Free Market Policies Rarely Make Poor Countries Rich

Rich countries in Europe, and the US are major proponents of free trade in poor countries.  The IMF and World Bank, which are dominated by Europe and the US, force poor countries to adopt free market policies in order to receive aid.  What they don't tell the poor countries is that this is not what they did to become rich countries.  The US protected it fledgling manufacturing industries from competition by placing tariffs on imported manufacturing products.  Britain made extensive use of tariffs to protect its wool industry competition with firms in Belgium and The Netherlands. After they established dominance in an industry they opened up their markets to trade.  The colonial system in Europe was predicated on importing raw materials from its colonies and selling high value added manufactured products to them.  Guess who wins in that trade.  They like poor countries to do as they say and they won't permit them to do what they did.

Ha-Joon Chang's book that I have been reviewing provides several examples of the hypocrisy.  Its a good thing that our dead presidents don't talk because they would tell you a very different story about US trade policy.  Alexander Hamilton was appointed as Treasury Secretary by George Washington.  They were the architects of US economic policy.  Hamilton used the "infant industry" argument to protect US manufacturing from competition with high tariffs.  He also promoted government investment in infrastructure and in the banking system.  If Hamilton were the finance minister of a developing country he would be heavily criticized by the US Treasury of today.

Benjamin Franklin was not an advocate of the infant industry defense but he had another reason for protecting manufacturers from foreign competition.  Land was available for almost no cost to immigrants and most of them were farmers.  In order to recruit labor for jobs in factories, it was necessary to pay wages that were four times what labor was paid in Europe.  He believed that tariffs were needed to protect US business from low wage competition from Europe.

Thomas Jefferson did not agree with Hamilton on protectionism but unlike Hamilton he opposed the granting of patents.  He argued that ideas were like air and that they should be free.  Patents and other intellectual property tools are major impediments to free markets.  They provide monopolies which restrict free markets and free trade.  Many firms in the US today turn out more patents and other forms of intellectual property than products.

If we look at the performance of developing countries today we find that most of the successful countries have done what rich countries did in order to grow.  Those that followed the advice and restrictions imposed by rich countries have done less well.  Rich countries are advocates of free markets and free trade when it serves their interests.  In their current state of development they benefit from free trade.  Developing countries are rarely helped by opening up their markets to foreign competition until they have established a foothold in an industry.  Moreover, governments have to take a larger role in developing countries in order to build the required infrastructure.  They have also played a major role in developing markets in countries that have been successful.