The History of Economic Development in the West
- 1. 1 The economic development of the world’s richest countries is not a case of liberalization and free trade, as many monetary organizations would have people believe, but one of protectionism and state intervention. It was sustained through resource extraction from conquered colonies and forced deindustrialization of the global South to create a large market for manufactured goods. An emphasis is placed on both trade and foreign direct investment (FDI) in the development process, and while they are important, both are often misrepresented in the current framework. The Washington Consensus claims that policies such as lowering exchange rates, increasing foreign direct investment by lowering barriers, and reducing the role of the state must be adopted to ensure economic growth. This emphasis on trade and lowering barriers ignores the context of colonialism and its influence on economic growth historically. Although new courses for inducing growth through liberalization have been postulated, it is apparent that those policies vital to the significant and rapid economic development of the West have been import substituting industrialization, protectionism, and the forced liberalization and deindustrialization of the global South. The role of trade and FDI in development is overstated in the current context because of the influence colonialism had on economic growth in the West. The extraction of natural resources prompted FDI, stimulating trade and supporting industrialization, as well as creating a market for manufactured goods. The three decades leading up to World War I (WWI) saw a rapid increase in international trade, growing nearly 3.5% per year and output growth reaching 2.7% (Bairoch and Kozul-Wright, 1996). There was a definite North-South dimension to this trade, and although developing countries benefited somewhat from export growth and significant increases in capital flows, it was much less than any currently developed country. Trade and resource endowments were critical because they allowed for industrialization to occur and made protectionism a viable policy. Industrialization is still seen as one of the most essential conditions for economic development. In the United States in particular, import-substituting industrialization was the main driver of growth in the post-Civil War period, with the average annual growth of manufacturing reaching 5.1% (Bairoch and Kozul-Wright, 1996). Nearly two decades later, this extraordinary growth was surpassed by Japan, “whose manufacturing sector grew at annual rate of 9.0 percent” (Bairoch and Kozul-Wright, 1996: pp. 14). Policies
- 2. 2 that allow for the viability of industrialization have been crucial to economic development, although they must be supported by internal natural resources or imports, and foster infant industry through protection. The nature of protectionism as a driving force in economic development has been entirely disregarded many contemporary economists and international organizations, such as the International Monetary Fund (IMF) and the World Bank. England was the first country to industrialize and to begin protecting its infant industries, as early as the 15th century (Pacheco-López and Thirlwall, 2009: pp. 6). Many other countries have followed this model, including the United States, and more recently South Korea and Japan. The acceleration of industrialization in the United States after the Civil War was accompanied by high levels of protectionism with, “import duties averaging 45% for manufactured goods,” and the highest rates reaching 60%,” (Bairoch and Kozul-Wright, 1996: pp. 7). Occurring concurrently with import substituting industrialization, which was largely possible due to resource endowments from colonies, rising barriers allowed industry to grow until goods reached a point of superiority over external commodities. Recently, East Asian countries, such as Japan and South Korea, “whose comparative advantage once lay in rice”, were able to transform, “themselves into industrial power-houses,” through direct state intervention and selective protection (Pacheco-López and Thirlwall, 2009: pp. 6-7). Protectionism has been the most critical policy for economic development. It has allowed states to industrialize and build industry without overwhelming competition from other actors. This was to a large extent possible because of trade based in colonialism and resource endowments. By far, the most important policies for creating rapid economic growth in the West were those of forced deindustrialization and liberalization of the global South. As industrialization accelerated, colonies became a source for natural resources and the main market for manufactured goods. In the decades preceding WWI, “developing country share of world manufacturing production declined from over one-third to under a tenth,” (Bairoch and Kozul-Wright, 1996: pp. 16). This deindustrialization coincided exactly with increasing international trade and the rapid growth of imports from Europe. Without protectionist policies, much of the global South’s industry was destroyed, due to the mass production and superior quality of Western goods. This was possible because of treaties
- 3. 3 that had been imposed, “in the first half of the 19th century which entailed the elimination of customs and duties,” (Bairoch and Kozul-Wright, 1996: pp. 8). Although there are many examples across several continents of forced liberalization causing deindustrialization, the most prominent was the destruction of the Indian textile industry. Policies that endorsed free trade and liberalization in the global South were, by far, the most effective in increasing economic development in the North. They decreased manufacturing and allowed for both the resource endowments and a growing market for final goods. The rapid economic development of the West was manufactured through considerable state intervention, culminating in high tariff barriers and industrialization fuelled by natural resources from developing countries. The Washington Consensus upholds free trade as a critical guideline for growth, reinforcing the liberalization of the global South that allowed many currently developed countries to grow rich. Protectionism allowed many countries, like the United States and Japan, to gain technological superiority while forced liberalization through treaties and colonialism gave them a market for manufactured goods, in turn destroying infant industry and furthering economic gain. Industrialization and protectionism both played a vital role in promoting the economic development of the West, but would have had a much smaller impact without the forced liberalization and deindustrialization of the global South.
- 4. 4 References Bairoch, Paul and Kozul-Wright, Richard. (1996). "Globalization Myths: Some Historical Reflections on Integration, Industrialization, and Growth in the World Economy," Discussion Paper no. 113, UNCTAD. Carkovic, Maria V. and Levine, Ross. (2002). Does Foreign Direct Investment Accelerate Economic Growth? U of Minnesota Department of Finance Working Paper Hagen, Everett E. (1958). “An Economic Justification of Protectionism.” The Quarterly Journal of Economics, Vol. 72, No. 4 (Nov., 1958), pp. 496-514 Pacheco-López, Penélope and Thirlwall, A. P. (2009). “Has Trade Liberalisation in Poor Countries Delivered the Promises Expected?” School of Economics discussion papers, No. 09,11 Rodrik, D., Grossman, G., and Norman, V. (1995). “Getting Interventions Right: How South Korea and Taiwan Grew Rich.” Economic Policy. Vol. 10, No. 20 (Apr., 1995), pp. 53-107 West, G. P., Bamford, C. E. and Marsden, J. W. (2008). “Contrasting Entrepreneurial Economic Development in Emerging Latin American Economies: Applications and Extensions of Resource-Based Theory.” Entrepreneurship Theory and Practice, 32: 15– 36