No Wonder Anti-Free Traders Are Angry

Gregory Clark  (Vice President, Akita International University)

If you want to understand why anti-free-trade demonstrators in Argentina were so angry nearly two weeks ago, visit a small metal-working factory in a humdrum Japanese village near where I spend weekends. Outside it looks nondescript. But inside it is a technological wonder -- CAD/CAM-operated machine tools, overhead cranes, everything needed for sophisticated manufacture of a range of metal products.

That factory has been around for a long time. It began life supplying local farmers with needed tools. Then as tools became mass-produced and cheap, it moved into specialized products needed by nearby construction and other firms. As competition further intensified, it went out and bought the advanced machines needed to remain competitive.

If that miracle of industrialization could happen in a small, isolated Japanese village, why can't it happen in the under-developed world? The World Bank, International Monetary Fund and World Trade Organization free-traders would say that the locals there are too backward, that they should concentrate on producing simple farm or other labor-intensive goods, and exchange them for sophisticated goods made elsewhere.

Too backward? In remote Filipino villages I have seen farmers turning lumps of metal into the sophisticated handguns needed by local gangsters. An NHK documentary once followed a group of young Bangladeshis making a truck out of spare parts scrounged from local dealers. When they turned the key and the truck sprung into action, even this hardened observer was moved.

If there are no truck-making and few other sophisticated industries in the Philippines or Bangladesh today, it is not because the people there are backward. It is because the IMF and other free-trade dogmatists have decided that these people should be denied the long-term protection needed to bring such industries to maturity, and to develop the industrial base -- the network of suppliers, transport links, repair shops, distribution outlets, skilled workforce, experienced officials and so on -- needed to support those industries.

Thailand is a good example of what can be done if the dogmatists are kept at bay. Forty years ago it had almost no industry to speak of. Through skillful use of tariffs it was able first to entice and then to force foreigners to invest in a range of key industries. Today it is even making and exporting trucks.

South Korea was even more ruthless in protecting and subsidizing the industries it needed to create the powerful industrial base it enjoys today. China is following the same path. None of this would have happened if the World Bank and IMF free traders could have had their way.

Take the pathetic and much-noted example of Mozambique. Ravaged for decades by a cruel civil war imposed by South African and U.S. hawks, it tried to ease some of its crushing rural unemployment by developing a cashew nut-processing industry. To do that, it had first to place a 20 percent tax on the export of raw nuts to other countries with established export and domestic markets and which wanted to do the processing themselves.

But in the eyes of the World Bank and IMF, that 20 percent tax was a breach of sacred free-trade dogmas. They threatened withdrawal of badly needed loans if the tax was not abolished. Mozambique had to back down. Its first attempt at industrialization was stopped dead in its tracks. Employees in the already-established processing plants were thrown out of work.

In the West today there is much hand-wringing over African backwardness. Massive aid and education are seen as the standard remedies. In fact, what the Africans need most is simply the chance to start manufacturing or processing a few things by themselves -- like that metal factory in my neighboring village. That way you soon gain the skills and experience needed for further industrialization.

Take an impoverished African nation currently having to import even the shirts on its backs, and having to pay for them by trying to sell farm goods into protected Western markets. Under free-trade dogma there is almost no way it can break out of that impasse, since no matter how cheap its labor is there is no way it can create a shirt industry able to compete with imported shirts.

Now imagine that its government was willing to defy the World Bank/IMF by banning shirt imports. Local and foreign entrepreneurs would rush in to build shirt factories, importing the fabric and other items needed for production. Then, following the Thai model, the government would stop the import of fabric. The shirt factory owners would expand into fabric making. And so on.

Impose the same policies over a range of imported goods and before long that once backward African nation would be well on the way to creating the industrial base needed for further progress. That is what Thailand did.

True, consumers for a while would have to pay more for their shirts. But that is not the end of the world. In effect they would be paying an impost to help create a base for their nation's industrialization. Many taxes and imposts are imposed on consumers for much less worthy reasons. Provided care was taken to encourage domestic competition and expand the industrial base, prices would soon come down. As with Thailand, exports would even be possible.

Almost all today's advanced industrial economies -- Germany, the United States, Japan -- relied on protectionism to get started. Yet with one or two infant industry exceptions, our textbook dogmatists today oppose the protectionist tariffs and subsidies needed to help the backward economies move ahead.

True, the dogmatists for some quaint reason do not mind the far greater protectionism that results from under-valued currencies. In fact, it was this protection that did so much to help Japan, South Korea and now China to industrialize.

Sadly, the Latin American and African economies under IMF and World Bank bondage do not even get to have this option. Currency weaknesses there can easily cause inflation. Any inflation is met with demands for the tight fiscal restraint that creates much of the chaos, unemployment and hopeless poverty we see today. Any wonder the Latin Americans are angry, and the Africans have given up in despair?

(This article appeared in the November 16, 2005 issue of The Japan Times)