Serendipity is a gift for all columnists. Sometimes, as a columnist, you get column ideas, unexpectedly, from unusual sources. For example, the trigger for this piece was an email that I received from a Nigerian, Olajumoke Akinjide, on 4 January this year. She sent me the link to an article, titled “Africa’s Boom is Over”, published in the 31 December edition of Foreign Policy magazine, a US-based publication. The article was written by Rick Rowden, a doctoral candidate in economics at the Jawaharlal Nehru University in India. It wasn’t clear why Akinjide sent the link to me because her email contained no text – just the link! But I think I know why. Rowden’s article was very critical of “free market champions” who oppose “state intervention”, and, given my views in this column on economic liberalism, Akinjide probably wanted to sensitise me to a contrary, anti-free market opinion.
But I am, unabashedly, an economic liberal. I believe that, given the right framework of rules and incentives as well as competitive pressures, the private sector will create the goods and services that society needs, generate economic growth, create jobs and stimulate prosperity. Of course, the market is self-interested, driven mainly by the profit motive, but it’s that “greed”, as Adam Smith put it, tamed only by competition and appropriate regulation, that generates economic prosperity. And as David Hume pointed out, “the public becomes powerful in proportion to the opulence and extensive commerce of private men”. Thus, it is “private men”, not the state, that generate the economic growth, but the state must be an enabler and a facilitator of such private business or entrepreneurial endeavours.
That was the prism through which I read Rowden’s article, and I disagreed with his interventionist views. Yet such protectionist and nationalist views of economic policy are very popular. Indeed, they are prevalent in this country. But, as Socrates said, the correctness of an opinion cannot be determined by whether it is held by a majority. At the same time, however, it’s important that the voices of economic liberalism are always heard, lest bad ideas drive out good! So, let me address Rowden’s claims about industrial policy.
To be fair, Rowden started his piece rather uncontroversially. Africa, he said, is not industrialising but, in fact, either stagnating or moving backwards in developing an industrial base. Hardly anyone would disagree with that view. In fact, the UN Economic Commission for Africa (UNECA) reached the same conclusions in 2011. And the Economist magazine put it more vividly in an article in November 2015 when it stated that “The collapse of Nigeria’s textile industry, which has gone from employing more than 350,000 people to fewer than a tenth as many reflects a wider problem of deindustrialisation across Africa that has occurred during a decade of rapid growth driven by high commodity prices”.
But why is Africa not industrialising and even deindustrialising? Well, while the Economist blamed the problem on weak infrastructure and the perverse effect of the commodity boom, which created the “Dutch disease” by driving up exchange rates thereby making it harder to produce and export locally manufactured goods, Rowden argued that the problem arose because African countries “drank the Kool-Aid of free markets and free trade” and abandoned industrial policy tools, such as trade protection and subsidies, “which they could have used to build up their domestic manufacturing sectors”. He said that “free market advocates told African countries that such ‘state intervention’ in the economy usually does more harm than good, because governments shouldn’t be in the business of trying to ‘pick winners’”. He then added, “But this advice neglects the actual history of how rich countries themselves have effectively used industrial policies for 400 years”.
To be sure, none of this is new. They are the arguments frequently used by advocates of protectionism in defence of state interventions. But, for me, the resort to history gives false validity to the claims. Often, because the arguments for protection are weak from the standpoint of economic theory, protectionists have tended to base their views instead on a politico-historical perspective, and their common argument is that free trade, to use the words of the famous economic historian Charles Kindleberger, is “the clever device of the climber who kicks the ladder away when he has attained the summit of greatness”. Indeed, there is a popular book, written by Ha-Joon Chang, with the title “Kicking away the ladder”! But as a student of economic history, I know that those who peddle this theory either simply distort historical facts or use them tendentiously.
The intellectual history of trade and industrial policies is truly fascinating, and what it tells us is that the battles of ideas between protectionism and economic liberalism are as old as recorded history itself, with economic liberalism becoming dominant particularly in the 19th century. But the origins of the debates date back to the early centuries. For instance, the first major justification for free trade was developed by philosophers and theologians in the first few centuries (AD), and was based on the doctrine of universal economy. Simply put, this doctrine says that God deliberately scattered resources and goods around the world unequally to promote commerce and peaceful cooperation between different nations.
David Hume built on this doctrine in “Of the Jealousy of Trade” (1758) and argued that every country is so specially endowed with resources and geniuses that no nation should lack manufactured goods to export provided they “preserve the spirit of industry and remain civilised”, that is, with respect to their institutions. Then he said: “and if, notwithstanding these advantages, they lose such a manufacture, they ought to blame their own idleness, or bad government, not the industry of their neighbours.” But, for Hume, as I quoted earlier, it is through the ingenuity and resourcefulness of “private men”, not the overbearing power of the state, that a country can turn its resources into manufactured products, that is, industrialise. This is relevant to Nigeria, of course. The country is blessed with super-abundant natural and human resources, yet, despite these advantages, we are unable to industrialise and diversify the economy. So, who should we blame? Well, unlike many, I would align with Hume and say we should blame our “own idleness” or “bad government” or both, not foreign products!
But the reality is that protectionist sentiments have, historically, always been strong. In fact, history shows that mercantilist thought dominated from the late 16thcentury until well into the 18th century. Indeed, it was the prevalence of mercantilist ideas and practice in Europe, between 16th and early 18th centuries, that partly shaped the protectionist views of Alexander Hamilton and his German follower Friedrich List. Hamilton’s “Report on Manufactures”, submitted to the US Congress on 5 December 1791 was a classic protectionist charter that most developing countries would embrace today. Hamilton made the case for economic nationalism and self-sufficiency on the grounds that Europe was preaching but not practising economic liberty, that America was weak and could not compete with Europe and that there was need to protect infant industries and diversify the American economy. And Friedrich List, who became a cult figure for protectionists, advocated that middle-income countries should foster industrialisation through protectionist measures.
However, the intellectual advocates of free trade had started fighting back since the late 17th century, led by the French Physiocrats and later by the English and Scottish moral philosophers. But it was not until Adam Smith came on the scene with his seminal book, The Wealth of Nations, that the whole intellectual landscape was transformed, as he systematically and forensically demolished the arguments of the mercantilists. Later, David Ricardo refined Adam Smith’s theory of absolute advantage and developed his own theory of comparative advantage, which is the strongest argument for international trade today.
Yet, policies were always slow in catching up with ideas. For instance, despite Adam Smith’s ideas and David Ricardo’s thesis, protectionism was prevalent in Britain, particularly with the enactment of the Corns Laws in 1815, which imposed restrictions and tariffs on import of grains. It’s also true that the industrial revolution in the late 18th century partly led to some protectionist measures in Britain, such as the prohibitions on export of machinery and on emigration of artisans, mainly to increase the supply for local use.
But, and this is my main point, ideological and policy shifts against protectionism in Britain soon became very strong as trade protection began to be seen as a “complete folly”, which “brings its own punishment”. By the 18th century and particularly after the Napoleonic wars, Britain began to move towards freer trade. About 605 duties were repealed between 1841 and 1846 and there were reductions in 1035 others. But it was the intellectual force of the Anti-Corn Law League, led by Richard Cobden and John Bright, and events, such as the Irish Potato famine, that finally turned Britain into a unilateral free trader. The Corn Laws were abolished in 1846 and the Navigation Act, which restricted the use of foreign ships for trade between every country except Britain, was abrogated in 1849. And in 1860, Britain and France signed a free trade agreement, called Cobden-Chevalier Treaty, named after Richard Cobden and Michel Chevalier, who spearheaded it. The treaty, with its most-favoured-nation (MFN) clause, transformed international trade fundamentally and turned the 19th century into the “golden era” of free trade.
Protectionists like Rowden use the “kicking away the ladder” argument to justify state intervention and protectionism in developing countries. But the truth is that the West didn’t industrialise because of industrial policy tools like import bans, high tariffs and exchange controls. As the economic historian and Harvard professor Niall Ferguson argued in his book, Civilisation: The Six Killer Apps of Western Power, the earlier industrialisation of the West reflected institutional advantages, based on competition, science, property rights, medicine, which helped improve workers’ health, the consumer society and the work ethic. It’s difficult to argue against any of these factors, and it’s to them that Africa must turn in order to industrialise. Any industrial policy that doesn’t create infrastructure and institutional advantages for manufacturers would further retard Africa’s industrialisation!
Olu Fasan
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