, but as late as 1;/;, 5=L of the ban,s accounting for /0L of ban,ing assets )ere outside the *ystem'

12

/a3le '. 1evelop#ent %entral &anking in the 41%s


Kear of Establishment *)eden UG France @etherlands * ain Portugal 3elgium 9ermany "taly *)itFerland U*(
1

1522 15;4 1200 1214 12/; 1246 12=1 1261 12;< 1;06 1;1<

Kear )hen @ote "ssue ?ono oly )as gained 1;04 1244 12421 (fter the 1250s 1264 12;1/ 12=1 1;0= 1;/5 1;06 (fter 1;/;<

Controlled by the ban,ers themselves until 1;<58 / .egally note issue mono oly )as established in 1226, but de facto mono oly )as achieved only in 12;1 due to the resistance of other note-issuing ban,s' The ban, is still 100L rivately o)ned and cannot intervene in the money mar,et8 < 5=L of the ban,s accounting for /0L of ban,ing assets )ere outside the Federal 1eserve *ystem until 1;/;'

( similar story a lies to ublic finance' The fiscal ca acity of the state remained highly inadeEuate in most @#Cs until the mid-/0th century, )hen most of them did not have income ta+' 3efore 3ritain introduced a ermanent income ta+ in 124/, countries used it only as emergency measures during )artime' Even in 3ritain, as last as in 1264, 9ladstone )as fighting his election cam aign )ith a ledge to abolish income ta+' Even *)eden, des ite its later re utation as high-income-ta+ country, did not have income ta+ until 1;</' :ith limited ta+ation ca ability, es ecially local government finance )as in a mess in most countries' ( most telling e+am le is the defaults by a number of U* state governments on 3ritish loans in 124/' (fter these defaults, the 3ritish financiers ut ressure on the U* federal government to assume the liabilities !)hich reminds us of the events in 3raFil follo)ing the default of the state of ?inas 9erais in 1;;;$' :hen this ressure came to naught, the Times oured scorn on the U* federal governmentHs attem t to raise a ne) loan later in the year by arguing that %BtChe eo le of the United *ates may be fully ersuaded that there is a certain class of securities to )hich no abundance of money, ho)ever great, can give value8 and that in this class their o)n securities stand re-eminent& !cited in Cochran > ?iller, 1;4/, ' 42$' '.1... 6el!are and la3our institutions

1;

*ocial )elfare institutions !e'g', industrial accident insurance, health insurance, state ension, unem loyment insurance$ did not emerge until the last fe) decades of the 1;th century, although once introduced they diffused Euite Euic,ly' Effective labour institutions !e'g', regulations on child labour, )or,ing hours, )or, lace safety$ did not emerge until around the same time even in the most advanced countries' Child labour regulations started emerging in the late 12th or the early 1;th century, but until the late 1;th century or the early /0th century, most of these regulations )ere e+tremely mild and oorly enforced' Until the early /0th century, in most countries regulation of )or,ing hours or )or,ing conditions for adult male )or,ers )as considered unthin,able' For e+am le, in 1;0= the U* *u reme Court declared in a famous case that a 10-hour act for the ba,ers introduced by the @K state )as unconstitutional because %it de rived the ba,er of the liberty of )or,ing as long as they )ished& !cited in 9arraty > Carnes, /000, ' 506$'

'. . Institutional 1evelop#ent in 1eveloping %ountries /hen and 4ow Ane im ortant conclusion that emerges from our historical e+amination is that it too, the develo ed countries long time to develo institutions in their earlier days of develo ment' The reasons behind such slo) rogress are varied and many, but institutions ty ically too, decades, and sometimes generations, to develo ' Thus seen, the currently o ular demand that develo ing countries should ado t %global standard& institutions right a)ay, or after very short transition eriods of =-10 years, is unrealistic' (nother im ortant oint emerges )hen )e com are the levels of institutional develo ment in the @#Cs in the earlier eriod and those in todayHs develo ing countries' For e+am le, as )e can see from in 12/0, the UG )as at a some)hat higher level of develo ment than that of "ndia today, but it did not even have many of the most %basic& institutions that "ndia has D universal suffrage !it did not even have universal male suffrage$, a central ban,, income ta+, generalised limited liability, a generalised ban,ru tcy la), a rofessional bureaucracy, meaningful securities regulations, and even minimal labour regulations !e+ce t for a cou le of minimal and hardly-enforced regulations on child labour$'

/0

For another e+am le, in 126=, "taly )as at a level of develo ment com arable to that of Pa,istanHs today' Ho)ever, it did not have universal male suffrage, a rofessional bureaucracy, an even a remotely inde endent and rofessional -udiciary, a central ban, )ith note issue mono oly, and com etition la) D institutions that Pa,istan has had for decades !e+ce t for eriodic disru tions in democracy due to military intervention, but even then suffrage, )hen allo)ed, has remained universal$' For still another e+am le, in 1;1<, the U* )as at a level of develo ment similar to that of ?e+ico today, but its level of institutional develo ment )as )ell behind that )e see in ?e+ico today' :omen )ere still formally disenfranchised and blac,s and other ethnic minorities )ere de facto disenfranchised in many arts of the country' "t had been -ust over a decade since a federal ban,ru tcy la) )as legislated !12;2$ and it had been barely t)o decades since the country recognised foreignerHs co yrights !12;1$' ( !highly incom lete$ central ban,ing system and income ta+ literally only -ust came into being !1;1<$, and the establishment of a meaningful com etition la) !the Clayton (ct$ had to )ait another year !1;14$' (lso, there )as no federal regulation on securities trading or on child labour, )ith )hat fe) state legislations that e+isted in these areas being of lo) Euality and very oorly enforced' These ,ind of com arisons can go on, but it seems clear that the develo ed countries in earlier times )ere institutionally less advanced com ared to todayHs develo ing countries at similar stages of develo ment, not to s ea, of the even higher %global standards& that the latter countries are forced to conform to these days'

*. Lessons !or the Present *o )hat lessons can )e dra) from these historical e+aminationsN *.1. 7e,thinking "cono#ic Policies !or 1evelop#ent "n relation to economic olicies, the icture seems clear' :hen they )ere trying to catch-u )ith the frontier economies, the @#Cs used interventionist industrial, trade, and technology olicies in order to romote their infant industries' The forms of these olicies and the em hases among them may have been different across countries, but there is no denying that they actively used such olicies' (nd, in relative terms !that is, ta,ing into account the roductivity ga )ith the more

/1

advanced countries$, many of them actually rotected their industries a lot more heavily than )hat the currently develo ing countries have done' "f this is the case, the currently recommended ac,age of %good olicies&, em hasising the benefits of free trade and other laissez faire "TT olicies, seems at odds )ith historical e+ erience, and the @#Cs seem to be genuinely %,ic,ing a)ay the ladder& The only ossible )ay for the develo ed countries to counter this accusation of %ladder-,ic,ing& )ill be to argue that the activist "TT olicies that they had ursued used to be beneficial for economic develo ment but are not so any more, because %times have changed&' ( art from the aucity of convincing reasons )hy this may be the case, the oor gro)th records of the develo ing countries over the last t)o decades ma,es this line of defence sim ly untenable' "t de ends on the data )e use, but roughly s ea,ing, er ca ita income in develo ing countries used to gro) at <L er year bet)een 1;50 and 1;20, but has gro)n only at about 1'=L bet)een 1;20 and /000' (nd even this 1'=L )ill be reduced to 1L, if )e ta,e out "ndia and China, )hich have not ursued liberal "TT olicies recommended by the develo ed countries' *o if you are a @eo-.iberal economist, you are faced )ith a % arado+& here' The develo ing countries gre) much faster )hen they used %bad& olicies during 1;50-20 than )hen they used %good& !at least %better&$ olicies during the follo)ing t)o decades' The obvious solution to this % arado+& is to acce t that the su osedly %good& olicies are actually not good for the develo ing countries but that the %bad& olicies are actually good for them' The more interesting thing is that these %bad& olicies are also the ones that the @#Cs had ursued )hen they )ere develo ing countries themselves' 9iven these, )e can only conclude that, in recommending the allegedly %good& olicies, the @#Cs are in effect %,ic,ing a)ay the ladder& by )hich they have climbed to the to beyond the reach of the develo ing countries' *. . 7e,thinking Institutional 1evelop#ent :hen it comes to institutional develo ment, the icture is much more com le+ than the one for "TT olicies, but the follo)ing may be said' ?ost of the institutions that are currently recommended to the develo ing countries as arts of the %good governance& ac,age )ere the res&lts( rather than the

//

ca&ses( of economic development of the @#Cs in earlier times' "n this sense, it is not clear ho) many of them are indeed %necessary& for todayHs develo ing countries D so necessary( in the view of the )DP*( that they have to #e imposed on these co&ntries thro&gh strong #ilateral and m&ltilateral e+ternal press&res' ?oreover, even )hen )e agree that certain institutions are %good& or even %necessary&, )e have to be careful in s ecifying their e+act sha es' For -ust about every institution, there is a debate on )hat e+act form it should ta,e, and therefore the currently dominant vie) that there is only one set of %best ractice& institutions !)hich usually, although not al)ays, mean (nglo-(merican institutions$ that everyone has to ado t is highly roblematic' (rguing that many of the institutions currently recommended by the %good governance& discourse may not be necessary, or even beneficial, for the currently develo ing countries, ho)ever, should not be inter reted as saying that institutions do not matter or that develo ing countries do not need im rovements in their institutions' An the contrary' Historically, im rovements in the Euality of institutions seem to have been associated )ith better gro)th erformance, and )e can easily su historical and contem orary evidence' (nnual er ca ita income gro)th rate among the 11 @#Cs for )hich data are available during 12/0-6= ranged bet)een 0'5L !"taly$ and /L !(ustralia$, )ith the un)eighted average and the median values both at 1'1L' 3et)een 126= and 1;1<, er ca ita income gro)th rates ranged bet)een 0'5L !(ustralia$ and /'4L !Canada$, )ith the un)eighted average at 1'6L and the median at 1'4L' 9iven that the @#Cs sa) a significant develo ment in their institutions since the mid-1;th century, it is very lausible that at least a art of this gro)th acceleration )as due to the im rovements in the Euality of their institutions' The vastly su erior economic erformance of the @#Cs during the so-called %9olden (ge of Ca italism& !1;=0-6<$ to those of the eriods before or after it also highlights the im ortance of institutions in generating economic gro)th and stability' #uring the 9olden (ge, the @#Cs ty ically gre) at <-4L 'a' in er ca ita terms, in contrast to the 1-/L rate that had revailed before it and also in contrast to the /-/'=L rate that has been ty ical since its end' ?ost commentators attribute the 9olden (ge in the @#Cs to the institutional changes that )ere made follo)ing *econd :orld :ar, such as activist !Geynesian$ budgetary institutions, full-fledged )elfare state, stricter financial mar,et regulations, cor oratist )age bargaining institutions, ort this )ith

/<

institutions of investment coordination, and in some cases nationalised industries !es ecially France and (ustria$' The com arison of gro)th erformance in the @#Cs in earlier times )ith that of the develo ing countries during the ost)ar eriod also rovides us )ith some im ortant insights into the relationshi bet)een olicies, institutions, and economic gro)th' TodayHs develo ing countries could gro) faster in the early ost)ar eriod !1;50-20$ than the @#Cs had done at com arable stages of develo ment artly because they had much better institutions than the latter countries' #uring the 1;50-20 eriod, in er ca ita terms, todayHs develo ing countries gre) at about <L er annum' This is a gro)th erformance that is far su erior to )hat the @#Cs managed during their %century of develo ment& !12/0-1;1<$, )hen the average gro)th rates in the @#Cs )ere around 1-1'=L 'a'' (ll the above suggest that im roving the Euality of their institutions is an im ortant tas, for the develo ing countries' Ho)ever, t)o Eualifications need to be made in relation to this statement' First of all, as argued earlier, in ushing for institutional im rovement in develo ing countries, )e should acce t that it is a lengthy rocess and be more % atient& )ith the rocess, es ecially given that todayHs develo ing countries are already institutionally more advanced than the @#Cs at com arable stages of develo ment' The second Eualification is that %good& institutions roduce gro)th only )hen they are combined )ith %good& olicies !good in my sense$' The fact is that, des ite the continuous, and resumably accelerating, im rovements in the Euality of their institutions, todayHs develo ing countries have e+ erienced mar,ed slo)do)ns in gro)th during the last t)o decades' "n my vie), this )as because the ability of the currently develo ing countries to ursue the %!genuinely$ good& olicies has been significantly curtailed due to the % olicy reforms& during this eriod' *.'. Possi3le $32ections (t least three ob-ections can be raised against my argument, )hich " e+amine in turn' The first, and most obvious, of these ossible ob-ections is the argument that develo ing countries need to ado t the olicies and institutions recommended by develo ed countries )hether they li,e them or not, because that is ho) the )orld is D the strong calling the shots and the )ea, follo)ing them' (t one level, it is difficult to

/4

deny the force of this argument' "ndeed, my discussion on the % ulling a)ay& tactics used by the @#Cs in earlier times !e'g', colonialism, uneEual treaties, ban on machinery e+ orts$ rovides am le su ort for this argument' (nd even in the resent age )hen colonialism and uneEual treaties are not acce table any more, the develo ed countries can e+ercise enormous influence on the develo ing countries through aid budgets and trade olicies, as )ell as their influence on various international organisations' Ho)ever, at another level, this argument is beside the oint' :hat " am arguing is recisely that these %ne) rules& should be changed' " do agree that the chance of these rules being changed in the near future is very lo), but this does not mean that therefore it is not )orth discussing ho) they should be changed' The second ossible ob-ection to my argument is that the olicies and institutions recommended to the develo ing countries have to be ado ted because they are )hat the international investors )ant' "t is not relevant, it may be argued, )hether the develo ing countries li,e these %ne) rules& or not or even )hether the "#PE is )illing to change them, because in this globalised age, international investors are those )ho are calling the shots' Ho)ever, there are some serious roblems )ith this argument' First of all, it is not clear )hether international investors do necessarily care so much about the olicies and institutions romoted by the "#PE' The massive inflo) of foreign investments into China, des ite its highly %deficient& olicies and institutions, is a good e+am le' *econd, )hile increased conformity to international standards may increase foreign investments, increased foreign investment does not al)ays bring net benefit' Third, even if certain %good& institutions get introduced under global ressure, they may not deliver the e+ ected results, unless they can be effectively enforced' Fourth, contrary to the %follo) the global norm or erish& argument, )hich assumes that the rocess of institutional evolution is beyond anyoneHs control, the donor governments and the "F"s are not )eathervanes blindly follo)ing the )inds of international investor sentiments, but they can, and do, actively decide to a large e+tent )hich institutions they ush for ho) strongly' The third ossible ob-ection to my argument, )hich articularly concerns the issue of institutional develo ment, is that the %)orld standard& in institutions has risen over the last century or so, and therefore that the current develo ing countries should not consider the @#Cs of 100, 1=0 years ago as their models' " )holeheartedly agree )ith this ro osition' (t one level, it )ill be absurd to argue other)ise' "ndeed the heightened global standard in institutions has been a good thing in many )ays for the

/=

develo ing countries, or at least for the reformers in them' Unli,e their counter arts in the @#Cs of yesterday, the reformers in todayHs develo ing countries donRt have to struggle !at least too hard$ )ith the vie) that the introduction of things li,e female suffrage, income ta+, restrictions on )or,ing hours, and social )elfare institutions s ells the end of the civilisation as )e ,no) it' They also donHt have to re-invent certain institutions li,e central ban,ing and limited liability, the logic behind )hich many eo le the @#Cs in earlier times had found difficult to understand' Therefore, the develo ing countries should e+ loit these advantages of being a late-comer to the ma+imum and try to achieve the highest level of institutional develo ment ossible' :hat " am )orried about, ho)ever, is the vie) that institutions are sim ly matters of choice and therefore all countries should try to reach the !Euite highly-set$ %minimum global standard& right a)ay or after a minimal transition eriod' :hile acce ting that late-comer countries do not have to s end as much time as the ioneer countries had done in develo ing institutions !as they can im orted and assimilate, rather than invent, them$, )e should not forget that it too, the @#Cs ty ically decades, and sometimes even generations, in establishing certain institution )hose need had already been erceived' "n addition, )e should not forget that, )hen com ared to the @#Cs in earlier times, todayHs develo ing countries already have high standards of institutional develo ment' *.*. %oncluding 7e#arks *o bac, to the original Euestion' Are the developed countries trying to kick away the ladder beyond the reach of the developing countries by insisting that the latter countries adopt policies and institutions that are not the ones that they had used in order to develop, but the ones that are beneficial for the developed countries themselves? The discussion in this book suggests that they indeed are. " do acce t that this %ladder-,ic,ing& may be done genuinely out of !misinformed$ good)ill' *ome of those @#C olicy-ma,ers and scholars )ho ma,e the recommendations may genuinely believe that their o)n countries had develo ed through free trade and other laissez faire olicies and )ant the develo ing countries benefit from the same olicies' Ho)ever, this ma,es it no less harmful for the develo ing countries' "ndeed, it may be even more dangerous than %ladder-,ic,ing&

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based on na,ed national interests, as self-righteousness can be a lot more stubborn than self-interest' :hatever the intention is behind the %ladder-,ic,ing&, the fact remains that these allegedly %good& olicies and institutions have not been able to generate the romised gro)th dynamism in the develo ing countries during the last t)o decades or so, )hen these olicies and institutions have been strongly ushed by the "#PE' "ndeed, in many develo ing countries gro)th has sim ly colla sed' *o )hat is to be doneN :hile s elling out a detailed agenda for action is beyond the sco e of this a er !and indeed the boo,$, the follo)ing oints may be made' To begin )ith, the historical facts about the develo mental e+ eriences of the develo ed countries should be more )idely ublicised' This is not -ust a matter of %getting history right&, but also of allo)ing the develo ing countries to ma,e informed choices about olicies and institutions that are a ro riate for them' "n terms of olicies, first of all, " )ould argue that olicy-related conditionalities attached to financial assistance from the "?F and the :orld 3an, or from the donor governments should be radically changed' These conditionalities should be based on the recognition that many of the olicies that are considered %bad& are in fact not, and that there can be no %best ractice& olicy that everyone should use' *econd, the :TA rules and other multilateral trade agreements should be re)ritten in such a )ay that a more active use of infant industry romotion tools !e'g', tariffs, subsidies$ is allo)ed' "n terms of institutions, their im rovements should be encouraged, es ecially given the enormous gro)th otential that a combination of !truly$ good olicies and good institutions can bring about' Ho)ever, this should not be eEuated )ith im osing a fi+ed set of !in ractice, todayHs D not even yesterdayHs D (nglo-(merican$ institutions on all countries' There also need to be more serious attem ts to e+ lore e+actly )hich institutions are necessary, or at least beneficial, for )hat ty es of countries, given their stages of develo ment and their economic, olitical, social, and even cultural conditions' * ecial care has to be ta,en in order not to demand e+cessively ra id u grading of institutions by the develo ing countries, es ecially given that they already have Euite develo ed institutions )hen com ared to the @#Cs at com arable stages of develo ment, and given that establishing and running ne)

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institutions is costly' (llo)ing the develo ing countries ado t the olicies and institutions that are more suitable to their stages of develo ment and to other conditions they face )ill enable them to gro) faster, as indeed it had done during the 1;50s and the 1;60s' This )ill benefit not only the develo ing countries but also the develo ed countries in the long run, as it )ill increase the trade and investment o ortunities available to the develo ed countries in the develo ing countries' That the develo ed countries are not able to see this is the tragedy of our time' To use a classic Chinese adage, they may be %missing larger, longer-term gains by too eagerly see,ing smaller, short-term ones&' "t is time to thin, again )hich olicies and institutions )ill hel the develo ing countries develo faster, )hich in the end )ill bring greater benefits to the develo ed countries as )ell'

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7e!erences 3airoch, P' 1;;<' *conomics and :heatheaf' 3hag)ati, J' 1;2=' Protectionism, Cambridge, ?assachusetts, The ?"T Press' Clar,, ?' 1;;5' ,odern )taly( -./-0-112, /nd ed', .ondon and @e) Kor,, .ongman' Cochran, T' > ?iller, :' 1;4/' The Age of *nterprise3 A Social History of )nd&strial America, @e) Kor,, The ?acmillan Com any' 9arraty, J' > Carnes, ?' /000' The American $ation A History of the %nited States, 10th edition, @e) Kor,, (ddison :esley .ongman' Gindleberger, C' 1;62' 9ermanyHs Averta,ing of England, 1205 to 1;14 !cha ter 6$ in *conomic !esponse3 "omparative St&dies in Trade( 4inance( and 5rowth, Cambridge, ?(, Harvard University Press' .ist, F' 122=' The $ational System of Political *conomy( translated from the original 9erman edition ublished in 1241 by *am son .loyd, .ondon7 .ongmans, 9reen, and Com any' 1einert, E' 1;;2' 1a) ?aterials in the History of Economic Policy D Ar )hy .ist !the rotectionist$ and Cobden !the free trader$ both agreed on free trade in corn in 9' Coo, !ed'$, The *conomics and Politics of )nternational Trade 4reedom and Trade( 6ol&me 7, .ondon, 1outledge' 1uggiero, 1' 1;;2' :hither the Trade *ystem @e+tN in J' 3hag)ati > ?' Hirsch !eds'$, The %r&g&ay !o&nd and 8eyond *ssays in Hono&r of Arth&r D&nkel, (nn (rbor, The University of ?ichigan Press' *achs, J' > :arner, (' 1;;=' Economic 1eform and the Process of 9lobal "ntegration, 8rookings Papers on *conomic Activity, 1;;=, no' 1' *mith, (' 1;<6 B1665C' An )n'&iry into the $at&re and "a&ses of the ealth of $ations, edited, )ith an introduction, notes, marginal summary and an enlarged inde+ by Ed)in Cannan, )ith an introduction by ?a+ .erner, originally ublished in 1665' :orld 3an, 1;;1' orld Development !eport( -11- The Development "hallenge, @e) Kor,, A+ford University Press' orld History ,yths and Parado+es, 3righton,