Bad Samaritans

1. Economic development requires defying comparative advantage

If they want to leave poverty behind, they have to defy the market and do the more difficult things that bring them higher incomes – there are no two ways about it.

Challenging free-market dogma. Developing countries must actively pursue industries beyond their current capabilities to achieve economic growth. This often means:

• Investing in industries where they currently lack competitive advantage
• Protecting and subsidizing nascent industries until they become globally competitive
• Gradually building technological and organizational capabilities over time

Historical examples:

• Japan's development of automotive industry despite initial lack of competitiveness
• South Korea's transition from agriculture to high-tech manufacturing
• United States' early protection of manufacturing against British competition

2. Protectionism and state intervention played crucial roles in rich countries' development

Britain and the US are not the homes of free trade; in fact, for a long time they were the most protectionist countries in the world.

Selective historical amnesia. Today's developed nations used protectionist policies extensively during their own industrialization periods:

• United States: High tariffs on manufactured goods throughout the 19th century
• Britain: Strict regulations on wool exports and manufacturing in the 18th century
• Germany and France: Significant government support for key industries in the 19th century

These countries only embraced free trade after establishing industrial dominance. Their current advocacy for free trade in developing countries is a case of "kicking away the ladder" they used to climb.

3. Free trade policies often harm developing countries' growth prospects

Free trade demands that poor countries compete immediately with more advanced foreign producers, leading to the demise of firms before they can acquire new capabilities.

Premature liberalization risks. Rapid trade liberalization can have detrimental effects on developing economies:

• Destruction of infant industries unable to compete with established foreign firms
• Loss of government revenue from tariffs, leading to reduced public investment
• Difficulty in developing new industries and technological capabilities

Examples of negative impacts:

• Mexico's sluggish growth and deindustrialization following NAFTA
• Sub-Saharan Africa's economic stagnation after IMF-mandated liberalization

Developing countries need policy space to strategically manage their integration into the global economy.

4. Foreign investment needs strategic regulation for optimal benefits

Accepting FDI unconditionally may actually make economic development in the long run more difficult.

Balancing act required. While foreign direct investment (FDI) can bring capital and expertise, it needs careful management:

• Risks:
  • Crowding out of domestic firms
  • Transfer pricing and tax avoidance
  • Limited technology transfer
• Potential benefits:
  • Access to capital and global markets
  • Introduction of new technologies and management practices

Successful FDI policies:

• South Korea and Taiwan's selective FDI policies in specific sectors
• China's joint venture requirements and technology transfer agreements
• Singapore's targeted incentives for high-value industries

Developing countries should maintain the ability to regulate FDI to align with national development goals.

5. State-owned enterprises can be efficient and contribute to economic development

There are numerous well-functioning SOEs in real life. Many of them are actually world-class firms.

Challenging privatization dogma. State-owned enterprises (SOEs) can play a vital role in economic development:

• Advantages of SOEs:
  • Ability to undertake long-term, high-risk investments
  • Provision of essential services and infrastructure
  • Strategic control over key industries

Successful SOE examples:

• Singapore Airlines: Consistently profitable and highly regarded
• POSCO (South Korea): Became a leading global steel producer under state ownership
• Statoil (Norway): Effectively managed oil resources for national benefit

The key is not ownership structure, but good governance and clear objectives. Many countries have successfully used SOEs as part of their development strategies.

6. Intellectual property rights can hinder technological progress in developing countries

If knowledge is like water that flows downhill, then today's IPR system is like a dam that turns potentially fertile fields into a technological dustbowl.

Balancing innovation and diffusion. Strong intellectual property rights (IPR) regimes can impede technological catch-up:

• Historical context:

  • Today's developed countries often violated IPRs during their own development
  • The Netherlands and Switzerland had no patent laws during crucial periods of industrialization

• Negative impacts of strict IPR on developing countries:

  • High costs for accessing technologies
  • Barriers to reverse engineering and adaptation
  • Reduced ability to develop domestic technological capabilities

A more flexible approach to IPR is needed for developing countries, potentially including:

• Shorter patent terms
• Easier compulsory licensing
• Exceptions for essential technologies (e.g., medicines, green technologies)

7. Macroeconomic policies should prioritize growth over price stability

Monetary policy that is too tight lowers investment. Lower investment slows down growth and job creation.

Rethinking orthodox policies. The focus on low inflation and balanced budgets can harm developing economies:

• Problems with orthodox policies:

  • High interest rates discourage investment
  • Strict balanced budget requirements limit public investment
  • Excessive focus on inflation control can lead to unemployment

• Alternative approach:

  • Allowing moderate inflation (up to 20-40%) to stimulate growth
  • Using counter-cyclical fiscal policies during economic downturns
  • Maintaining policy space for strategic investments in infrastructure and industry

Historical examples of successful heterodox policies:

• South Korea's high growth with double-digit inflation in the 1960s-70s
• China's managed exchange rate and capital controls

8. Culture is not destiny: Economic policies shape cultural traits

Many of the 'negative' forms of behaviour of the Japanese and Germans in the past were largely the outcomes of economic conditions common to all economically underdeveloped countries, rather than of their specific cultures.

Debunking cultural determinism. Cultural traits often attributed to economic success or failure are malleable:

• Historical misconceptions:

  • Japanese were once considered "lazy" by Westerners
  • Germans were viewed as "dishonest" and "individualistic" before industrialization

• Economic development changes culture:

  • Work ethic improves with better job opportunities
  • Punctuality becomes important in industrial settings
  • Trust and cooperation increase with stable institutions

Policy implications:

• Focus on creating economic opportunities rather than attempting to change culture directly
• Recognize that seemingly "cultural" traits can change rapidly with economic development

9. Bad Samaritan policies hinder development in poor countries

The Bad Samaritans have made it increasingly difficult for developing countries to pursue the 'right' policies for their development.

Exposing policy hypocrisy. Rich countries often advocate policies for developing nations that they themselves did not follow:

• Problematic policies pushed by "Bad Samaritans":

  • Rapid trade liberalization
  • Unrestricted foreign investment
  • Strict intellectual property regimes
  • Tight monetary and fiscal policies

• International institutions enforcing these policies:

  • World Trade Organization (WTO)
  • International Monetary Fund (IMF)
  • World Bank

To promote genuine development:

• Rich countries should allow policy space for developing nations
• International rules should be more flexible for countries at different stages of development
• Developing countries need to critically assess policy advice and maintain autonomy in decision-making

Last updated: September 29, 2024