Kicking Away the Ladder. Development Strategy in Historical Perspective

With the recent crisis in Korea and the prolonged recession in Japan, it has become popular to argue that activist ITT policies have been proved to be mistaken. While this is not the place to enter this debate, a few points may be made.[202] First of all, whether or not we believe that the recent troubles in Japan and Korea are due to activist ITT policies, we cannot deny that these policies were behind their ‘miracle’. Second, Taiwan, despite having used activist ITT policies, did not experience any financial or macroeconomic crisis. Third, all informed observers of Japan, regardless of their views, agree that the country’s current recession cannot be attributed to government industrial policy- it has more to do with factors like structural savings surplus, ill-timed financial liberalization (which led to the bubble economy) and macroeconomic mismanagement. Fourth, in the case of Korea, industrial policy had been largely dismantled by the mid-1990s, when the debt build-up that led to the recent crisis started, so it cannot be blamed for the crisis. Indeed, it could be argued that, if anything, the demise of industrial policy contributed to the making of the crisis by making ‘duplicative investments’ easier.[203]

2.3. The Pulling-Ahead Strategy by the Leader and the Responses of the Catching-up Countries – Britain and its Followers

Once a country gets ahead of other countries, it has a natural incentive to use its economic and political powers to pull ahead even further. Britain’s policies, especially those of the eighteenth and nineteenth centuries, are the best examples of this. What is disconcerting is that these policies have so many parallels with those pursued in our time by developed countries in relation to their developing counterparts.

2.3.1. The Colonies

Britain instituted a strong set of policies intended to prevent the development of manufacturing in the colonies, especially America. List reports that in 1770, William Pitt the Elder (then the Earl of Chatham), ‘made uneasy by the first manufacturing attempts of the New Englanders, declared that the colonies should not be permitted to manufacture so much as a horseshoe nail’ .[204] Brisco’s characterization of the colonial policy under Walpole describes the gist of this strategy:

By commercial and industrial regulations attempts were made to restrict the colonies to the production of raw materials which England was to work up, to discourage any manufactures that would any way compete with the mother country, and to confine their markets to the English trader and manufacturer.[205]

The policies deployed by Britain included the following. First, policies were deployed to encourage primary production in the colonies. For example, in the 1720s, Walpole provided export subsidies (‘bounties’) to and abolished British import duties on raw materials produced in the American colonies (such as hemp, wood and timber). This was done in the belief that encouraging the production of raw material would ‘divert them from carrying on manufactures which interfered with those of England’.[206] Note that this is exactly the same logic that Cobden used in justifying the repeal of the Corn Law, which he thought was unwittingly helping continental Europe and the USA to industrialize by making their agricultural exports more difficult (see section 2.2.1 above).

Second, some manufacturing activities were outlawed. For example, the construction of new rolling and slitting steel mills in America was outlawed, which forced the Americans to specialize in the low-value-added pig and bar iron, rather than high-value-added steel products.[207] Some historians argue that this kind of policy did not actually damage the US economy significantly at the time, as the country did not have comparative advantage in manufacturing.[208] It seems reasonable to argue, however, that such policy would have become a major obstacle, if not an insurmountable barrier, to US industrial development if the country had remained a British colony beyond the early (mainly agrarian and commercial) stages of development.[209]