September 5, 2010 8:45 pm

23 Things They Don’t Tell You About Capitalism

23 Things They Don’t Tell You About Capitalism, by Ha-Joon Chang, Allen Lane £20

Back in 1968, the South Korean government wanted to be a big steel producer, and so they picked Park Tae-Joon, a retired army general, to run the newly established Pohang Iron and Steel Company. He knew little about the industry, but then neither did Korea: its economy was dominated by agriculture and cheap exports.

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There were practical difficulties. South Korea had none of the iron ore needed to produce steel, so it had to import it. Economics textbooks were not encouraging: developing countries ought to stick to areas in which they had a competitive advantage; labour intensive industries were good, capital intensive ones, like steel, were not. World Bank executives advised aid donors to shun the venture.

The plan might not have been the worst business proposition in history, as Korean economist Ha-Joon Chang claims, but it seemed unlikely to succeed. And yet succeed it did: today the company is the world’s fourth largest steel producer.

It was not alone. From the 1970s on, South Korea’s government intervened in numerous industries, in just the way the textbooks say you should not. Industrial giants like LG and Hyundai followed, turning a backwater into the world’s 15th largest economy.

This unlikely miracle came about despite a common misconception about capitalism, namely that governments cannot pick winners. Mr Chang wants to clear this one up, along with 22 further “mistakes” – from conventional leftwing claims (“there is no such thing as a free market”) to more counter-intuitive ones (“more education in itself is not going to make a country richer”). Taken together, his answers take on those who zealously advocated deregulated markets and open trade before the economic crisis.

Some of the analysis smacks of bayonetting already fallen enemies: a chapter on the follies of the post-crash Icelandic economy, for instance, attacks folly already much lambasted elsewhere. But behind the sometimes disconnected structure lie two important arguments about how economic theory needs to be rethought.

The first involves growth, and the particular importance of manufacturing. Mr Chang is persuasive that enthusiasm for moves to a post-industrial economy was over-cooked. Much recent growth in services in advanced countries, he claims, has been a trick. Jobs once done in-house (like cleaning) are now outsourced, creating little new growth. The fall in the size of manufacturing relative to services is also partially explained by changing productivity: computers get cheaper and better over time; haircuts do not.

Equally, while there is plenty of knowledge embedded in the creation, design, and branding of modern manufactured products, it often comes at the expense of those who use them. British shop assistants may be unable to do simple arithmetic as bar-code machines and electronic tills now do it for them. No 19th-century shopkeeper could have survived without such basic knowledge.

In short, advanced countries are unwise to think they can survive on services alone. Much the same is true in developing countries, as a chapter debunking theories of microfinance shows. While lending African women money to buy mobile phones (which they then rent on) works for a while, others soon catch on. Their businesses then get crowded out, and fail.

Instead, Mr Chang argues, what developing countries really need are large “effective organisations and institutions” — in particular big manufacturing companies capable of growing and adapting over time, just like South Korea’s steel mills.

But how to do this? Here lies the book’s second big argument: countries should be encouraged to protect and promote their own industries. Mr Chang is a “heterodox” economist, who has spent much of his academic career (and two previous books) arguing this with more orthodox colleagues. He has shown in particular that western countries who preach free trade and competitive markets commonly protected their own industries during earlier periods of growth.

He admits that attempts to back native industries — from the Concorde to the Indonesian aircraft manufacturing industry — have often been expensive flops. But he says developing countries need to improve their “batting average” of winners versus losers, although he neither explains exactly how this might be done, nor whether it is possible for all developing countries to do so simultaneously.

Even so, the thrust of his engaging case for a more cautious and caring era of globalisation is difficult to dispute. Anyone keen to repeat the unlikely success of Park Tae-Joon would do well to read it.

The writer is the FT’s comment editor

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