What drives development?

HDR2013_CoverThis week on the train I’ve been writing up some notes from the 2013 edition of the UN Human Development Report. It’s always well worth looking up as a measure of development progress, but also because each year has a theme and the comments are generally quite insightful. This year’s report looks into the rise of the global south.

One item of good news in the report is that there isn’t a single country in the world that has seen its Human Development Index score fall between 2000 and 2012. There have been short term dips in places, but the overall trend is upwards. This couldn’t have been said in the 90s, so there is really something to celebrate about that.

Among all the developing countries however, some have seen sharper rises in both income and non-income measures of progress. China and Brazil we know about, Uganda, Tunisia, Ghana, Vietnam and Chile are places we hear less about. The report looks at the strategy followed by these countries, to see if can identify common themes or policies. What drives development, and what could other countries learn from those making the fastest progress? Here are three broad patterns that the report identifies as drivers of development:

1. A proactive developmental state: one big factor in accelerated development is an activist government that sees development as an overarching ambition that transcends politics. Often called ‘developmental states’, these are countries that put development at the heart of every department of government, and plan strategically for it. There are many countries that fit the description today, and many developed countries would have done at specific times in the past, including France after the Second World War and South Korea between 1960 and 1980.

Developmental states often see rising public spending, making sure that education and health are incrementally improved as part of development, and aren’t seen as something to be added on once you ‘arrive’ at some notional level of wealth. That spreads the benefits of growth to everyone, creating inclusive development. It’s entirely possible to see economic growth that doesn’t include those that need it most, so pro-poor policies are an important aspect of the developmental state.

It also often includes industrial policy, creating and nurturing comparative advantage by protecting or prioritising certain sectors. Some of the most successful initiatives here have favoured labour intensive industries, creating large numbers of jobs and benefiting more people. This is often assumed to mean manufacturing, but countries can also modernise and formalise agriculture to create more stable jobs.

The report points out that there is a difference between ‘hard’ and ‘soft’ industrial policy, those that dictate economic directions and those that encourage and nurture them more subtly. Both can work, but each country needs to negotiate its own balance between the state and the markets. They need to complement each other, and the report insists that there is no one magic strategy to do that.

2. Tapping of global markets: The second big factor is engaging with global markets to ‘import what the rest of the world knows and export what it wants’. This is a two way process, of adopting new technologies and opening markets to international trade, and of looking for export niches at the same time.

However, engaging with global markets is a process. The idea that countries could be thrown open to international trade overnight was dramatically proven wrong in the 90s. Instead, the places that have done best have opened up slowly, “a gradual and sequenced integration with the world economy”. That could include reducing and removing trade barriers over time so that domestic businesses aren’t destroyed by imports. It could mean opening up to overseas finance, but only as joint ventures with local partners, something China and India have modelled.

A more controversial strategy, employed by countries such as Korea and Turkey, is import substitution. This is when a country limits certain imports in order to develop domestic alternatives, and then removes the protection once domestic industry is competitive. The IMF and World Bank have effectively banned this as one of their many loan conditions. That’s because the theory says it leads to inefficient, molly-coddled industries that couldn’t stand on their own two feet.

(At one point in my childhood, Madagascar limited soap imports to encourage local soap-makers, despite their fatty, stinking product being practically unusable. I can say from experience that the IMF are right when they say this can happen – but they are wrong to say it inevitably will happen. Like many economic ideas, it’s not about whether it works or not, but whether you do it right.)

Other ways that countries have successfully tapped into global markets is to raise competency and add value to exports. Chile, for example, has made a concerted effort to turn its well established timber exports into paper and furniture exports instead. The key here, a recurring theme in the report, is that this meant investing in people as well as infrastructure. “The lesson is that development cannot be sustained without adequate investment in people’s skills to constantly upgrade the quality of products and production techniques.”

3. Determined social policy innovation: Building on that last point comes the third factor. There’s a lot of jargon in ‘determined social policy innovation’, but what it refers to is the idea that “development strategies cannot succeed without a commitment to equality of opportunity, giving everyone a fair chance to enjoy the fruits of growth.”

One of the best ways to do this is through education, investing in ‘human capital’. Education for girls is particularly important. Healthcare and social care programmes such as pensions are also under this umbrella, as ways of making sure that the benefits of growth are shared across the whole of society. This also reduces conflict, builds stability, and increases government legitimacy. Social programmes are not luxuries for rich countries, they are essential to real development.

With a couple of notable exceptions (China and Brazil), countries that have grown without increasing inequality have raised more people out of poverty. There are lots of ways to integrate the poor into a growing economy. Some countries have opted for land reform, India has its National Rural Employment Guarantee Scheme. Mexico has a cash transfer programme specifically designed to break inter-generational poverty cycles. The report has a case study on how the Mexican Oportunidades scheme inspired Opportunity NYC, the first cash transfer programme in the US. It’s a nice example of another recurring theme in the report – developing countries innovating their own solutions, often contrary to the advice of the ‘Washington consensus’ of the IMF.

What drives development is one of the biggest questions in economics, and politics too. The UNDP haven’t got to the bottom of it by any means, but what’s great about their work is that it is rooted in observation, not theory. They are looking at what has worked in the real world. The economics textbooks wouldn’t necessarily recommend many of these ideas, but we can look at recent history and see that they have worked.

The other thing that comes through is that there are many, many ways to develop. The three themes here are very broad, covering many different policies and strategies. There is no one way to accelerate development, no ‘golden straitjacket’ as Thomas Friedman put it in The Lexus and the Olive Tree. But there lots of patterns that can be seen in the success stories of the last few decades.  The state and the private sector should work together in balance. Free trade is best seen as a process, and countries should open to international trade over time. And perhaps most of all, focus on people.

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53 Comments on “What drives development?”

  1. henry1941 March 19, 2013 at 2:07 pm #

    Land has got to be freely available at the margin. Otherwise development leads to higher rents and the benefits are all snaffled by landowners. That increases the gap between rich and poor.

  2. DevonChap March 19, 2013 at 2:41 pm #

    It isn’t just theory that import substitution is a bad idea. There are many concrete examples of its undesirability. Even when it is deemed to have ‘worked’ you have had an inevitable opportunity cost of what those resources that were diverted into the protected industry could have done if not so directed.

    You could look at the Korean car industry and say Hyundai is now a globally competitive firm making cars equal of established manufactures and providing thousands of well paid jobs in South Korea. They were developed as part of a import substitution industrial policy. So far so good. But what of the costs to the rest of the economy? For Koreans for decades they had to pay over the odds for worse cars. Lending was directed to favoured national champions, choking it off for other areas. That money could have been spent on other things that could have developed into world beating industries. We won’t know because it didn’t happen, the opportunity cost. In deciding what to invest in it is ruling out other possibilities nationally.

    Protected industries are generally less efficient (being sheltered from competition and underwritten by the government to prevent failure), so often fail when exposed to free trade. Kia and Daewoo are examples here. To export they needed artificially cheap finance provided by the government to subsidise sales. When the Asian crisis removed that funding they failed.

    Protected industries also twist the government. Since their favoured status is granted by politicians the firms cultivate close links that corrupt politics, especially since the favoured firms become so much larger than the others in the economy, so have the resources to buy politicians. This again is evident in Korea. When the time comes that the now developed protected industry can be opened to foreign competition the companies will fight to retain their privileges.

    Finally it requires government planners who can identify sectors with market opportunities for successful import substitution. Occasionally they get it right but you don’t know before hand if they are, and they have to be able to respond to changing circumstances. That kind of quality bureaucrat is hard to find in one generation, but even less likely generation after generation. This is especially true since as an economy develops and matures what they should invest in becomes less obvious. So the planners should step back as the economy matures but human nature is to say “We were successful before, we can carry on that way” rather than “I’ll put myself out of work”. Public Choice theory at work.

    All this isn’t to say that import substitution and linked industrial policies will never work, just that they are likely to impose a greater cost on the wider economy with no guarantee of success.

    • Jeremy March 19, 2013 at 3:31 pm #

      I had a feeling you’d want to weigh in on import substitution. I nearly didn’t mention it in order to keep the peace, but it’s there in the report and I thought it was interesting. Of course it can be a disastrous policy, but it can also work rather well. And if we’re looking at the car industry, Korea’s car companies don’t look any more government supported than Britain’s or America’s. We’ve repeatedly had to step in to save our car companies or boost sales through things like scrappage schemes. At least Korea set out to create a government supported industry from the start, rather than intervening when it had gone wrong later.

      Protected industries are frowned upon now, but as economists like Ha Joon Chang and Erik Reinert have been saying until their blue in the face, every developed country has had times in its history when it put up barriers to protect its own industries. It’s a necessary part of the development story, and if Britain and the US were able to do it for centuries, we shouldn’t belittle developing countries who choose to do it today.

      But, like any economic policy, you have to do it right.

      • DevonChap March 19, 2013 at 4:49 pm #

        I’ve said before that protection can have a place in development, but it is very hard to do correctly. “You have to do it right” is easy to say, but much harder to implement. Import substitution and other industrial policies are basically picking winners. Its like roulette. A free market has thousands of small gambles putting small stakes all over the table, government planning such as described here is putting all the chips on a couple of numbers; great if you win but more likely you’ll lose.

        Opportunity cost is the big thing which is never addressed by import substitution’s supporters. The billions of won destroyed in Kia, Daewoo and Samsung Motors. We’ll never know what else they could have done.

        I’d have rather we had let creative destruction run its course in the UK car industry, once BL was gone our car output increased. Luckily our civil service and political system was never as warped by large industrial groups as South Korea’s was by the Chaebol. Untangling those corrupt links took years (not finished yet) and they still dominate the economy. Great if they pick winners, less good when they start backing donkeys, like Sony in Japan.

        • Jeremy March 20, 2013 at 10:44 am #

          There’s an opportunity cost to every investment. To read back in and say ‘what if?’ can only ever be speculative. The free market could never have delivered a car industry in Korea. It needed a degree of government support and it worked, creating jobs and a high value, worldwide industry that they would not have otherwise had. It was a massive gamble, for sure, and it’s had plenty of consequences in other ways, but it did pay off this time.

          That doesn’t mean others should follow their exact example mind you. I’m not advocating import substitution – as you’ll notice from the post, my personal experience of it was hardly positive and it goes wrong more often than it goes right. I think there are much less risky ways to nurture domestic industry.

          More generally, history shows us that protectionist policies have played a part in the early industrialisation of practically every developed country, and that free trade is something you grow into rather than adopt straight off. Britain nurtured its wool industry for 100 years through the 1500s. The US had a tax of 40% on imported manufactured goods in the early 1800s in order to protect its infant industries.

          Now that we’ve grown into free traders, we have a rather self-serving ideology that discourages the use of protectionist strategies now, policed through the IMF and the WTO. This effectively cuts off the proven development paths that Britain, the US, and many others followed.

          So what I’m interested in is this: since protectionism can work, and you agree that it has a role in development, why can’t we acknowledge this internationally and help countries to think through best practice. Do it wrong, and it can be deeply unhelpful – so which international institutions are going to step and help countries to do it right?

          • DevonChap March 20, 2013 at 2:28 pm #

            Should Korea have a car industry, does it make best use of their comparative advantages? Given the Chaebol’s nearly wreaked the country in 1998 it might have been the wrong turn. Hong Kong had no strategy after WW2. In fact the Governor even banned the collection of official statistics in case someone tried to use them to plan things. Didn’t turn out too badly for a tiny place devastated by war, full of refugees, with a limited independent life next to a massive implacably opposed country.

            I think international institutions have to be very careful about giving advice, since what works for one country won’t work for another, and what we don’t want is for them to advise everyone to build up the same industries, that way they just flood the market and bankrupt themselves.

            Tariffs against the West can have a place, though as I suggested they do politically damaging things, but we must not let that stop free trade between developing countries.

            We have in Africa currently some interesting different models. Kenya is very freewheeling and fairly open. It has created an innovative mobile phone industry wit phone banking that no government would have done. Others such as Ethiopia are more state lead. Ethiopia has improved its HDI scores quicker than Kenya but in the long haul the Ethiopian model relies on the government remaining clean, competent and far-sighted while Kenya’s should deliver a longer term economic future even with iffy politicians (provided there is no civil unrest but that stuffs any country).

  3. Jeremy March 20, 2013 at 3:30 pm #

    A lot of things nearly wrecked the economy in 1998, that was a major crisis for that part of the world. And big car companies tend to run into trouble in any recession, when people stop buying them. The US had to bail out its car companies in the latest crisis too, so I’m not convinced that the problems in 98 suggest it was a bad move on Korea’s part to create the companies in the first place.

    Kenya’s mobile network is not entirely a free market innovation. It was started by Telkom Kenya, the national phone company, who then sold a 40% stake of their profitable Safaricom venture to Vodafone. Last I heard the government still had a large stake in Safaricom. It’s actually a rather good example of public/private partnership, using the best of both to create infrastructure and innovate around it.

    And I’m absolutely with you on recognising that what works in one country doesn’t necessarily work in another. That’s the main reason why the UN’s analysis is so valuable, because they insist on that point throughout – unlike the Washington institutions, which insisted for years that there was only one way to prosperity.

    • DevonChap March 20, 2013 at 8:20 pm #

      I don’t think you’ve looked into the 1997-8 Asian crisis very deeply. The Korean Chaebols caused Korea’s exposure. I quote Wikipeadia: “The banking sector was burdened with non-performing loans as its large corporations were funding aggressive expansions. During that time, there was a haste to build great conglomerates to compete on the world stage. Many businesses ultimately failed to ensure returns and profitability. The South Korean conglomerates, more or less completely controlled by the government, simply absorbed more and more capital investment. Eventually, excess debt led to major failures and takeovers.” http://en.wikipedia.org/wiki/1997_Asian_financial_crisis

      That mobile phones started in Kenya as part of the national operator is nothing special, BT is after all an ex state provider. But only once control went to the private sector did it boom and, importanatly, innovate with things like M-Pesa.

  4. Jeremy March 20, 2013 at 8:37 pm #

    Sure, but would Korea’s car companies have got into trouble if the whole region hadn’t been in economic turmoil?

    I’m not saying Safaricom is anything special, just that it’s not an entirely free market thing. It’s been able to innovate because it is piggybacking on public investment made to kickstart the mobile network in Kenya. Bringing in the private sector to built on that is exactly what should have happened.

    • DevonChap March 20, 2013 at 8:51 pm #

      Would Korea’s car companies have got into trouble if there hadn’t been a crisis? Well the test of an economy is how well it weathers external shocks.The Korean economy was far more vulnerable than it should have been because of the way the Chaebols had been built up. So at a crisis they fell over while Taiwan, for example, did not.

      Gordon Brown would have truly ended boom and bust if nothing bad ever happened, we know his model failed when things went south, whilst Canada or Sweden suffered far less. Resilience is the key, economies that bend with the wind, not shoot up high with no roots and topple in strong winds.

      • Jeremy March 20, 2013 at 9:10 pm #

        Sure, and perhaps Korea’s car companies could have been managed better. Taiwan did do better in the 97 crisis, I believe its success is attributed to the large number of small and medium sized industries rather than big expensive corporates that go wrong spectacularly. Taiwan has been a big fan of import substitution though, so we can’t lay all the blame for Korea’s woes on that particular strategy.

        • Henry Law March 20, 2013 at 9:15 pm #

          Taiwan’s success is due to land value taxation. It favours self-employment and small/medium sized companies and ensures that there are always plenty of premises available for them to move into and expand if necessary.

          • Jeremy March 21, 2013 at 9:26 am #

            I believe Hong Kong has unusual land rules too, where the state owns all land and everyone else leases it. That’s played a big part in providing services while keeping taxes low.

          • DevonChap March 21, 2013 at 10:05 am #

            Without the economic development they couldn’t provide many services. Sir John Cowperthwaite RIP.

          • henry1941 March 21, 2013 at 10:06 am #

            The Hong Kong system of land tenure was introduced to ensure that the development took place and that land was not purchased by speculators and held on to.

          • DevonChap March 21, 2013 at 10:39 am #

            I’m quite open to a LVT. I don’t think it is the solution to all problems but as you say does encourage the productive use of land. In that sense I’d have thought Jeremy would be against it since it pushes growth.

        • DevonChap March 21, 2013 at 9:43 am #

          Facepalm. Korea is the example of the exploding big corporations! Taiwan had followed an import substitution policy but they had been moving away from that since the 1980s, while Korea kept to the big corporations which blew up spectacularly.

          Why didn’t Korea follow Taiwan’s route? Because of the corrupting influence of state sponsored business which industrial policy and import substitution create. Now Taiwan managed to avoid the worst aspects of this but more by chance than design (Taiwan being threatened by China tries to minimise its exposure to external shocks).

          Most countries don’t have that kind of discipline so develop a corrupt relationship between politicians, government and big business where there is an industrial policy. America had it, Korea had it, China has it today. Eventually there is some kind of shake out but that is painful.

          • henry1941 March 21, 2013 at 10:08 am #

            Taiwan was failing to develop but then land value taxation was introduced, which kick-started the economy.

          • Jeremy March 21, 2013 at 10:10 am #

            Don’t worry, I’m with you. Yes, Korea’s economy suffered because it’s car companies were too big and too involved. I don’t think that makes a case against import substitution, as you seem to be suggesting.

            Import substitution doesn’t have to mean massive corporations. Taiwan’s was much more diversified, focused on building skills and targeted at SMEs. And of course they moved away from it, that’s kind of the point.

            But I don’t want to get hung up on specific protectionist policies though. The broader point is that countries can nurture industries and should be allowed to. There are good and bad ways to do it. What I’d like to see is more discussion around how to do it well, rather than the flat ‘all protectionism is bad’ philosophy which dominates at the moment, and is so demonstrably wrong.

          • henry1941 March 21, 2013 at 10:23 am #

            A policy of “nurturing industry” is a path to corruption, pork-barrel politics and impoverishment of the people at large. Honest governments would not touch it with a bargepole.

            There is a case for supporting academic research and possibly near-market development but it should stop there. If governments want prosperity for their people, they should minimise taxes on labour, goods, services and imports and raise most of the revenue they need from a tax on the rental value of land. Given the opportunities this opens up, people can be relied upon to use their creativity and make themselves prosperous.

          • DevonChap March 21, 2013 at 10:36 am #

            Jeremy, you do realise that Chaebols are more than just car companies, that is very much the point.

            Henry is banging the same nail as me here. Government interference breeds corruption. As the risk of sounding like a scratched record “when the politicians decide what is bought and sold, the first thing bought and sold are the politicians”. It is possible that protectionist policies can ‘work’ but experience tells us more often that not it will create corruption with no guarantee of success. Therefore, while it is worth discussing how to do it well I’m concerned that you haven’t recognised the damage to the politics of a country protectionist policies do.

  5. Jeremy March 21, 2013 at 11:31 am #

    Why are you so reluctant to engage in some intelligent debate here? You’re both toeing the party line, where protectionism is a dirty word. That’s exactly the uncompromising attitude we need to get over.

    I’m not suggesting protectionism is some great answer, or that it is risk free or that it always succeeds. I’m just pointing out that it’s played a major role in the economic history of almost every rich country. It is a pattern identified by the UNDP in their report as a factor in the fastest growing economies of the last couple of decades. So let’s put the ideology to one side for a moment and think about it a bit more practically.

    Can I suggest that before you harangue me any further, that you go and read the development report? It’s exactly the kind of balanced debate I’m talking about. Chapter 3 deals most specifically with drivers of development if you don’t want to read the whole thing.
    http://hdr.undp.org/en/reports/global/hdr2013/download/

    I’m a supporter of land value taxation, by the way.

    • DevonChap March 21, 2013 at 1:06 pm #

      Now now with the passive aggression. Just because we don’t agree with you doesn’t make our comments unintelligent.

      The report is fairly slanted in favour of activist government. There is a wonderful bit on page 70 where they are justifying the decades of failure of India’s and Brazil’s protectionist policies by suggesting they created a base for later, non government backed, success. On India their report on India backs (but I don’t think means to) the idea of a government supporting infrastructure (such as higher education) rather than picking winners since the Indian government did not plan the IT revolution there. The report is overly rosey on South Korean history too.

      The report says that India, Brazil and Turkey built up capabilities during times when they had import substitution which they later capitalised on. What they don’t say is that when they ran those policies they produced uncompetitive products that the locals had to buy at high prices and even then the government had to subsidize until they could not afford to do so. Once that crisis came they follow more ‘Washington Consensus’ policies and those protected sectors shrank dramatically while the rest of the economy took off. While now they might be growing again the time and money wasted was huge. There is also a survivor bias in this report, in that those formally protected industries that are not now flourishing are not mentioned. Also Hong Kong is ignored, doesn’t fit the story.

      Protectionism is damaging to politics. It creates groups of ins and outs. The costs imposed by protectionism are spread across many, the gains enjoyed by few (Example rubbish expensive soap for everyone to benefit a small number of people who work in soap factories. This perversely makes it harder to remove protections since those who lose will lose a lot immediately (soap worker laid off) while everyone else only gains a little slowly (cheaper soap isn’t a big part of most shopping bills)).

      The UN report doesn’t say much about how to avoid “rent seeking and cronyism.” I’d have thought democracy would help with a free press to expose corruption but it is something every country would have to work out for themselves. If your so intelligent what is your answer?

      • henry1941 March 21, 2013 at 1:51 pm #

        Cronyism goes hand-in-hand with protectionism. It is a conspiracy against the people at large.

        In the 1980s the EU slapped an import duty on computer printers. This was the result of lobbying by the one German manufacturer of printers, who could not compete against products from Japan. The public was forced to pay more, and in the end the firm stopped making printers in Germany anyway. The whole technology moved on and the EU countries were cut out altogether.

        I wonder how many Eurocrats and politicians were treated to fancy meals at expensive hotels and restaurants to get that piece of legislation through.

        • DevonChap March 21, 2013 at 2:42 pm #

          It doesn’t require bribes or inducements for protectionism to breed political corruption. If the politicians feared that the upset caused by the lay off of the workers from the printer makers would have negative electoral consequences for them then and that led them to back tariffs that is a form of political corruption – following policies for their political self interest over that of the country.

          • henry1941 March 21, 2013 at 3:04 pm #

            Too true, look at the story of the dying British car industry in the 1970s. But if work opportunities were more plentiful, as they would be with land value taxation in place, then old industries could be allowed to fade away and new ones take their place, and people would understand that there is not a limited amount of work to go round.

          • DevonChap March 21, 2013 at 3:11 pm #

            Sadly human psychology favour holding on to what you have over what you might have. Hence the fear of Schumpeterian Creative Destruction and why once protectionism is entrenched it is so hard to get rid of.

  6. Jeremy March 22, 2013 at 12:58 pm #

    There’s a big difference between protectionism to try and cling on to something you have that isn’t competitive, and protectionism to nurture infant industries. That latter kind is, if history is anything to go by, vital to kickstarting industrialisation.

    This is why the debate around protectionism needs to be more nuanced. It’s not good enough to say all protectionism is bad, or to say it’s all good. It’s entirely contextual, and every country is different.

    I’m puzzled, Devonchap, that you think the fact that countries adopted more free market policies later supports your view. The whole point of protectionism in development is that you create the industries and then open your markets. That’s what supposed to happen. It’s what Britain and America did. It’s not a matter of trying one thing and then giving up and trying something else. It’s a process.

    Henry, your statements that protectionism is a conspiracy against the people at large is also a little bizarre in the development context. As the post, and UNDP’s report suggests, those countries that have done best are the ones that have prioritised labour intensive industries, creating stable employment for more people. They’re often publicly owned companies in the early stages of infant industry protectionism, privatised later. It’s all about expanding participation and including as many people as possible in the rising prosperity. Sure, corporates and elites can lobby for perverse protection like the example you give, but protectionism at its best is pro-poor.

    Hong Kong won’t have been included here because it is specifically looking at countries that have delivered rises in both the income and non-income aspects of the Human Development Index faster than others at the same level of development.

    • Henry Law March 22, 2013 at 8:31 pm #

      Thre is something fundamentally wrong when it is necessary to “create employment”. Creating “labour intensive” employment is equivalent to cleaning the floor with your bare hands when you could use a dustpan and brush. It creates work but where is the gain? The question that has to be asked is what is the matter that people cannot provide themselves with livelihoods for themselves and their families? When this is looked into it will invariably be the case that they are deprived of access to free land at the margin.

      • Jeremy March 23, 2013 at 10:34 am #

        Except that what we’re often talking about in these situations is subsistence farmers leaving that way of life and seeking out more stable employment in the cities, usually in manufacturing. I’m all for free land, but it seems rather reductionist to say that ‘invariably’ that’s the problem if people aren’t able to provide for themselves.

        • Henry Law March 23, 2013 at 6:33 pm #

          Subsistence farming is farming on sub-marginal land. Either the above-margin land it taken or tax systems are constructed in such a way that above-marginal land has become sub-marginal, or both. Free land at the margin means that anyone operating at the margin is not having to pay tax in any shape or form, “directly” or “indirectly” – it makes no real difference ultimately. The original statement holds. There is something very wrong with the economic system if it becomes necessary to “provide employment”.

          • Jeremy March 24, 2013 at 11:35 am #

            Okay, you’ve lost me a little here – I’ve not come across the idea of sub-marginal land. Can you define marginal here – free land at the margin of what?

          • henry1941 March 24, 2013 at 6:10 pm #

            To understand the concept of marginal land the easiest explanation is in one of the earlier chapters in Progress and Poverty by Henry George, “The Unbounded Savannah”. If land is freely available, then marginal land is the least productive land in use. If all land is enclosed ie someone “owns” it, then those who own no land are obliged either to work for wages or pay rent to an owner, or to work land which provides only bare subsistence.

    • DevonChap March 22, 2013 at 8:36 pm #

      The case studies of India, Turkey and Brazil are not fairly reported in the study. They built up local champions behind tariff walls in the 1960s and 1970s. However by the 1980s these inefficient industries (because they were badly run monopolies) were costing more than the governments could afford. Amid borrowing and balance of payment crisis these governments then opened their markets and removed the support for those industries. Those industries rapidly declined but because of the pro market policies the wider economies boomed such that foreign firms, or successful local ones, looked to manufacture in those countries. The remnants of the former national champions were sold at a song (for a fraction of the money the governments invested) to the new owners who then made a success of the operations. Not clever at all.

      Protectionism is not pro-poor. Tariffs man higher prices for all because they keep out cheap goods and without competition promote monopolistic inefficient local producers. To fund the directed industrial development the governments pull money from agriculture by making farmers sell to them at low prices.

      You don’t need a protected industry to develop one. Slovakia didn’t make one car when part of Czechoslovakia. After independence by encouraging foreign investment with low taxes and flexible workforce they now have the 8th largest car industry in Europe.

      • Jeremy March 23, 2013 at 10:48 am #

        No, you don’t need protected industry to develop one, but every country is different. Slovakia had distinct advantages that most poorer countries don’t have – becoming a member of the EU for example.

        Tariff barriers are, as I keep saying, a stage that you move through. The long term benefits of industrialisation are worth the short term higher prices. Take the US example, where Alexander Hamilton put high tariffs on imported manufactured goods from Britain. Must have been a complete pain to make do with the inferior locally made goods for a while, but it paid off once domestic industry picked up.

        And yes, there are plenty of bad examples you could pull out, and so could I. It’s all about balancing private and public investment, and the latter giving way to the former as soon as possible.

        • DevonChap March 23, 2013 at 2:09 pm #

          America is an interesting example. It had a major advantage over most countries that raise tariff walls in that it was a continent sized economy so had much larger markets, allowing true competition internally rather than a single state supported national champion. Also while America had tariff barriers to imports of manufactured good, there were still open to foreign investment. Many American railways were built with British capital. Counties like India and Turkey when they were going through their protected economy phase restricted FDI as well as other imports. Finally America had vast corruption and bought politicians. Look up the Credit Mobiller scandal.

          Export led growth doesn’t need tariffs, since you are not trying to serve your own market. It needs a competitive economic governance and to be open to foreign investment. A competitive economy will grow without picking winners. Tariffs are used to build up national champions and with the increasing complexity of manufactured good, only large economies these days can hope to do that. successfully. The others just won’t have the resources to spend on a long term inefficiency.

          Those countries cited, excepting perhaps the US, have not ended protectionism and tariffs voluntarily. Most countries that have had tariff barriers have had borrowing or other economic crises that have bankrupted their economies and led to ending those tariffs as unaffordable. Since that is more likely than not, countries should err against tariffs and protection.

          Now since every country in the world has had tariffs at some point (there were very fashionable from 1930s to 1970s) you can of course say, “Country X once had tariffs, now it is developed, therefore tariffs were essential to its development.” Logical fail but you can still say it, but please note that broader based, faster and more sustained growth occurs after those tariffs are removed.

          • Jeremy March 24, 2013 at 11:57 am #

            Ah, now we’re getting closer to the kind of ‘best practice’ conversation that I’m interested in. (not here, but generally) There’s no point is saying it never works, because that’s not true. So when does it work, and when does it not? The size of your potential domestic market is one such consideration.

            You need to look a lot further back than the 1930s to the 1970s to get a real picture of the role of protectionism in economic history. That will only show you the 20th century fad for it, which coincided with nationalist and socialist movements and was mostly negative.

            We have muddied the waters somewhat by veering off into talk of protectionism, when the UN report is about activist government, a much broader category that may not involve any protectionist measures at all. I had a feeling the mention of import substitution would do that.

          • DevonChap March 26, 2013 at 8:54 pm #

            Its hard to draw lessons on protectionism prior to 1776 since up to then mercantilist ideas held sway so pretty much everyone thought there was a fixed amount of trade and you had to fight to get it and protect what you had. If everyone is doing it then you can’t compare policies. Only after Adam Smith and Ricardo did free trade gain ground.

            The Corn Laws were not designed to protect infant industries, quite the opposite.

            The countries that have taken off have had relatively competent government that have not overly oppressed their peoples and have not be run by overly greedy ruling classes. Human entrepreneurial spirit is a common and hardly thing so will flourish if allowed.

            The best thing for development is to have an honest open government with a stable society that is accessible to markets and the Rule of Law and property rights with a tax system that allows the accumulation of capital. Have that and you don’t need state guided or state capitalist companies. The problem is that developing countries are in the main run by relatively small cliques or groups (Chinese Communist Party is small compared to the Chinese population). Rule of law is weak. To protect you from predatory officials and get required permits it helps to be party of that clique. So an entrepreneur needs to be from that clique or have friends in that clique. Once in you can use your access to get the state to favour your business as long as you keep in with the clique. This is inefficient but better than nothing.

            The trouble with the UN report is that is, as I said before, the survivor bias. It doesn’t look at similar examples that have failed. Something that works 1 time in 10 isn’t a model to follow.

          • Jeremy March 27, 2013 at 10:14 am #

            You should read Ha Joon Chang or Erik Reinert on this – there’s a wealth of examples both before and after 1776. The early American economy is a textbook case and right in the time frame you’re looking for. The British Empire also has a host of lessons for us, as they deliberately managed some of their territories (including India) to prevent them industrialising. There are some bizarre echoes between what the Empire was trying to do to prevent development, and what the IMF later recommended to stimulate development.

            Of course there’s an element of survivor bias, and a focus on what worked. But there is for your view too – it’s easy to name Hong Kong and other shiny examples while ignoring a whole list of countries where market liberalisation failed to deliver. You could no doubt provide extenuating circumstances for all of them, in the same way that a developmental state activist could explain away all their failed projects.

            The point is that there is no magic solution. I’m not clamouring for protectionism, and neither am I against free markets. Every country is different and needs to find its own way, but we can all be guided by the best examples from history. That’s what the UN report does quite well – and since the second point in their three is all about engaging with global markets, I’m not sure why you’re so convinced that it’s unbalanced.

            Have you read Chang or Reinert at all?

          • DevonChap March 27, 2013 at 3:58 pm #

            The reason I think it is unbalanced is because if it is genuinely trying to look at the best examples in history in all their variety then why doesn’t it look at those who had a less interventionist method? It also doesn’t look at the failures of intervention which surely is as valuable. The economists quoted are all of a supportive mind. Now it chimes with what you believe which is why you see it as balanced. But it is slanted.

            I’ve seen Chang and Reinhert’s ideas but they fail to convince for the modern era. The technology, and hence capital, needed to industrialise in the 19th century was tiny compared to today. Ghana could I’m sure afford to build a steam locomotive industry but today’s trains are two to three times more complex than those of just 20 years ago, let alone 150.

            I said above good governance it the key. The UK, Germany and the US didn’t really have models to follow in that regard and had to work it out piece by piece. A developing country today can see the need for a competent civil service, strong civil society, a central bank and the rule of law etc and have many examples to copy.

  7. Jeremy March 25, 2013 at 11:14 am #

    Thanks Henry. That’s what I thought, which is why I got confused. If marginal land is the least productive, how can land be ‘sub-marginal’?

    I ask because plenty of subsistence farmers are on very good land, which they actually pay no rent on (but equally have no legal right to). Since they are subsistence farmers, by definition they have no income and therefore pay no tax. So clearly something more is needed for development to happen – free land at the margins is not enough in and of itself.

    • henry1941 March 25, 2013 at 11:22 am #

      If (a) there is not free land at the margin or (b) the rent of land is privately appropriated or (c) taxes are levied on labour, goods or services, then development can still happen but only the 1% will benefit substantially. They will get extremely rich and the other 99% will get the crumbs that fall off the table.

      • dichasium March 26, 2013 at 8:31 pm #

        Is it not a plain fact that the powerful have regularly and overall, (whatever else they’ve done), taken resources of all sorts from as many places and people as was available, thereby keeping their position and others in theirs. The crumbs have merely been relative to the feast. Some try scrabbling up the tablecloth, others fight each other for the crumbs, and some watch on in dismay. Then there are the ‘Jeremys’ who seem to ride forth with much enthusiasm and optimism? No criticism, but wondering, as always, where hope can exist between truth and optimism that I see in these economic/political debates? Any answers?

  8. Jeremy March 28, 2013 at 12:39 pm #

    So that’s a no, Devonchap, on reading Reinert or Chang. You should. Their contribution is a more balanced view of economic history, not ‘ideas’ for development today.

    • DevonChap March 28, 2013 at 3:19 pm #

      While we have much to learn from history I thought you wanted ideas for development today. Chang does have views as to what we should do now, but they don’t convince me.

      • Jeremy March 28, 2013 at 6:08 pm #

        It’s not an either/or though is it? Chang does have some ideas. It’s not his strong point in my opinion, nor his focus.

        • dichasium March 28, 2013 at 11:27 pm #

          I know there is little reason for your interest in my generalisations but I follow your arguments (despite not receiving them automatically any more!), with all the details from your wide knowledge. It is, as one commonly finds, that even then (with so much knowledge), there is still disagreement, and it appears impossible to put the jigsaw pieces in the correct places.(I do not know how anyone can speak with confidence, let alone have to act on it). Many consider Jeremy to be even handed, yet Devon Chap finds flaws. It is very interesting, but unfortunately not encouraging. I’m glad you are both listening to each other, rather than the school boy insults though! Keep up the good work (and sorry if I’m just a boring interuption to your mutual challenges!)

          • Jeremy March 29, 2013 at 10:52 am #

            I started this blog not to advocate a particular view, but to track what I was learning as I tried to understand the world better. People with very different views from mine have been an important part of that learning process. Hopefully I’m more even-handed now than when I started, but I still have my biases and blind-spots. We all do, and it takes others to point them out!

            Ultimately, these sorts of questions are matters of interpretation though. We can agree on what happened – why is a much more difficult proposition.

  9. Imran Nazir April 2, 2013 at 3:44 am #

    Calm down calm down (said in a Liverpudlian accent whilst sporting a perm). I agree that opening up your countries markets should happen gradually so that you home grown industries and working population can be nurtured to a productive and competitive level and not be taken advantage of.

    • henry1941 April 2, 2013 at 8:21 am #

      The difficulty is that local politicians will be bribed to protect the local businesses, will they not? Or receive death threats if they do not.

      The whole thing is based on the false premise that “populations need to be provided with jobs”.

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