Kicking Away the Ladder. Development Strategy in Historical Perspective

Only as a result of the theoretical legitimacy of free trade when measured against widespread mercantilism provided by David Ricardo, John Stuart Mill and David Hume, Adam Smith and others from the Scottish Enlightenment, and as a consequence of the relative stability provided by the UK as the only and relatively benevolent superpower or hegemon during the second half of the nineteenth century, was free trade able to flourish for the first time [in the late nineteenth century].[2]

This Liberal world order, perfected around 1870, was based on: laissez-faire industrial policies at home; low barriers to the international flows of goods, capital and labour; and the macroeconomic stability, both nationally and internationally, which was guaranteed by the Gold Standard and the principle of balanced budgets. A period of unprecedented prosperity followed.

Unfortunately, according to this story, things started to go wrong with the onset of the First World War. In response to the ensuing instability of the world economic and political system, countries once again started to erect trade barriers. In 1930, the USA abandoned free trade and enacted the infamous Smoot-Hawley tariff. According to de Clercq, this tariff ‘had disastrous effects on international trade and after a while ... on American economic growth and employment. Nowadays, some economists even believe that the Great Depression was caused primarily by these tariffs’.[3] The likes of Germany and Japan erected high trade barriers and also started creating powerful cartels, which were closely linked with fascism and these countries’ external aggression in the following decades.[4] The world free trade system finally ended in 1932, when Britain, hitherto its champion, succumbed to temptation and reintroduced tariffs. The resulting contraction and instability in the world economy, and then the Second World War, destroyed the last remnants of the first Liberal world order.

After the Second World War, so the story goes, some significant progress was made in trade liberalization through the early GATT (General Agreement on Trade and Tariffs) talks. However, dirigiste approaches to economic management dominated the policy-making scene until the 1970s in the developed world, and until the early 1980s in developing countries (as well as the Communist world until its collapse in 1989). According to Sachs and Warner, a number of factors contributed to the pursuit of protectionism and interventionism in developing countries.[5] ‘Wrong’ theories, such as the infant industry argument, the ‘big push’ theory of Rosensetin-Rodan (1943), and Latin American structuralism, not to speak of various Marxist theories, prevailed. Protectionist policies were also motivated by political requirements, such as the need for nation building and the need to ‘buy off’ certain interest groups. There were also legacies of wartime control that persisted into peacetime.

Fortunately, it is held, interventionist policies have been largely abandoned across the world since the 1980s with the rise of Neo-Liberalism, which emphasizes the virtues of small government, laissez-faire policies and international openness. By the late 1970s economic growth had begun to falter in most countries in the developing world, with the exception of those in East and Southeast Asia, which were already pursuing ‘good’ policies. This growth failure, which often manifested itself in the economic crises of the early 1980s, exposed the limitations of old-style interventionism and protectionism.

As a result, most developing countries have come to embrace Neo-Liberal policy reform. The most symbolic of these conversions, according to Bhagwati, are: Brazil’s embrace of Neo-Liberal doctrine under the presidency of Fernando Henrique Cardoso, a leading Dependency theorist until the 1980s; the entry of traditionally anti-US Mexico into the NAFTA (North American Free Trade Agreement); and the move towards an open, liberal economy by India, once the bastion of protectionism and regulation.[6] The crowning glory of this trend towards liberalization and opening-up was the fall of Communism in 1989, which finally ended the ‘historical anomaly’ of a closed world trading system that had prevailed in the early postwar years.[7]