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Consumer pays the cost
on 13 October 2010
Basic premise of the book is that private investors are generally unwilling to sacrifice present returns for future gains, therefore agressive government policies (subsidies, tariffs, import restrictions,etc.) are required to protect domestic manufacturers in developing nations so that they can eventually compete with developed ones. Chang does accept this this protection has costs to be bourne by consumers in the developing world, but those are presumably outweighted by future benefits. It's not a revelation and no one will argue that governments have a role to play (and they do - always did), but book is ultimately unconvicing on the most relevant aspect - practical solutions. Chang is a macroeconomist, perhaps this is why his focus is entirely on a "nation" as opposed to real people who live in it. Which effectively leads him to overstate the benefits of protectionism as they are accrued to the "nation" (unit he is optimising for) and understate the costs as those are borne by the nation's consumers. In other words, Chang makes an implicit assumptions that interest of the "nation" override those of its citizens. IMHO, this is a dangerous slope - many a people slipped here before. This implicit authoritarianism does not seem to bother Chang - or his reviewers who grew up in largely open societies. Perhaps it should think agai. As Chang himself points out, flipside of protectionism in South Korea was death penalty for FX irregularities, while Koreans were also encouraged to report their neighbours for smoking foreing cigarettes. This is not to say that import barries or currency controls are necessarily bad - but the fact that Chang does not see that having government to tell you what to buy and from who actually may have some material drawbacks.
My other reservation is when Chang implicitly equates correlation and causation. Granted, not at all uncommon and often goes unnoticed, but think for a second. To show that many countries prospered while ignoring neoliberal principles is not at all the same as to show that they did so BECAUSE they ignored them. Few things just don't fit. For example, when US cut manufacturing tariffs to historic lows in 1841, one would expect freer trade to be damaging to the then developing economy and bring down its growth rate. Which did not happen. Another example - Germany had some of the lowest tariffs in Europe while it was becoming an industrial power in the 19th century. Finally, even Chang's favourite examples of manufacturing excellence (Switzeland and Singapore) followed a very close line to free trade.
Next concern is what I feel is lack of balance. Chang takes you through several success stories of government industrial interventions, but not as eloquent on those that ended up in expensive failures. Examples? Here you go: in Britain - cars and semiconductors, in France - IT, in Japan - spent billions on semiconductors and still failed to match US, Taiwan and Korea. China spent billions on trying to establish semicondutor industry and equally failed. List can go on, bottom line is that it is not at all obvious that government is any better at picking winners and estimating costs / benefits even directionally correctly.
Finally, one question that Chang avoids alltogether - why did neoliberal orthodoxy became so powerful when it did (late 70s-early 80s)?
In many ways, Chang falls into the same trap that eventually consumed neoliberals - insistence that there is a simple, straightforward route to economic success, and that they know it.