Kicking Away the Ladder. Development Strategy in Historical Perspective

My discussion confirms to a remarkable extent the observation made by List 150 years ago – a time when many would have laughed at the suggestion that, within two generations, Germany would be economically challenging Britain or that the USA would become the world’s leading industrial power. A consistent pattern emerges, in which all the catching-up economies use activist industrial, trade and technology (ITT) policies – but not simply tariff protection, as I have repeatedly pointed out – to promote economic development, as had been the case since before List’s time. The policy tools involved in such promotional efforts may have become more varied, complex and effective since List’s time, but the general pattern has remained remarkably true to type.

Whatever the exact policy method used, there seems to be a number of common principles that run through the lengthy series of successful development strategists starting from Edward III in the fourteenth century, through to Robert Walpole, Frederick the Great and Alexander Hamilton in the eighteenth century, to the nineteenth century US, German, or Swedish policy-makers, right down to their twentieth century East Asian or French counterparts.

As has been repeatedly observed over the last few centuries, the common problem faced by all catch-up economies is that the shift to higher-value-added activities, which constitutes the key to the process of economic development, does not happen ‘naturally’.[1] This is because, for a variety of reasons, there exist discrepancies between social and individual returns to investments in the high-value-added activities, or infant industries, in the catch-up economies.[2]

Given such discrepancies, it becomes necessary to establish some mechanisms to socialize the risk involved in such investments. Contrary to the popular view, this does not have to involve direct policy intervention such as tariff protection or subsidies, but could be done by establishing institutions which can socialize the risk involved in such projects (more on this later – see section 4.3). However, the institutional solution has significant limitations. First of all, institutions are by nature embodiments of general rules, and therefore may not be effective in addressing problems related to particular industries. Second, establishing new institutions can take a long time, as we argued in Chapter 3, and this is therefore likely to limit the ability of countries to respond quickly to new challenges. As a result, a more focused and quick-footed policy intervention may in many cases be preferable to institutional solutions.

However, the fact that direct state intervention, especially in the form of ITT policies, is often necessary for socializing the risks involved in the development of infant industries, does not mean that there is only one way of doing it – that is to say, by means of tariff protection.[3] As my discussion in Chapter 2 shows, there were many different policy tools used for the purpose across different countries, as a result of the differences in their relative technological backwardness, international conditions, human resource availability and so on. Needless to say, even within the same country the focus of promotion can – indeed has to – evolve over time with changing domestic and international conditions. Typically, the successful countries have been those that were able skilfully to adapt their policy focus to changing conditions.

Of course, the fact that the use of activist ITT policies is necessary does not imply that all countries that use such policies are guaranteed economic success. As we know from the experiences of a range of developing countries during the postwar period, the success of these policies is critically determined one the one hand by the detailed forms of these policies, and on the other by the ability and the willingness of the state to implement these policies.[4]

The picture that emerges from our historical survey seems clear enough. In trying to catch-up with the frontier economies, the NDCs used interventionist industrial, trade and technology policies in order to promote their infant industries. The forms and emphases of these policies may have been varied according to different countries, but there is no denying that they actively used such policies. In relative terms (that is, taking into account the productivity gap with the more advanced countries), many of them actually protected their industries far more strongly than the currently developing countries have done.