Under capitalism, man exploits man; under communism, it is just the opposite.
This was one of the best books I’ve read recently. It was sometimes aligned with my current beliefs, but at other times challenged them using both history and data. Bad Samaritans is a book about international trade and how to grow developing economies. The author’s main thesis is that the world’s current rich countries, the Bad Samaritans, got rich using trade restrictions (for example, tariffs) to grow their economies, but they now require poor countries to engage in ‘neo-liberal’ free trade (low tariffs, low inflation) in order to trade with the rich countries or to get access to loans/aid.
In the introduction, he summarizes Thomas Friedman’s writing by saying that
“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”.
Chang then disagrees with just about all of these points (and some others, to boot).
‘Laziness’
I want to start by covering some of the smaller points I found interesting outside of that main thesis. The last chapter, “Lazy Japanese and thieving Germans”, challenges the statement that certain countries are more successful than others due to their ‘culture’ (for example, the claim that East Asian countries have been successful due to their Confucian culture of saving, respect for law, or whatever).
The history lesson is really interesting – the perception of various cultures can change quickly over the course of the centuries. Here’s one quote he shares: “to see your men at work made me feel that you are a very satisfied easy-going race who reckon time is no object”. This was said by an Australian. About the Japanese. In 1915. Here’s another, “According to John Russell, a travel writer of the 1820s, the Germans were a ‘plodding, easily contented people’”. These quotes gave me a better appreciation for the extent that culture is shaped and can be changed, and how quickly that can happen. They were surprising enough that I could feel my mind changing as I read this chapter.
So if culture isn’t immutable, why do people in poor countries seem ‘lazy’? He points out two factors: first of all, poor countries have bad economies, and bad economies have high unemployment rates: “people may have jobs but do not have enough work to occupy them fully…This is the result of economic conditions rather than culture.” Second, ‘living for today’ is a more rational choice in an environment where economic growth is stagnant: “In a slowly changing economy, there is not much need to plan for the future; people plan for the future only when they anticipate new opportunities or unexpected shocks”. In America, we work hard and save because we believe that a better life is achievable. But someone who’s never lived to see an economy grow or friends get rich is making a rational choice based on the evidence they have when they decide to not work hard.
‘Corruption’
The first line I highlighted in this book is from the introduction, where he offers a list of conventional wisdom he’ll challenge. The one I was most intrigued by: “Corruption exists because there is too much, not too little, market.” Actually, his extended comments on that one end up being not too interesting to me, but a few other notes on corruption stood out.
First, corruption is not necessarily the worst thing ever…it’s theoretically possible that the person receiving the bribe will invest it better than the person giving the bribe would have, causing the economy to grow more quickly! In developing countries with corruption problems, it also matters whether that money stays in the country, or ends up in a ‘Swiss bank account’: “In Indonesia, the money from corruption mostly stayed inside the country, creating jobs and incomes.” This led to faster growth than other equally corrupt countries. If the goal of this book is to find a better way for rich countries to help poor countries develop, then is there any way to encourage countries to make sure those bribes don’t end up in the Swiss bank account?
Second, the bribe actually has some aspects of the kind of auctions/privatization that some economists seem to love, just with the downside that this money is going to an individual and not into the government accounts: “the producer who expects to make more money out of the licence would be, by definition, willing to offer the bigger bribe …”
Certainly bribes are not the best thing. And there’s other factors to consider like the erosion of public trust. But these seem like valid points that there are worse things than bribery in a developing economy.
Economic Theory
#1 Infant industries
While he believes that developing countries should protect their ‘infant industries’, he agrees with the conventional wisdom that competitive companies don’t need protection: “Protecting industries that do not need protection any more is likely to make them complacent and inefficient, as Smith observed.” In fact, there’s a parallel between this book and How To Be An Antiracist, where Kendi says that antiracist policies are temporary policies used to right historical wrongs, and won’t be needed anymore once equality is reached. Chang also develops his argument using metaphors with humans – like a company in a developing economy, he doesn’t expose his 6-year-old son to the ‘competition’ of the free market, he protects him and gives him time to learn and grow.
#2 The benefits of free trade
As we know, not “everyone” benefits from free trade. While economic theory assures us that free trade is, on balance, good, there will be some individual losers. Theoretically, the winners could even give some of their ‘winnings’ to the losers, and then literally everyone could be better off. But Chang notes that ‘losers’ in poor countries will have more challenges than ‘losers’ in rich countries: “In developed countries, the welfare state works as a mechanism to partially compensate the losers from the trade adjustment process through unemployment benefits...In most developing countries the welfare state is very weak and sometimes virtually non-existent...the victims of trade adjustment in these countries do not get even partially compensated for the sacrifice that they have made for the rest of society.”
#3 Comparative Advantage
Another important economic concept in free trade is comparative advantage, the idea that it makes the most sense for countries to produce what they are good at producing, relatively speaking. Chang does not deny the logic of comparative advantage, but rather says that it doesn’t apply in this situation: “the theory is about efficiency in the short-run use of given resources, and not about increasing available resources through economic development in the long run...free trade theory does not tell us that free trade is good for economic development”. The best way to make money tomorrow is not necessarily the best way to make the most total money over your lifetime.
Finally, drawing some of these concepts together, he says that free trade theory rests on an assumption of ‘perfect factor mobility’ – that “productive resources can move freely across economic activities” For example if a steel mill shuts down, the resources employed will be employed by another industry that has become relatively more profitable. But this “perfect” mobility is obviously not the case in the real world. Since the assumption is violated, we can’t be sure that the theory itself is the best choice in the real world, either.
Other Thoughts
#1 State Owned Enterprises
In the chapter on State Owned Enterprises, he doesn’t disagree with the mainstream analysis that SOEs are structured to have inefficiencies, but rather points out that these same inefficiencies exist with companies that have publicly traded stock, as well: “all the alleged key causes of SOE inefficiency – the principal-agent problem, the free-rider problem and the soft budget constraint – are, while real, not unique to state-owned enterprises.” Companies try to remedy the principal-agent problem by giving CEOs stock, but CEOs are still not perfectly aligned with the company’s goals. Any large company surely has “free-rider” stock owners who are hoping someone else will fix the company’s problems. Companies who were ‘too big to fail’ during the Great Recession are a perfect example of the “soft budget constraint” existing in the “free market”.
#2 Varying Tariff Rates
Here’s an interesting fact about tariffs that I didn’t know: “even though the rich countries have low average tariff protection, they tend to disproportionately protect products that poor countries export, especially garments and textiles. The overall import tax rate for the USA is 1.6 per cent, but is 14-15 per cent for Bangladesh, Cambodia, and Nepal. In 2002, Bangladesh paid almost as much in tariffs to the US government as France”. Low tariffs on things like software or services don’t help poor countries, since they are not exporting those things.
#3 World Bank Mission Creep
He relates some history of the IMF, World Bank, and WTO. He suggests that their ‘mission creep’ played a key role: “Following the Third World debt crisis of 1982, the roles of both the IMF and the World Bank changed dramatically. They started to exert a much stronger policy influence on developing countries...These programmes covered a much wider range of policies than what [these institutions] had originally been mandated to do.” He mentions multiple times that things “between the 1950s and the 1970s” were different than they are now.
#4 Intellectual Property
Similarly, there is a chapter on intellectual property, pointing out that in the IP realm, the rich countries also have a history of ignoring foreign IP, but now that they are rich they want to impose international IP rights on poor countries. This chapter is similar to the arguments in Against Intellectual Monopoly, although the author here has less extreme beliefs than the authors of that book:
“To put it bluntly...the new IPR system has made economic development more difficult. When 97% of all patents and the vast majority of copyrights and trademarks and held by rich countries, the strengthening of the rights of IPR-holders means that acquiring knowledge has become more expensive…This is an area where developed countries are almost always sellers and developing countries buyers.”
#5 Balancing the Budget
Chang says that “When the rich countries get into recession, they usually relax monetary policy and increase budget deficits. When the same thing happens in developing countries, the Bad Samaritans, through the IMF, force them to raise interest rates to absurd levels and balance their budgets”, suggesting that it’s “Keynesianism for the rich, monetarism for the poor”.
Markets And Competition
Over the course of reading a number of economics-related books, and perhaps especially after reading Against Intellectual Monopoly, I’ve come to notice that at least in our current world, there is no such thing as atruly free market; there is always interaction with the government that shapes the market. Chang puts it this way:
“Markets are political constructs in so far as all property rights and other rights that underpin them have political origins. The political origins of economic rights can be seen in the fact that many of them that are seen as natural today were hotly contested politically in the past – examples include the right to own ideas (not accepted by many before the introduction of intellectual property rights in the 19th century) and the right not to have to work when young (denied to many poor children). When these rights were still politically contested, there were plenty of ‘economic’ arguments as to why honouring them was incompatible with the free market. Given this, when neo-liberals propose de-politicizing the economy, they are presuming that the particular demarcation between economics and politics that they want to draw is the correct one. This is unwarranted.”
Do you believe in banning child labor? Do you believe in having patents? If you answered yes to either of these questions, then you don’t believe in a “free market” with no government intervention. We can disagree about how to best use the government to shape a market, but we both want to use the government to shape the market – neither of us want there to be a completely free market. (Perhaps I’ll write more about this some day.)
A couple lines stood out to me from Chang’s concluding chapter, that reminded me of other things I’ve been reading lately: “[rich countries] might be better off in the long run if they allowed alternative policies that would let developing countries grow faster.” I’m currently reading China’s Second Continent, and this idea comes up in that book as well: one reason China invests in Africa is that if China wants to keep growing their own economy, they need somewhere to sell their exports in the longer term. (Side note: China itself seems to be acting as a prototypical Bad Samaritan with their dealings in Africa – for example, they require joint ventures for foreign companies to do business in China, but don’t use joint ventures to help African countries grow)
Another line reminded me of some ideas that I think I first read in The People’s Republic of Walmart. Chang disputes that countries should just blindly do ‘what the market wants them to do’: “The free market dictates that countries stick to what they are already good at...But if poor countries want to leave poverty behind, they have to defy the market.” Is defying the market a good thing? He points out that it is “something that is done by business managers all the time. Business managers, of course, get judged ultimately by the market, but they – especially the successful ones – do not accept market forces blindly.”
The People’s Republic of Walmart points out that companies internally are not run like free markets; and if a company as big as Walmart can succeed that way, why couldn’t a country with an economy the size of Walmart (Byrne Hobart makes a similar point about Amazon)? Chang’s comment has a similar flavor, but works in a different direction – not just focused on the aspect that companies plan, but on the fact that these plans involve risks and ignoring what the market seems to be asking for in a particular moment in time.
This Paul Graham article that was published at the same time I was working on this review: “There are some kinds of work that you can't do well without thinking differently from your peers...You see this pattern with startup founders too. You don't want to start a startup to do something that everyone agrees is a good idea, or there will already be other companies doing it. You have to do something that sounds to most other people like a bad idea, but that you know isn't…”. This too has aspects of ‘defying the market’. Like Chang’s infant industries, startups have ‘infant’ periods where they are burning through money, and perhaps not even selling anything at all.
A second article that popped into my head while writing this is “Studies on Slack” from Slate Star Codex. He brings up other ‘socialist’ aspects of companies:
“each worker would selfishly be best off if they spent the day watching YouTube videos…if all the employees loaf off and all the executives focus on office politics, the company won’t make products, and competitors will eat their lunch. So someone – maybe the founder/CEO – comes up with a ruleset to incentivize good work, probably some kind of performance review system where people who do good work get promoted and people who do bad work get fired. The outer-layer competition between companies will select for corporations with the best rulesets; over time, companies’ internal politics should get better at promoting the kind of cooperation necessary to succeed.”
Alexander adds, “You can find these kinds of two-layer evolutionary systems everywhere”...and then I read further and see that he literally mentions tariffs as an example of what he’s talking about!
There can be different levels on which competition is helpful (competition among companies within a poor country) and harmful (competing with international companies whose products are years ahead). As Taleb points out in Skin in the Game, we may enjoy the benefits of the free market, but our internal family matters are closer to Communism. Or in another section, he says “Thus, we see the point that individual ruin is not as big a deal as collective ruin... the fragility of the system’s components (provided they are renewable and replaceable) is required to ensure the solidity of the system as a whole.” Different levels of fragility/competition on different scales is a natural part of life.
Has Chang found the right answer?
I gave a two-sentence summary of this book to a smart person I know, whose response was “yes, the current rich countries used tariffs (etc.), but that doesn’t mean it was the best thing to do. In a world where they didn’t use tariffs, they could have gotten rich even faster”. So I wanted to dig in a little more.
The Wikipedia article on the book links to some critical reviews, for example this Economist article, which ends, “For all his scholarly verve, Mr Chang gives his readers no more than a glimpse of the lively debate that still flowers about the historical episodes he describes. His book will not settle this 200-year duel between the Hamiltonians and the liberals. But he succeeds in drawing a few flecks of blood on his opponents' waistcoats.” (The fact that this is a “200-year” debate makes me think that I shouldn’t try to resolve it in a few paragraphs in a book review! But I should give some thoughts to the counter-arguments.)
[Interesting side note about this book’s Wikipedia article: “In 2008, Bad Samaritans was included on a list of 23 "seditious" books released by the Ministry of National Defense of South Korea. The listed books cannot be read or kept on a military base.”]
Chang develops his argument through a few methods: as mentioned above, there’s use of metaphor – an ‘infant industry’ (a term invented by Alexander Hamilton, apparently) needs time to grow, like an infant child, before it should be exposed to the stresses of the free market. There’s also the history of the currently rich countries, who in the past had tariffs and had weak intellectual property laws. He uses more recent case studies like South Korea (the country where he grew up). The Economist takes issue with some of his analysis here, claiming that other factors led to South Korea’s growth.
There’s also historical stats he shares regarding the non-rich countries. “Britain is rich and used to use tariffs” is an anecdote; studying the varying growth rates of all countries over varying historical periods where tariffs were more or less common gives us a fuller picture:
“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.”
“The right to ‘asymmetric protection’ that the developing countries secured in 1964 at the GATT is portrayed as ‘the proverbial rope on which to hang one’s own economy!’...The problem with this interpretation is that the ‘bad old days’ in the developing countries weren’t so bad at all. During the 1960s and the 1970s, when they were pursuing the ‘wrong’ policies of protectionism and state intervention, per capita income in the developing countries grew by 3.0% annually...This growth rate is a huge improvement over what they achieved under free trade during the ‘age of imperialism’ (see above)
Since the 1980s, after they implemented neo-liberal policies, they grew at only about half the speed seen in the 1960s and the 1970s (1.7%). Growth slowed down in the rich countries too, but the slowdown was less marked (from 3.2% to 2.1%), not least because they did not introduce neo-liberal policies to the same extent as the developing countries did. The average growth rate of developing countries in this period would be even lower if we exclude China and India. These two countries, which accounted for 12% of total developing country income in 1980 and 30% in 2000, have so far refused to put on Thomas Friedman’s Golden Straitjacket.
This seems like some pretty good data to me. China’s continued economic success is an interesting case, as it’s essentially become both a developing economy and a Bad Samaritan at the same time – joint ventures at home to get access to foreign companies’ knowledge, while (for example) sending Chinese laborers to Africa instead of helping train local Africans and engaging in knowledge transfer there.
The Economist complains that “Mr Chang's own grip on the historical record is a bit shaky. Liberalism owes its resurgence in developing countries not to a “selective amnesia” about the 19th century, but to their recent and painful memory of post-war failure.” But it’s just a short opinion article and doesn’t explicitly rebut any of the figures I’ve quoted above, or explain exactly what the ‘post-war failure’ was. This would make a fun research project, I think. But for now, I’m going to leave it here.
The last factor that comes into play for me in deciding who to believe is what we know about economically ‘rational’ decision-making. When the American government asks poor countries to engage in free trade, I’m asked to believe that they’re doing it out of the kindness in their heart? I’m skeptical of this, based on *gestures broadly at lots of things*. Chang’s hypothesis – that America wants free trade because it’s good for America (or, specifically, for America’s ‘moneyed interests’) – is convincing. If America thought it would benefit from tariffs (for example, to rebuild our manufacturing sector), is there any doubt we would do it? Overall, I’m pretty convinced by this book, although it would be healthy to read some other rebuttals.
Stats:
Rating: 9/10
New words I learned: 1
Days to read: 7
Where I heard about it: not sure