Flat Earthers Versus Bad Samaritans

It must be frustrating to be a leader of a developing country. Just as you are becoming convinced on the virtues of free trade and globalization, there emerges a countervailing viewpoint suggesting that those are nothing more than attempts by the developed world to maintain their economic dominance.

To me, the differences between the two viewpoints are more apparent than real. To former Prime Minister Mahathir however, this merely vindicates his conviction all along. And the man can speak with considerable authority.

He defied the then prevailing economic thinking – the so-called Washington consensus – and successfully steered Malaysia out of the treacherous 1997 Asian economic contagion. Mahathir made those brilliant economists at the IMF and US Treasury Department eat more than their share of humble pie with the success of his unique if unorthodox initiatives that were at variance to the accepted wisdom.

The surprise is that Mahathir’s remarkable achievement is not more analyzed or appreciated. The 1997 economic crisis and Mahathir’s bold and contrary approaches to solving it provided one of the rare “experiments of nature” in economics.

It is interesting that with America currently experiencing severe economic squeeze as a result of its sub-prime mortgage mess, many of the solutions adopted by the champions of free market in the Bush Administration bear remarkable resemblance to the methods of Mahathir. These include the government’s prompt and unhesitating “rescue” of a major Wall Street firm (Bear Stearns), the lowering of interest rates (with scant regards to its negative impact on the dollar), and the priming of the economic pump with generous tax rebates.

When Mahathir did similar “rescues,” he was accused of bailing out his cronies. Nobody would dare suggest that Treasury Secretary Paulson, a former major Wall Street figure, of doing the same thing. As for the decline of the dollar, the direct consequence of lower interest rates, it is deemed acceptable to avoid recession and unemployment! Exactly what Mahathir had uttered then!

Malaysia came out of the 1997 economic crisis much faster and with fewer scars than countries like Indonesia that followed the “severe but necessary” prescription of the Washington consensus. Mahathir was right then; I hope that Paulson would also be right.

Cause Versus Effect

This wind of change is also evident outside the corridors of power. Consider that a book by the Korean-born Cambridge University economist Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, is fast making the bestseller list. His provocative point is that the developed countries are preaching the very opposite of what they had practiced, with respect to economic development.

Unlike other economists who rely on complex econometric models and esoteric mathematics (no equations or Greek alphabets in his book!), Chang is into economic history. He studied what countries actually did, in contrast to what they now preach. He also reminds us that many economic conclusions are based on statistical correlations. Correlations are just that; they do not mean or even infer causation, nor do they differentiate between cause and effect.

Take the widely accepted notion of the poor: They are poor because they are lazy, so we are told repeatedly. This observation is of course made only by the rich, never by the poor.

Could it be, as Chang challenged us, that they are lazy because they are poor? The poor are more likely to be malnourished, unhealthy, and thus lack vigor to do hard work. Even if they are capable of hard work, because of their poverty they could not afford an education and thus their hard work is valued less. It is callous if not cruel to label those poor hardworking rice planters and fisherman in Kelantan as lazy. Try spending an hour in their day under the blazing Malaysian sun!

If we assume that they are poor because they are lazy, then we are dealing with basic human nature, very difficult to change. However if they are lazy because they are poor, then we are dealing with external conditions, and thus potentially solvable. It makes more sense to approach the problem from this perspective.

Today we are told that unfettered free trade and globalization are the recipe for economic development. We are lectured endlessly of this truism, most persuasively by Thomas Friedman of “The-World-is-Flat” fame.

Chang concluded that historically, trade liberalization has been the outcome rather than the cause of economic development. Many of today’s developed nations, in particular America, were once ardent advocates of protectionism. Indeed Alexander Hamilton coined the term “infant industries” and the need to protect them.

Chang refers to his own South Korea which made the remarkable transformation from a backward agrarian society to a modern industrialized one by resorting to unabashed protectionism and aggressive state interventions in the marketplace, all anathema to free market disciples. He remembers as a young man ostracizing those who would dare smoke foreign brands of cigarettes. Precious foreign exchange should be used to support local industries, not foreign ones! Of course now that the nation is developed, South Koreans have no compulsion buying expensive Gucci handbags.

Had South Korea been diligent in enforcing copyright laws as per WTO dictates, Chang would not have become an economist as practically all his textbooks were pirated versions!

South Korea proves that active participation in international trade does not require free trade. In economics as in other areas of human endeavors, dogmas should never come in the way of pragmatism. Extremism in the pursuit of a truism is a vice. A familiar hadith says it better: In everything, moderation.

As Chang wisely noted, “The secret of success is in a judicious mix of protection and open trade, with areas of protection constantly changing as new infant industries are developed and old infant industries become internationally competitive.”

Sifting Concept From Content

Globalization makes the world smaller, with physical distance reduced to irrelevance. At the same time other distances – cultural, institutional, and linguistic – become more pronounced. Indonesia is physically, culturally, and linguistically close to Malaysia, while America is far away in all dimensions. Yet trade between Malaysia and America greatly exceeds that between Malaysia and Indonesia. Malaysians are more likely to have heard of or even visited San Francisco than Surabaya.

Trade benefits its participants; we should encourage and facilitate it. While the benefits may never be equal or perceived to be so, there is no such thing as unfair trade, only that we can make it fairer. The best way to achieve this is not to discourage trade but to increase it even more. As the participants get more sophisticated and more engaged, they are more likely to make compromises lest they would lose their now valuable relationships. Exploitative trade, like other exploitative relationships whether business or personal, rarely endures.

In the past, jute farmers in Bangladesh were at the mercy of middle men. Nonetheless both benefited more by trading than by not partaking in it. Through globalization, specifically modern technology like cell phones, jute farmers now have access to market information. This liberates them; they are now no longer dictated by the middlemen. Information makes the playing field more level.

Technology destroyed the monopoly and monopsony of the middlemen far more effectively than any rigid communist mandate. The middlemen can still make their profits but not through the ignorance of their clients but by providing better services, as it should be.

The recent electoral humiliation of Barisan Nasional would not have been possible if not for the Internet, an accoutrement of globalization. Globalization is liberating. We should not ignore globalization or discourage trade in our purist pursuit of fairness. We should instead focus more on preparing our citizens for both.

Protection maybe necessary but it is only good if you use that opportunity to enhance the competitiveness of your people and infant industries. Otherwise it would be the surest and quickest route to complacency and mediocrity. If you cannot provide indigenous competition, introduce some from outside.

Trade must be actively promoted; it does not happen spontaneously, as revealed by our trade figures with Indonesia. For this reason, I am optimistic on the future of the Taiwan-China conflict because of the increasing trade and other economic ties between the two countries.

Globalization also brings the reality of a diverse world closer to each of us. A plural society like Malaysia is uniquely positioned to prepare its citizens for this new reality than those from culturally and ethnically homogenous societies. Our diversity is an asset, not a liability in this era of globalization.

I see no conflict in the truth and wisdom expressed by Friedman and Chang as they both offer relevant lessons for Malaysia.