Ha-Joon Chang: In Conversation
Nestled amongst the leafy streets of Cambridge is the University’s Economics faculty. This, unassuming, 1960s building, plays host to one of the world’s leading development economists: Ha-Joon Chang. An international best selling author, Chang is no stranger to controversy, he is known for his critical analysis of economic orthodoxy and draws upon economic history in much of his work. His most recent book “23 things they don’t tell you about capitalism” gallantly contributes to the ongoing critique surrounding our global economic system. In 2005 the South Korean born economist was awarded the Wassily Leontief prize for Advancing the Frontier of Economic Thought for his book “Kicking Away the Ladder”. I enter his office, quaint and amassed with books. His manner, affable and upbeat, we begin.
You co-wrote a paper entitled “Industrial Policy and the Role of the State in Egypt” which outlined an alternative development policy, comparing Egypt to the East Asian experience, can you tell us a little about your vision at the time?
“We wrote it in 1995/4, it was a time when they [the IMF] were accelerating liberalization and privatization. We felt that in a relatively closed economy like what Egypt was before, liberalizing and opening can bring some benefits because you have more competition and foreign exchanges and so on. But we were worried that this brought, at best, short-term benefits. You really need a long-term strategy to take your country to another level. Back in the early 60s Korea and Egypt had similar levels of income, two of the poorest countries in the world. Today Egypt still is a poor country, with a per capita income of $2000 compared to South Korea’s $20,000. So, what happened during those 50 years that made such a huge a difference is an important question. Of course, there were problems with the earlier economic strategy under Nasser. In my view, it was too closed – but, liberalising everything without any strategy and privatising, without any clear view of what should be done was not a very promising strategy. Unfortunately we have been proven right in that sense because they’ve done a lot of things since the 90s, but where did it end up?”
The IMF recognises that, although growth rates remained stable after further economic reforms in 2004, and, during the world financial crisis - unemployment and poverty persisted…
“To me, it is basically the lack of a coherent growth strategy, especially the lack of a coherent industrial policy, that has led to this situation. Egypt is not one of those very poor African countries where they start with 7 people with university degrees in the whole country or with a literacy rate of 20%. You know, it was, still is, a country with a long tradition of education and high quality human capital, you have world class people with degrees in engineering and economics and so on. It’s not because they started with such poor conditions that they couldn’t do what South Korea did. There were probably a lot of people in the 60s that thought that Egypt had better prospects than South Korea.”
There is much talk, including from the IMF, about Egypt’s mounting budget deficit. Now, looking at Greece, how likely are we to see European style spending cuts and austerity?
“Worrying, isn’t it. I mean in Europe as well. What people need to see is that a budget deficit has two elements; it is a gap between your spending and your revenue. So, why can’t you reduce it by increasing your revenue? The best way to do it is by generating growth. This is the critical failure of so-called austerity economics, they only look at one side of the equation, they have to look at the other part. Very often when you have a large budget deficit problem like in Greece, actually cutting spending might reduce your revenue - in the sense that it kills your growth and reduces tax revenue. It reduces the yearly budget deficit a bit, but, in the long run, since you’re not growing and all these debts are collecting interest, your debt to GDP ratio might actually rise - which has happened in Greece. Egypt should take this as an important lesson. I don’t know what the current thinking of the IMF about Egypt is; do you know what they say?”
They say that Egypt would have to reduce its budget deficit and do that by implementing VAT and a one off sales tax…
“Well yeah raising tax is an option. But the problem with VAT is that it is actually quite costly to administer because you need all the receipts, and who issues receipts in Egypt apart from the largest firms? It is a common problem in developing countries…”
Because they have a large informal sector…
“That’s right – it’s difficult to implement. They need to find some other way, implementing VAT can help but it will not be the main solution. More importantly once again look at the denominator, how do you increase growth and so on. Also, this idea that somehow the budget should be balanced every year is quite idiotic. Because, if you balance your budget every year, why not every quarter, every month or every day? That is absurd. You want to balance your budget over economic cycles.”
In your work, you draw many lessons from economic history, particularly with regards to protectionism. Egypt lost its competitive edge in the production of cotton partly due to global prices that were brought down by huge subsidies given to American cotton farmers…
“Yes. I still remember, 6 or 7 years ago, I was in a meeting organised by former US president Jimmy Carter. He said his neighbour was a cotton farmer - he himself used to be a peanut farmer – but, this guy, the previous year, got $1 million just for subsidies. In situations like this, how do you compete? But, the more important point is that Egypt, yes, has one of the best quality cottons, but they somehow fail to make the best clothes or fashion. They need to find a way to add value to their cotton, especially when they already have that reputation of “the best cotton in the world”. Why not try to build a series of industries from cotton textile to fashion industry?”
Would that kind of industry model work well for Egypt? They have a lot of micro enterprises but these don’t seem to have linkages to medium and large firms…
“Yes, that’s the trouble with micro farms, they might do some interesting things but the trouble is entering, especially entering markets that will give them good value for their products, particularly export markets, is very costly. They need to work with bigger firms to be able to export for example, or to engage in research and development. This is how all the small firms, producing furniture and designer clothes in Italy, have developed. Something like agricultural co-operatives, that are independent companies, who pool some amount of resources to have this co-operative organisation engaged in export marketing, market research, a bit of R&D and so on.
In the end, these micro enterprises – most of which are just survivor strategies - need to be upgraded if they are going to become the source of productive growth. To put it bluntly, what in the end distinguishes countries like Vietnam or Ecuador from say Germany or the US, is not that Germans have more people with Engineering degrees and the Americans have more Phds. But that, the Germans have their Volkswagen and Benz, and Americans have Boeing. It’s not enough to have this raw entrepreneurial energy, which is being exploited, both in a good and bad sense, through this micro enterprise system. They need more than that, they need a bigger economic system to work and upgrade them.”
Do you think this is currently achievable given the current economic climate and restrictions by the IMF on economic policy and so on?
“It’s tough, but it’s not as though there were no restrictions in the 1960s and 70s when countries like South Korea were trying to do this. But yes, there are more restrictions on what kind of subsidies you can use and what kind of protectionist policies you can use, so it’s tougher. On the other hand, you now have more experiences to learn from because you’re starting late.
One point that I may emphasise in this context is that they really need to look at other experiences. As I keep telling my students, life is often stranger than fiction. Think about Singapore, if you read things like the Economist magazine or the Wall Street Journal you would think that it is a model free market and free trade economy. Of course it has free market and free trade, but, you will be surprised to know that all the land is owned by the government, 85% of housing is provided by a government owned housing company, and something like 22% of GDP is produced by state owned enterprises. So I tell my students, look, if someone told you to invent a well working economic system on the basis of an economic theory, whether it’s Neo-Classical, Keynesian or Marxist. You would never be able to invent something like Singapore, because it combines elements of Marxist thinking with the most extreme free market thinking, so, what is it?
My worry is, that in countries like Egypt, with this new transition, there is a degree of impatience internally, and also, of jerking from the outside to basically capture the country before it finds its own direction. The Egyptians need to sit together, study some of these experiences and decide what direction they want to take and where they can learn lessons. Sorting this out might take two or three years, but what is two or three years compared to the next two or three centuries? Otherwise, the IMF will carry on its usual strategy and what has that given Egypt in the last 20 years? Nothing.”
Egypt is still in the process of transition and the future seems uncertain. What advice would you give to the many young people hoping for a better future?
“Well, the youth of Egypt have made this big achievement of bringing democracy to the country, so first of all Kudos to them. Now they have an even bigger task of taking the country to another level. But, you know, if you could kick out Mubarak, I’m sure that you can do a lot more! I think that the young people need to be patient, not in the sense of putting up with unemployment for years, but in the sense of really thinking through these strategies and trying to come up with a consensus behind it. I was like that too, when you’re young every month counts! But, in the grand scheme of things, it’s better to do it one year later than doing it in a rush and botching it up.”
Article first published by Pulse media http://pulsemedia.org/2012/08/22/if-you-could-kick-out-mubarak-im-sure-that-you-can-do-a-lot-more/#more-36785
Following the break up of the Socialist Federal Republic of Yugoslavia, Slovenia held a referendum granting its independence, formally declared on the 26th June 1991. In comparison to its neighbours Slovenia’s transition to independence and democracy had been relatively smooth, unlike for instance Bosnia and Herzegovina, which suffered a bloody war until the Western negotiated Dayton accord. The atrocities of war damaged the latter country’s infrastructure, led to the collapse of industry, and saw an exodus of the talented including scientists and intellectuals to more promising ventures abroad. Civil society, in other words, crumbled, the country was engulfed in poverty, unemployment and political instability – obstacles that prevail to this day.
Slovenia was a nation with minimal ethnic tension; national unity in an independent Slovenia ensured a conflict free transition. In addition, unlike its East European neighbours, the former Yugoslavia had developed a form of “market socialism”, rather different from soviet style state planning, as a result Slovenia was in fact a participant in certain western markets. Full-blown shock therapy in the form of the Washington Consensus was therefore avoided and gradual reforms were adopted instead. Crucially, however, civil society was integrated within the political system and acted as a significant player in the transition toward democracy.
Despite differences in size and population, elements from the Slovenian transition are potentially relevant to that of post-revolutionary Egypt. A strong civil society acted in unison in the ousting of ex-president Mubarak indicating a clear willingness toward democratic engagement. The Egyptian parliament is currently in the process of appointing members charged with drafting a Constitution, a process likely to define the political landscape for years and therefore of crucial importance. Slovenia favoured an inclusive process and established a National Council, which formed part of the new constitutional system of 1991. The council’s role gradually evolved into a secondary parliamentary chamber, comprising of 22 representatives from local communities. Functional interests were included, 4 employers, 4 employees, 2 farmers and one each from: universities and high schools, education, culture and sport, medicine, social services, trades-people and the professions. Their powers ranged from demanding referenda, launching investigations relating to public matters and recommending that the national assembly – the first chamber – reconsider bills. The latter institution was also open to lobbying from interest groups representative of member citizens.
The Slovenian people, highly suspicious of political parties, regarding them as a source of conflict comprised of corrupt elites, embraced a general ethos of co-operation over competition, interests and civil society organisations, in other words, provided a welcome and effective alternative; a notion of participatory political culture that included working people in political and social spheres was favoured. In fact, political parties only came about precisely in order to carry out specific functions of political interest groups. This inclusive nature was key to democratization in Slovenia, an ingredient often advocated in political science literature.
Egypt, is no Bosnia. Its economic framework is functioning, albeit not perfectly, the task of reconstruction therefore appears more manageable. It’s civil society is existent, the recent revolutions a clear demonstration of the will of the people to work together for change. The energy for political participation is clear, the challenge now seems to be both to integrate leaders of civil society into the political system and encourage more precise and structured efforts to hold the government to account, through NGOs, think tanks and local community organisations in order to more effectively engage with the public at large.
What seems most crucial at this stage is their selection of members to draft the Egyptian constitution. Ideally, the body would comprise of members of civil society, from expert constitutional lawyers to trade union representatives and human rights activists. However, the recent crackdown on NGOs is disheartening, and a sign of intolerance towards independent organising of interests - crucial in any democracy. In addition, Egypt’s parliament has recently voted in favour of allowing its own lawmakers to make up 50% of the panel entrusted to draft the constitution. Not only does this course of action display incredible egotism on the part of parliamentarians, more importantly it shows disdain and contempt for the interests of Egypt’s 85 million citizens, a sentiment shared by many and vocally expressed by Egypt’s head of the Judges Club Ahmad El-Zend, who is urging parliament to reconsider it’s decision.
The revolution sought change towards democracy, the battle is far from over, it is in fact in its most crucial stage; that of transition, which is likely to determine its future. Independent action and bodies, engaging in dialogue with resolutions and compromises reached is democracy in action. The government ought not fear public engagement but rather welcome it, inclusiveness at this stage is crucial, the alternative is further public disaffection and alienation of the people who elected them in the first place. A woman may have voted for a Brotherhood candidate, though her religion is unlikely to be her sole interest. She may be a mother, with school fees to pay, access to healthcare to think of, and the cleanliness of her community to worry about. These interests ought to be represented through dialogue, and the government held to account through a transparent record of achievements through a clear mechanism providing room for both critique and praise. Persecution and the use of force to shut down such voices is not only undemocratic, but a sign of a newly elected authoritarian government in disguise.
Workers at Freeport, gold and copper mine in West Papua, Indonesia, extended their strike, the longest in Indonesian history, to a third month. Dispute over pay and conditions is said to be the main concern. Workers currently earn $1.50 an hour and are asking for an increase to $4 an hour, arguing that their pay is far lower than international standards of other local miners. In addition, it is widely recognised that local workers earn a fraction of expat workers salary with identical job descriptions.
Tensions flared when police admitted to being on the company payroll for $130 a month pocket money, a serious concern given the numerous accusations of serious human rights violations both on this occasion and in the past. Many workers suspect that politicians too are being paid by the mine, hence the company’s reluctance to increase pay and, as they see it, accumulate more costs.
As a result of the increasing violence towards miners - many in fact were shot dead by police – as well as the discrimination the Papuan people have been facing, including religious violence and abuses by the military, Human Rights Watch launched an urgent appeal to US president Barack Obama who is currently visiting Indonesia. Whilst US Secretary of State Hilary Clinton expressed concern over the issues, the Indonesian government has confirmed that Papua is off the agenda, whether it can be avoided however, remains to be seen.
Child Miners in Sierra Leone
Haven’t we all heard this argument made before? Courtesy of the brilliant Louis Theroux, we’ve seen prisoners in Miami County Jail held for years in this cramped high security institution before being charged. Some are guilty, others innocent. And all, face abuse and violence from their fellow inmates, awaiting years for their transfer or release. Though it might be legal to face inhumane conditions whilst awaiting trial, some, like me, may argue a so-called “loophole” in the law; or rather highlight its imperfection, which causes tremendous strain and agony, particularly on those who are innocent, and their families. If I were to campaign for remedies in the law, should I expect to be branded as a defender of criminals, a raving lunatic intent on the subversion of the rule of law? Though vaguely amusing I’m sure, it’s a worrying possibility. Whilst in our society of highly organised ideologically based vocal interests, you might say it’s indeed expected, in fact I hope it wouldn’t be too presumptuous of me to say the “right” would rather enjoy the charade. Nevertheless, I sense the issue lies rather deeper and will venture a possibility that it may not all be down to aggressive political point scoring. Perhaps the question lies more into the nature of law, what is “the Law”? Should it reflect our society’s tolerance or rather act as a moralistic benchmark, or, is it up to elected legislators to decide, based on ideology and/or campaign pledges? The truth is, it’s usually a medley of those things combined with judges’ rulings and interpretations included, akin to a meeting place, say, of ideology, politics and explanation. It’s crucial therefore, not to shutdown an argument when a valid cause for concern is raised, what I have in mind is the issue of tax havens.
On the one hand, as far as I’m aware, it’s not explicitly illegal to shelter finance abroad. Many companies as well as individuals, ranging from financiers to rather more colourful characters like dictators and criminals, are attracted to them both for their financial interests and tight secrecy. Those making the case for “liberty” expressly believe that tax is theft and that the money they earn is no business of government to appropriate, they may therefore behave as they wish and have the added choice of doing so – many who feel this way do not, actually have the choice though this is seldom taken on board. The law, they argue, does not prevent them from doing so. Claiming that they pay the tax that they are obligated to pay and usually with the help of technical experts, they are able to “avoid” tax through various complicated means. Their argument usually stops there and any attempt to challenge their view is usually met with contempt, at best. Though, I sometimes wish that the bigger picture were allowed an equal say. This practice harms the poorest in this world most, countries with an abundance of natural resources, from diamonds to iron ore, see their wealth literally sucked out through these loopholes. Living in dire poverty, generation after generation see their wealth disappear before their eyes. Dictators the world over appropriate and shelter development loans in the very banks that lent the country the money in the first place. The bank then not only profits from the interest of the loan but also from the commission fee of “handling” the loan. Where’s the morality here and what to make of generations being denied the right of fully exploiting and enjoying their own “comparative advantage”? Or is the truth that we deem their only comparative advantage to be cheap and unskilled labour?
If the argument is shut down on the basis that it isn’t “illegal” then how can we even begin to remedy problems of corruption? I simply fail to see the moral justification behind one’s so-called liberty at the expense of entire nations and generations doomed to poverty, massacre and disease. The sooner we acknowledge the problem, the sooner we can address it. Alternatively, a justification addressing all the issues that tax havens are responsible for would be most welcome.
Yesterday the Greek Parliament passed an excruciating austerity package that seems unlikely to pave the way for growth. Measures include cutting the deficit by £64 Billion, cutting more than 100,000 public sector jobs and privatizing over 40% of state owned assets. Measures unlikely to be swallowed by the people, and indeed shouldn’t. The truth is, Greece’s economic woes have a long history.
Beginning with their entry to the Euro, aware of the challenge ahead to meet certain criteria, namely the EU convergence criteria the Government brought in the big guns, aka Goldman Sachs to decorate their accounts, which swiftly eased EU concerns regarding their Government debt.
Candidates to the EU as well as members must comply with the following:
1. The ratio of the annual government deficit to GDP must not exceed 3%
2. The ratio of gross government debt to GDP must not exceed 60%
3. “Normal” Fluctuation of exchange rates to be accompanied by no currency devaluation
4. Nominal long term interest rates must not exceed 2%
Greece joined the Euro in 2001, with a Government deficit of 4.5% and Government debt of 103.7%, breaking both rules one and two. Naturally these figures weren’t on display at the time of entry, though they soon came to light.
You would think someone from the Commission would have shown some concern, perhaps point out that Greece may be heading down the wrong path. The debt grew year by year reaching a staggering 110.7% in 2008. To put things into perspective, the UK’s national debt in 2008 was 54.4% of GDP, below the 60% recommended by the EU.
The truth is, no one really paid any attention to breaches of convergence criteria. When the EU discovered that Greece had joined the eurozone with a larger deficit than it had initially claimed, swift measures ought to have been taken at the time. Of course there was also a problem of tax evasion, which again, went uncontested.
I don’t believe Greek teachers, police officers or rubbish collectors ought to suffer for what clearly was negligence on behalf of politicians and EU bureaucrats. Mistakes have been made, and the true culprits are no worse off. In my mind it seems unreasonable to impose such obscene austerity measures on a populace that, quite frankly, understands perfectly well what went wrong.
A more realistic outcome for Greece would be to promote growth through investment, strengthen public institutions and devalue their currency. If that means wiping off most of their debt, then so be it. Unfortunately, membership of the eurozone takes these options off the table and more debt accumulation and public unrest a tragic certainty.
So Saudi troops are to begin a withdrawal from Bahrain, along with UAE police forces. One can only imagine the brutality and human rights abuses inflicted on demonstrators. Literally, imagine, as their plight has been amongst the hundreds of stories that go unreported in our “fifteen minutes, every fifteen minutes” news cycle - from underground prisons in Eritrea, to authoritarianism in Belarus.
The true hypocrite is the one who ceases to perceive his deception, the one who lies with sincerity — Andre Gide
When Professor Yunus won his Nobel Prize in 2006 he set the international community alight. Here was a man advocating the international community’s gospel. At last! One can help the poor help themselves, and possibly turn a profit. Only a fool would turn this down.
The UN proclaimed 2005 to be the year of microcredit. Micro loans were swiftly disbursed throughout the developing world at huge cost. The poorest people - lacking sufficient collateral to obtain commercial loans - would individually or through groups borrow money at high interest rates to set up a stall or buy a cow and turn a profit. Ingenious.
What started in Bangladesh soon travelled across Eastern Europe, Africa and South America. The world over people gushed and cooed, the romantic idea of a poor villager earning an income and supporting his family spread like wildfire, sites like Kiva personalized the romance enabling ordinary people, like you and I, to make a donation too.
A leading proponent of microfinance and co-author of a leading textbook on the subject once said that: “While economic theory suggests microfinance has benefits, rigorous evidence that shows it happening just doesn’t exist… The evidence is pretty dicey”. Why then have billions of dollars been spent on an initiative lacking any substantial evidence of its merits? Bosnia’s sector reached levels of saturation and over-indebtedness when it turned out many “clients” were taking out numerous loans to service already existing loans, plunging them further into debt and further into poverty. And, before you ask, yes a regulatory body existed, but loan officers’ bonuses were linked to the number of loans disbursed. A similar scenario is recorded to have happened in India and Bangladesh where many resorted to suicide out of desperation and fear of loan recovery mechanisms.
Brutal, for what is purported to be charitable. Many now recognize this scheme to be little more than glorified loan sharking, many too, trust and believe in it still. Microcredit is big business, and many will be reluctant to relinquish their portfolios. The industry stretches far and wide, and has quickly developed into the number one feel good job. What concerns me is the vast amount of valuable and, not to mention scarce resources available for sustainable development, spent on harming the poorest, a rather expensive and reckless opportunity cost?
If I had a burst pipe, and feared flooding, would I stick a band aid on and hope for the best? The band aid is microfinance. Sure, a small sum may cause some relief though a World Bank Study has shown that half of the businesses fail within a year, micro-firms often operate within the informal sector and therefore have no legal protection, Governments also, are unable to levy taxes to service basic infrastructures and institutions. Stuck in subsitence farming, these goods are far too inefficient to compete on global markets – Agri-processors often triple their costs on transport moving from one micro-farm to the next, for respectable volumes of goods to be sold.
Over-lending leading to over-indebtedness plunges families deeper into poverty and exacerbates an already desperate situation. To some the idea of “pulling oneself from their bootstraps” is not only romantic but ideologically driven. To others, a glitterati endorsement and the growing demand for “impact-investments” makes the idea a dream job. A gentle reminder though, that one reason for the Soviet Economy collapse is the lack of technology intensive small enterprises, countries like South Korea and Japan developed not thanks to microfinance but rather because of an abundance of the technologically intensive SMEs.
References for all points can be made available; just ask!