Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism

Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism

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by Ha-Joon Chang

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Bad Samaritans was an introduction to open-minded economists and political free-thinkers to Ha-Joon Changs theories of the dangers of free-trade. With irreverent wit, an engagingly personal style, and a keen grasp of history, Chang blasts holes in the "World Is Flat" orthodoxy of Thomas Friedman and others who argue that only unfettered capitalism and wide-open


Bad Samaritans was an introduction to open-minded economists and political free-thinkers to Ha-Joon Changs theories of the dangers of free-trade. With irreverent wit, an engagingly personal style, and a keen grasp of history, Chang blasts holes in the "World Is Flat" orthodoxy of Thomas Friedman and others who argue that only unfettered capitalism and wide-open international trade can lift struggling nations out of poverty. On the contrary, Chang shows, todays economic superpowers-from the U.S. to Britain to his native Korea-all attained prosperity by shameless protectionism and government intervention in industry, a fact conveniently forgotten now that they want to compete in foreign markets. Changs cage-rattling, contrarian history of global capital appeals to readers new to economic theory as well as members of the old school looking for a fresh take.

Editorial Reviews

Publishers Weekly

In the 1950s, South Korea was one of the poorest countries in the world, suffering the aftereffects of decades of brutal Japanese colonialism and war with its northern counterpart. During his childhood, Chang (Kicking Away the Ladder), a respected economist at the University of Cambridge, witnessed the beginnings of Korea's postwar economic miracle as Gen. Park Chung-Hee's dictatorship (despite its corrupt machinations) set the economic groundwork that would lift Korea out of poverty. Though Korea's strategies are "heretical" to first world, free-market economists, Chang argues that the world's wealthiest nations historically relied on the same heavy-handed protectionist approaches in their quests for economic hegemony. These wealthy, first world economies, which "preach free market and free trade to the poor countries in order to capture larger shares of the latter's markets and to pre-empt the emergence of possible competitors" are Chang's "bad Samaritans." Chang builds his outsider stance through a history of capitalism and globalization and stories of other struggling countries' economic transformations. The resulting polemic about the shortcomings of neoliberal economic theory's belief in unlimited free-market competition and its effect on the developing world is provocative and may hold the key to similar miracles for some of the world's most troubled economies. (Jan.)

Copyright 2007 Reed Business Information
Library Journal

University of Cambridge economics professor Chang (Institutional Change and Economic Development ) joins the heated discussion on globalization and economic justice with his alternative, iconoclastic views on the currently popular free-trade dogma of global capitalism. Contrary to the opinions of neoliberal economists (e.g., Thomas Friedman) who argue that only free capitalism and wide-open international trade can lift struggling nations out of poverty, Chang instead explains that today's economic superpowers, including the United States, Britain, and his native South Korea, all attained their prosperity by shameless government protectionism and intervention in industry. Solidly researched and filled with striking examples, this book does not deny the benefits of integration into the world economy to developing countries, but it also draws on the lessons of history to argue that Third World nations must be allowed to integrate on their own terms. Chang's starkly stated, oppositional views will stimulate refreshing debate among economists, and the crisp, steady narration by Jim Bond maintains listener interest in material that may be better received in university graduate economics classes. Highly recommended for university libraries supporting a business and economics curriculum and for larger public libraries.-Dale Farris, Groves, TX

Copyright 2006 Reed Business Information.
From the Publisher

“A well-researched and readable case against free-trade orthodoxy.” —Business Week

“A lively addition to the protectionist side of the debate…well written and far more serious than most anti-globalization gibberish.” —New York Sun

“Bookstore shelves are loaded with offerings by economists and commentators seeking to explain, in accessible prose, why free-trade-style globalization is desirable and even indispensable for countries the world over. Now comes the best riposte from the critics that I have seen. Readers who are leery of open-market orthodoxy will rejoice at the cogency of Bad Samaritans. Ha-Joon Chang has the credentials -- he's on the economics faculty at Cambridge University -- and the storytelling skill to make a well-informed, engaging case against the dogma propagated by globalization's cheerleaders. Believers in free trade will find that the book forces them to recalibrate and maybe even backpedal a bit….Chang's book deserves a wide readership for illuminating the need for humility about the virtues of private markets and free trade, especially in the developing world.” —Paul Blustein, Washington Post

“Lucid, deeply informed, and enlivened with striking illustrations, this penetrating study could be entitled "economics in the real world." Chang reveals the yawning gap between standard doctrines concerning economic development and what really has taken place from the origins of the industrial revolution until today. His incisive analysis shows how, and why, prescriptions based on reigning doctrines have caused severe harm, particularly to the most vulnerable and defenseless, and are likely to continue to do so. He goes on to provide sensible and constructive proposals, solidly based on economic theory and historical evidence, as to how the global economy could be redesigned to proceed on a far more humane and civilized course. And his warnings of what might happen if corrective action is not taken are grim and apt.” —Noam Chomsky

“A smart, lively, and provocative book that offers us compelling new ways of looking at globalization.” —Joseph Stiglitz, 2001 Nobel Laureate in Economics

“I recommend this book to people who have any interest in these issues--i.e. everyone.” —Bob Geldof

“Every orthodoxy needs effective critics. Ha-Joon Chang is probably the world's most effective critic of globalization. He does not deny the benefits to developing countries of integration into the world economy. But he draws on the lessons of history to argue that they must be allowed to integrate on their own terms.” —Martin Wolf, Financial Times, author of Why Globalization Works

“This is a marvelous book. Well researched, panoramic in its scope and beautifully written, Bad Samaritans is the perfect riposte to devotees of a one-size-fits-all model of growth and globalisation. I strongly urge you to read it.” —Larry Elliott, economics editor, the Guardian

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Bad Samaritans
The Myth of Free Trade and the Secret History of Capitalism

By Ha-Joon Chang
Bloomsbury USA
Copyright © 2008 Ha-Joon Chang
All right reserved.

ISBN: 978-1-5969-1399-8

Chapter One
The Lexus and the olive tree revisited

Myths and facts about globalization

Once upon a time, the leading car maker of a developing country exported its first passenger cars to the US. Up to that day, the little company had only made shoddy products - poor copies of quality items made by richer countries. The car was nothing too sophisticated - just a cheap subcompact (one could have called it 'four wheels and an ashtray'). But it was a big moment for the country and its exporters felt proud.

Unfortunately, the product failed. Most thought the little car looked lousy and savvy buyers were reluctant to spend serious money on a family car that came from a place where only second-rate products were made. The car had to be withdrawn from the US market. This disaster led to a major debate among the country's citizens.

Many argued that the company should have stuck to its original business of making simple textile machinery. After all, the country's biggest export item was silk. If the company could not make good cars after ?? years of trying, there was no future for it. The government had given the car maker every opportunity to succeed. It had ensured high profits for it at home through high tariffs and draconian controls on foreign investment in the car industry. Fewer than ten years ago, it even gave public money to save the company from imminent bankruptcy. So, the critics argued, foreign cars should now be let in freely and foreign car makers, who had been kicked out ?? years before, allowed to set up shop again.

Others disagreed. They argued that no country had got anywhere without developing 'serious' industries like automobile production. They just needed more time to make cars that appealed to everyone.

The year was ???? and the country was, in fact, Japan. The company was Toyota, and the car was called the Toyopet. Toyota started out as a manufacturer of textile machinery (Toyoda Automatic Loom) and moved into car production in ????. The Japanese government kicked out General Motors and Ford in ???? and bailed out Toyota with money from the central bank (Bank of Japan) in ????. Today, Japanese cars are considered as 'natural' as Scottish salmon or French wine, but fewer than ?? years ago, most people, including many Japanese, thought the Japanese car industry simply should not exist.

Half a century after the Toyopet debacle, Toyota's luxury brand Lexus has become something of an icon for globalization, thanks to the American journalist Thomas Friedman's book, The Lexus and the Olive Tree. The book owes its title to an epiphany that Friedman had on the Shinkansen bullet train during his trip to Japan in 1992. He had paid a visit to a Lexus factory, which mightily impressed him. On his train back from the car factory in Toyota City to Tokyo, he came across yet another newspaper article about the troubles in the Middle East where he had been a long-time correspondent. Then it hit him. He realized that that 'half the world seemed to be ... intent on building a better Lexus, dedicated to modernizing, streamlining, and privatizing their economies in order to thrive in the system of globalization. And half of the world - sometimes half the same country, sometimes half the same person - was still caught up in the fight over who owns which olive tree'.

According to Friedman, unless they fit themselves into a particular set of economic policies that he calls the Golden Straitjacket, countries in the olive-tree world will not be able to join the Lexus world. In describing the Golden Straitjacket, he pretty much sums up today's neo-liberal economic orthodoxy: in order to fit into it, a country needs to privatize state-owned enterprises, maintain low inflation, reduce the size of government bureaucracy, balance the budget (if not running a surplus), liberalize trade, deregulate foreign investment, deregulate capital markets, make the currency convertible, reduce corruption and privatize pensions.? According to him, this is the only path to success in the new global economy. His Straitjacket is the only gear suitable for the harsh but exhilarating game of globalization. Friedman is categorical: 'Unfortunately, this Golden Straitjacket is pretty much "one-size fits all" ... It is not always pretty or gentle or comfortable. But it's here and it's the only model on the rack this historical season.'

However, the fact is that, had the Japanese government followed the free-trade economists back in the early 1960s, there would have been no Lexus. Toyota today would, at best, be a junior partner to some western car manufacturer, or worse, have been wiped out. The same would have been true for the entire Japanese economy. Had the country donned Friedman's Golden Straitjacket early on, Japan would have remained the third-rate industrial power that it was in the 1960s, with its income level on a par with Chile, Argentina and South Africa - it was then a country whose prime minister was insultingly dismissed as 'a transistor-radio salesman' by the French president, Charles De Gaulle. In other words, had they followed Friedman's advice, the Japanese would now not be exporting the Lexus but still be fighting over who owns which mulberry tree.

The official history of globalization

Our Toyota story suggests that there is something spectacularly jarring in the fable of globalization promoted by Thomas Friedman and his colleagues. In order to tell you what it is exactly, I need to tell you what I call the 'official history of globalization' and discuss its limitations.

According to this history, globalization has progressed over the last three centuries in the following way:? Britain adopted free-market and free-trade policies in the 18th century, well ahead of other countries. By the middle of the 19th century, the superiority of these policies became so obvious, thanks to Britain's spectacular economic success, that other countries started liberalizing their trade and deregulating their domestic economies. This liberal world order, perfected around 1870 under British hegemony, was based on: laissez-faire industrial policies at home; low barriers to the international flows of goods, capital and labour; and macroeconomic stability, both nationally and internationally, guaranteed by the principles of sound money (low inflation) and balanced budgets. A period of unprecedented prosperity followed.

Unfortunately, things started to go wrong after the First World War. In response to the ensuing instability of the world economy, countries unwisely began to erect trade barriers again. In 1930, the US abandoned free trade and enacted the infamous Smoot-Hawley tariff. Countries like Germany and Japan abandoned liberal policies and erected high trade barriers and created cartels, which were intimately associated with their fascism and external aggression. The world free trade system finally ended in 1932, when Britain, hitherto the champion of free trade, succumbed to temptation and itself re-introduced tariffs. The resulting contraction and instability in the world economy, and then, finally, the Second World War, destroyed the last remnants of the first liberal world order.

After the Second World War, the world economy was re-organized on a more liberal line, this time under American hegemony. In particular, some significant progress was made in trade liberalization among the rich countries through the early GATT (General Agreement on Trade and Tariffs) talks. But protectionism and state intervention still persisted in most developing countries and, needless to say, in the communist countries.

Fortunately, illiberal policies have been largely abandoned across the world since the 1980s following the rise of neo-liberalism. By the late 1970s, the failures of so-called import substitution industrialization (ISI) in developing countries - based on protection, subsidies and regulation - had become too obvious to ignore. The economic 'miracle' in East Asia, which was already practising free trade and welcoming foreign investment, was a wake-up call for the other developing countries. After the 1982 Third World debt crisis, many developing countries abandoned interventionism and protectionism, and embraced neo-liberalism. The crowning glory of this trend towards global integration was the fall of communism in 1989.

These national policy changes were made all the more necessary by the unprecedented acceleration in the development of transport and communications technologies. With these developments, the possibilities of entering mutually beneficial economic arrangements with partners in faraway countries - through international trade and investment - increased dramatically. This has made openness an even more crucial determinant of a country's prosperity than before.

Reflecting the deepening global economic integration, the global governance system has recently been strengthened. Most importantly, in 1995 the GATT was upgraded to the WTO (World Trade Organisation), a powerful agency pushing for liberalization not just in trade but also in other areas, like foreign investment regulation and intellectual property rights. The WTO now forms the core of the global economic governance system, together with the IMF (International Monetary Fund) - in charge of access to short-term finance - and the World Bank - in charge of longer-term investments.

The result of all these developments, according to the official history, is a globalized world economy comparable in its liberality and potential for prosperity only to the earlier 'golden age' of liberalism (1870-1913). Renato Ruggiero, the first director-general of the WTO, solemnly declared that, as a consequence of this new world order, we now have 'the potential for eradicating global poverty in the early part of the next [21st] century - a Utopian notion even a few decades ago, but a real possibility today.'

This version of the history of globalization is widely accepted. It is supposed to be the route map for policy makers in steering their countries towards prosperity. Unfortunately, it paints a fundamentally misleading picture, distorting our understanding of where we have come from, where we are now and where we may be heading for. Let's see how.

The real history of globalization

On 30 June 1997, Hong Kong was officially handed back to China by its last British governor, Christopher Patten. Many British commentators fretted about the fate of Hong Kong's democracy under the Chinese Communist Party, although democratic elections in Hong Kong had only been permitted as late as 1994, 152 years after the start of British rule and only three years before the planned hand-over. But no one seems to remember how Hong Kong came to be a British possession in the first place.

Hong Kong became a British colony after the Treaty of Nanking in 1842, the result of the Opium War. This was a particularly shameful episode, even by the standards of 19th-century imperialism. The growing British taste for tea had created a huge trade deficit with China. In a desperate attempt to plug the gap, Britain started exporting opium produced in India to China. The mere detail that selling opium was illegal in China could not possibly be allowed to obstruct the noble cause of balancing the books. When a Chinese official seized an illicit cargo of opium in 1841, the British government used it as an excuse to fix the problem once and for all by declaring war. China was heavily defeated in the war and forced to sign the Treaty of Nanking, which made China 'lease' Hong Kong to Britain and give up its right to set its own tariffs.

So there it was - the self-proclaimed leader of the 'liberal' world declaring war on another country because the latter was getting in the way of its illegal trade in narcotics. The truth is that the free movement of goods, people, and money that developed under British hegemony between 1870 and 1913 - the first episode of globalization - was made possible, in large part, by military might, rather than market forces. Apart from Britain itself, the practitioners of free trade during this period were mostly weaker countries that had been forced into, rather than had voluntarily adopted, it as a result of colonial rule or 'unequal treaties' (like the Nanking Treaty), which, among other things, deprived them of the right to set tariffs and imposed externally determined low, flat-rate tariffs (3-5%) on them.

Despite their key role in promoting 'free' trade in the late 19th and early 20th centuries, colonialism and unequal treaties hardly get any mention in the hordes of pro-globalisation books. Even when they are explicitly discussed, their role is seen as positive on the whole. For example, in his acclaimed book, Empire, the British historian Niall Ferguson honestly notes many of the misdeeds of the British empire, including the Opium War, but contends that the British empire was a good thing overall - it was arguably the cheapest way to guarantee free trade, which benefits everyone. However, the countries under colonial rule and unequal treaties did very poorly. Between 1870 and 1913, per capita income in Asia (excluding Japan) grew at 0.4% per year, while that in Africa grew at 0.6% per year. The corresponding figures were 1.3% for Western Europe and 1.8% per year for the USA. It is particularly interesting to note that the Latin American countries, which by that time had regained tariff autonomy and were boasting some of the highest tariffs in the world, grew as fast as the US did during this period.

While they were imposing free trade on weaker nations through colonialism and unequal treaties, rich countries maintained rather high tariffs, especially industrial tariffs, for themselves, as we will see in greater detail in the next chapter. To begin with, Britain, the supposed home of free trade, was one of the most protectionist countries until it converted to free trade in the mid-19th century. There was a brief period during the 1860s and the 1870s when something approaching free trade did exist in Europe, especially with zero tariffs in Britain. However, this proved short-lived. From the 1880s, most European countries raised protective barriers again, partly to protect their farmers from cheap food imported from the New World and partly to promote their newly emerging heavy industries, such as steel, chemicals and machinery. Finally, even Britain, as I have noted, the chief architect of the first wave of globalization, abandoned free trade and re-introduced tariffs in 1932. The official history describes this event as Britain 'succumbing to the temptation' of protectionism. But it typically fails to mention that this was due to the decline in British economic supremacy, which in turn was the result of the success of protectionism on the part of competitor countries, especially the USA, in developing their own new industries.

Thus, the history of the first globalization in the late 19th and early 20th centuries has been rewritten today in order to fit the current neo-liberal orthodoxy. The history of protectionism in today's rich countries is vastly underplayed, while the imperialist origin of the high degree of global integration on the part of today's developing countries is hardly ever mentioned. The final curtain coming down on the episode - that is, Britain's abandonment of free trade - is also presented in a biased way. It is rarely mentioned that what really made Britain abandon free trade was precisely the successful use of protectionism by its competitors.

Neo-liberals vs neo-idiotics?

In the official history of globalization, the early post-Second-World-War period is portrayed as a period of incomplete globalization. While there was a significant increase in integration among the rich countries, accelerating their growth, it is said, most developing countries refused to fully participate in the global economy until the 1980s, thus holding themselves back from economic progress.

This story misrepresents the process of globalization among the rich countries during this period. These countries did significantly lower their tariff barriers between the 1950s and the 1970s. But during this period, they also used many other nationalistic policies to promote their own economic development - subsidies (especially for research and development, or R&D), state-owned enterprises, government direction of banking credits, capital controls and so on. When they started implementing neo-liberal programmes, their growth decelerated. In the 1960s and the 1970s, per capita income in the rich countries grew by 3.2% a year, but its growth rate fell substantially to 2.1% in the next two decades.


Excerpted from Bad Samaritans by Ha-Joon Chang Copyright © 2008 by Ha-Joon Chang. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Meet the Author

Ha-Joon Chang, a Korean native, has taught at the Faculty of Economics, University of Cambridge, since 1990. He has worked as a consultant for numerous international organizations, including various UN agencies, the World Bank, and the Asian Development Bank. He has published 11 books, including Kicking Away the Ladder, winner of the 2003 Myrdal Prize. In 2005, Ha-Joon Chang was awarded the 2005 Leontief Prize for Advancing the Frontiers of Economic Thought.
Ha-Joon Chang, a Korean native, has taught at the Faculty of Economics, University of Cambridge, since 1990. He has worked as a consultant for numerous international organizations, including various UN agencies, the World Bank, and the Asian Development Bank. He has published 11 books, including Kicking Away the Ladder, winner of the 2003 Myrdal Prize. In 2005, Ha-Joon Chang was awarded the 2005 Leontief Prize for Advancing the Frontiers of Economic Thought.

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Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism 4.3 out of 5 based on 0 ratings. 7 reviews.
Willp More than 1 year ago
In this brilliant book, Ha-Joon Chang, Assistant Director of Development Studies at Cambridge University, asks how rich countries became rich, whether free trade is the answer, whether countries should regulate foreign investment, whether private enterprise is always good and public enterprise always bad, whether it is wrong to borrow ideas, whether financial prudence can go too far, whether we should shun corrupt and undemocratic countries, whether some cultures are incapable of economic development, and whether things can get better.

Neo-liberal globalisation - de-regulation, privatisation and liberalised finance, trade and investment - has cut growth, equality and stability. In the 1960s and 1970s, the developing countries grew 3% per head, twice as much as in the years since 1980. In the period 1945-71, before the global financial market was liberalised, the developing countries had no banking crises and just 16 currency crises. In the period 1971-97, after liberalisation, they had 17 banking crises and 57 currency crises.

Some claim South Korea¿s growth proves the free market¿s virtues. Its income per head multiplied by 14 between 1963 and 2007; it took the USA 150 years to do this. Yet South Korea¿s government nurtured new industries through tariff protection and subsidies; it discriminated against foreign investors; and, since it owned the banks, it directed credit into promising firms. The resulting improved industrial production, not the market, was the key to its development.

The policies that the USA used to develop its economy are what we all need now to beat the slump: to direct investment into strategic industries, impose selective protective tariffs and import bans, provide prizes and patents for inventions, impose export bans on key industrial inputs, allow tariff rebates on imports of key industrial inputs, regulate product standards, develop transport infrastructure (especially railways), subsidise innovations, control foreign investment, relax intellectual property rights, adopt good technologies from abroad, impose local content requirements, and insist that foreign investors transfer their technologies.

Chang sums up, ¿History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and, more importantly, where productivity tends to (although does not always) grow faster than in agriculture or services.¿
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