Do As I Say, Not Do As I Do.

Frank Lee looks at the politics of development and under-development. '' . countries which got rich after 1485 have all done so in defiance of Ricardo's economic theories.''

I think it was Sir Ian Gilmour (now deceased) who, as one time member of Mrs Thatcher's first Cabinet, referred to her economic policy as 'Clause 4 dogmatism in reverse.' This was an apt descri ption from a thinking Tory. The notion that there existed a magic panacea which would banish all the problems associated with Britain's economic ills, formed the basis of Thatcherism and late Thatcherism (Blairism). The so called 'supply-side' revolution consisted of removing all the controls from capitalism which had been painstakingly put in place over the centuries, and simply letting the system rip. Privatisation, deregulation, liberalisation were the components is this policy paradigm.

In international terms free-trade was at the heart of the system - a system which was to become known as 'globalization' was packaged and sold as an irresistible force of nature. Globalization was neo-liberalism writ large. It was considered that free-trade was always and everywhere the best policy. This was codified in what became known as the 'Washington consensus.' The new conventional wisdom was conceived of and given a legitimating cachet by political, business, media and academic elites around the world.

However, many of the elements - if not all - of the Washington consensus were hardly new, many date back to the 18th and 19th centuries and perhaps beyond. It could be said that the newly emergent mainstream orthodoxy represented a caricature of an outdated and somewhat dubious political economy.

The theory that free-trade between nations would maximise output and welfare was first mooted by Adam Smith but its final elaboration was conducted by David Ricardo in his famous work The Principles of Political Economy and Taxation first published in 1817. Briefly, he argued that nations should specialise in what they do best and in that way world output would be maximised. The example he used was England and Portugal and the production of wine and cloth, where he calculated that England should produce cloth and Portugal should produce wine. It was asserted, though no evidence was ever presented, that all would gain from this international division of labour.

However, even a cursory glance at economic history, and particularly the transition from agrarian to industrial societies, demonstrates the weaknesses, and indeed, serves to falsify the whole Ricardian model. The brute historical fact is that every nation which has successfully embarked on this transition - including the UK - has done so adopting policies which were the exact opposite of those advocated by the free-trade school. In the world of actually existing capitalism, free-trade is the exception rather than the rule. Contemporary world trade is mainly a matter of intra-firm trading, that is, global companies trading with their own affiliates and subsidiaries in different countries, mainly for tax avoidance purposes (see below). Next there are regional trading blocs like the EU or NAFTA which erect tariff barriers to non-members. Thirdly there is barter trade where goods and services are exchanged for other goods and services rather than money. Finally, only about 20% at most, can be considered to be free trade, and even here there are exceptions involving bilateral specifications and agreements.

Modernisation and industrialisation, wherever it took place, involved tariffs, infant industry protection, export subsidies, import quotas, grants for R&D, patents, currency manipulation, mass education and so forth . a smorgasboard of interventionist policies whereby the economy was directed from above by the state. For example during its period of industrialisation the United States erected tariff walls to keep out foreign (mainly British) goods with the intention of nurturing nascent US industries. US tariffs (in percentages of value) ranged from 35 to almost 50% during the period 1820-1931, and the US itself only became in any sense a free-trading nation after World War II, that is once its financial and industrial hegemony had been established. In Europe laissez-faire was also eschewed. In Germany in particular tariffs were lower in the US, but the involvement of the German state in the development of the economy was decidedly hands on. Again there was the by now the standard policy of infant industry protection, and this was supplemented by and array of grants from the central government including scholarships to promising innovators, subsidies to competent entrepreneurs, and the organisation of exhibitions of new machinery and industrial processes. In addition, ''during this period Germany pioneered modern social policy, which was important in maintaining social peace - and thus promoting investment - in a newly unified country . '' (Kicking Away the Ladder - Ha-Joon Chang)

It has been the same everywhere, yet the Ricardian legacy still prevails. But this legacy takes on the form of a free-floating ideology with little connexion to either practical policy prescri ptions or the real world. It has been said in this respect that '' . practical results have little to do with the persuasiveness of ideology.'' (The Trillion Dollar Meltdown - Charles Morris) This much is true, but it rather misses the point: the function of ideology is not to supply answers to problems in the real world, but simply give a Panglossian justification to the prevalent order of things.

Turning to the real world it will be seen that '' . history shows that symmetric free-trade, between nations of approximately the same level of development, benefits both parties.'' However, ''Asymmetric trade will lead to the poor nation specialising in being poor, while the rich nation will specialise in being rich. To benefit from free trade, the poor nation must rid itself of its international specialisation of being poor. For 500 years this has not happened anywhere without any market intervention.'' (How Rich Countries Got Rich and Why Poor Countries Stay Poor - Erik Reinert).

This asymmetry in the global system is both cause and consequence of globalization. It should be borne in mind that the Least Developed Countries (LDCs) are suppliers of cheap raw material inputs to the industrialised countries of North America, Western Europe and East Asia. In technological terms the LDCs find themselves locked into low value-added, dead-end production where no discernible development or technology transfer takes place. Thus under-development is a structural characteristic of globalization, not some unfortunate accident. Put another way:

'' . if rich nations (the North) as the result of historical forces, are relatively well endowed with the vital resources of capital, entrepreneurial ability, and skilled labour, their continued specialisation in products and processes that use the resources intensively can create the necessary conditions for their further growth. By contrast LDCs (the South) endowed with abundant supplies of cheap, unskilled labour, by intentionally specialising in products that use cheap, unskilled labour . often find themselves locked into a stagnant situation that perpetuates their comparative advantage in unskilled, unproductive activities. This in turn inhibits the domestic growth of needed capital, entrepreneurship and technical skills. Static efficiency becomes dynamic inefficiency, and a cumulative process is set in motion in which trade exacerbates already unequal trading relationships, distributes benefits largely to the people who are already well-off, and perpetuates the physical and human resource under-development that characterises most poor nations.'' (Development Economics - Todaro and Smith)

The cocoa-chocolate industry (hereafter CCI) of the West African nations, Cameroon, Ghana, Ivory Coast and Nigeria are a case in point. These countries produce the majority of the world's raw cocoa beans. But of course the industry as a whole is controlled by western multinationals such as Hershey, Nestlé and Cadbury-Schweppes (now Kraft). The structure of this industry - vertically integrated - is very typical of the relationship between the LDCs and the developed world. The low value-added part of the industry - growing and harvesting the beans - is left to individual farmers in West Africa. Buying agencies, either very close to, or in fact subsidiaries of multinational companies (MNCs), then buy the raw material at prices usually dictated by the MNCs. This asymmetrical relationship between supplier and sole buyer is termed 'monopsony' in the economics jargon. It should be understood that large companies not only over-price their products to the final consumer, but also under-price their purchases from their captive suppliers. From then on the various stages of processing supply chain are in the hands of the parent company. From raw beans, to roasting, milling, refining, manufacturing of chocolate or cocoa, shipping and packaging, branding and advertising - all of these stages add value to the product, value which is garnered by the MNC. The exporting African nations are left with the low or no value added end of the operation, a technological cul-de-sac.

Nor does it end there. MNCs can avoid much local taxation by shifting profits to subsidiaries in low-tax venues by artificially inflating the price which it pays for intermediate products purchased from these same subsidiaries so as to lower its stated profits. This phenomenon is known as transfer pricing and is a common practice of MNCs - one over which host governments can exert little control as long as corporate tax rates differ from one country to the next.

Bear in mind also that although the IMF and World Bank enjoin LDCs to adopt market liberalisation policies, they apparently see - or conveniently ignore - the past and current mercantilist practices of developed nations. Agriculture for example is massively subsidised in both NAFTA and the EU. But it really is a question of don't do what I do - do as I say. This hypocrisy at the heart of the problem represents the elephant in the room. We know that countries which attempt to open their markets when they are not ready to do so usually pay a heavy price (Russia and the free-market shock-therapy for example). The countries which protect their growing industries until they are ready to trade on world markets have been the successes - even in capitalist terms. The wave of development in the 19th century and the development of East Asian economies during the 20th bears witness to this.

But the object of the free-trade rhetoric and finger wagging posture of the developed world is precisely to maintain the status quo. We should be aware that: '' . multinational corporations are not in the development business; their objective is to maximise their return on capital. MNCs seek out the best profit opportunities and are largely unconcerned with issues such as poverty, inequality, employment conditions, and environmental problems.'' (Economic Development - Todaro and Smith)

Given the regulatory capture of the political structures in the developed world by powerful business interests, it seems that this situation is likely to endure for the foreseeable future. Development will only come about when the LDCs take their fate into their own hands and emulate the nation-building strategies of East Asia.

'' . markets have a strong tendency to reinforce the status quo. The free market dictates that countries stick to what they are good at. Stated bluntly, this means that poor countries are supposed to continue with their current engagement in low productivity activities. But engagement in those activities is exactly what makes them poor. If they want to leave poverty behind, they have to defy the market and do the more difficult things that bring them higher incomes - there are no two ways about it. (Bad Samaritans - Ha-Joon Chang)

Amen to that.