Free trade darlings not so neoliberal after all

When wind blasts through the fields of bamboo in East Asia, the clackety-clack of shoots slamming against each other evokes the tickety-tick of the old method of reading stock prices. Open your borders! Unshackle your prices! For the gospel of Friedman has cometh! The recent economic ascendancy of the East Asian Tigers has been heralded by some as a true coup for neoliberal development policies. Indeed, it is now “common knowledge” that the reason these countries succeeded where others have failed is that they removed barriers to free trade where others did not.

Unfortunately, as so often is the case, “common knowledge” and elegant mathematical models of the hegemonic theory do not successfully explain the ascendancy of these countries. In fact, given that it is historical fact that these East Asian countries had governments with no qualms about interfering in the free market (and that the market sectors in which they interfered often became some of the largest sectors of the economy), crude neoliberal doctrine positively fails to explain their rapid development.

However, it is now without doubt that absolute government control over the economy of a country will absolutely fail to industrialize that country without major human costs (Stalin’s rapid industrialization of Russia being the textbook example). The question, then, is what the proper role of the government of a developing country is, given that one major characteristic of development will be the modernization (and, in most cases, deregulation) of the country’s economy. Neoliberal development theory would maintain that the most important duties of government in development are to enforce clear property rights, encourage export-led growth, and otherwise integrate, deregulate, and trade with developed countries. While these duties are quite important to development, they are not the only important duties of government for development, if history is any indicator; and countries who take only these steps without qualification have tended to do worse than countries who took a more moderate approach.

Many developing countries have economies that are primarily agricultural in nature. Agriculture makes four important contributions to development: a market contribution, a foreign exchange contribution, a product contribution, and a factor contribution. Thus, the modernization of agriculture (which mainly consists of raising productivity) plays a central role in every central concern for development. Unfortunately, many developing countries have agricultural sectors that are characterized by extremely inefficient patterns of landholding, which significantly impedes development. For example, in Latin America, one percent of the landowners own seventy percent of the land, while ten per cent of the largest farms occupy eighty percent of the land. Property rights assigned to land in this manner are inefficient because peasants who farm the land—who are tenants, not owners—often have no security on their tenure and may have to relinquish to the landowner a significant part of their output, and due to these conditions there is no incentive for the farmer to increase efficiency or productivity.

The interference of government is the only true means through which these inefficiencies can be corrected. Among the most important changes it must accomplish is that property rights must be shifted from the landowners to the tenant farmers. However, this is only a necessary, not a sufficient, condition for increased productivity in agriculture. New landowners must be given access to credit, water, fertilizers, and extension services for advice. Farmers must have access to credit, improved farm implements, irrigation, and new social infrastructure.

Government has a role to play in all these endeavors. If the new landowners do not have sufficient access to the basic necessities of commercial farming, it is not likely they will break traditional farming techniques and improve productivity. If, however, the government steps in and provides incentives as well as infrastructure, the evidence shows that peasant farmers are ready to break with custom and tradition.

Another area in which governmental interference in the free market is beneficial to growth is investment in infrastructure. As most important kinds of infrastructure are public goods, private entities will undersupply them. Good infrastructure increases productivity and reduces costs in the private sector, and also has the effect of diversifying production, improving environmental conditions, coping with population growth, and reducing the effects of poverty. Although the public sector must provide these public goods to some extent, it is true that the lack of competition results in inefficiency in many cases; and it is not impossible to apply private sector principles to public sector goods. The World Bank thus recommends that governments set performance targets, increase managerial autonomy, and increasing competition.

What, then, of the commonly held assertion that the East Asian Tigers, following neoliberal principles, have achieved what so many other countries have failed in development? The economist Marc Piazolo maintains that South Korea, at least, did not follow broadly neoliberal policies, but did not follow protectionist policies, either. Rather, it changed its policies through time, generally following an import-substitution model but with an emphasis on export diversification.

As South Korea’s labor market dried up in the early 70s and light industry became burdensome on the country’s trade balance, the government initiated a program that heavily favored capital-intensive industries and built them up—simultaneously subsidizing them and encouraging them to become internationally competitive early on by setting export targets. Thus, by the time neoliberal policy prescriptions became fashionable and widely applied in the 80s and 90s, South Korea’s government had already interfered in the free market to positive effect: it protected infant industries from foreign competition but also forced them to remain competitive without opening their borders. And the eventual effect was that South Korea’s economy was heralded as a miracle, growing in the 90s at an average nine percent yearly.

These functions of government in developing countries are, of course, in addition to the usual (and widely accepted) governmental functions of correcting for negative externalities (and promoting positive ones), correcting for market imperfections, and generally correcting for other market failures while providing an environment in which markets can flourish. While the academic debate still rages between neoliberal economists and those who take more heterodox views, the data seems at the moment to support the assertion that government has a major role to play in the development of impoverished countries, that whether a country has good governance or bad governance can determine whether that country will develop, that countries that adopt hard neoliberal policies seem to have performed worse than countries that take a more moderate approach, and that the countries with the most impressive development patterns took a moderate approach and also benefited from good governance.