Of Licks and Ladders: An Analysis of Industrial Policy of Developed and Developing Countries (Part 3 of 4)

 The World Bank, International Monetary Fund, and the Rise of Neoliberalism

By: Siyanda Pali

It is often stated that "A rising tide lifts all ships." However, this has not always been the case, especially when referring to the rise of the neoliberal era globally, which took off in the 1970s-1980s. Neoliberalism is an economic policy which is essentially a political or economic idea which supports 'free markets' as the main means to run a society. It is anchored on the principles of free market capitalism, deregulation, privatisation, austerity and globalisation. (Keen 2026). Through the International Monetary Fund, World Bank, and World Trade Organisation, its adoption has been ubiquitous, and it has had some rather potent consequences, especially for the developing world. 

Business Recorder

The World Bank and IMF were both established in 1944 at the Brettonwoods Conference. These institutions formally came to being on 27 December 1945, first with a mandate to finance the reconstruction of Europe, and later the developing world. A decision was reached that the headquarters would be in the USA, and that the president should come from the country with the largest shareholding, which invariably, was the USA. In tandem with the World Bank and IMF came the formation of the World Trade Organisation from the GATT, a key player in the drive towards globalisation and liberalisation in spheres such as trade and foreign investment regulation (Chang H-J 2007).

 The intellectual founding father of the IMF, British Economist John Maynard Keynes, had his own ideas about how the IMF should function eg an international clearing union overseen by a central bank, with an international currency called The Bancor. The US repudiated this, opting for a US Dollar-centered system linked to gold. It was also not fortuitous that Keynes did not support the idea of conditionalities attached to loans. Invariably, Keynes foresaw that corporations from the developed countries would be unable to resist the temptation of taking advantage of countries from the developing world (King LP 2018). Unfortunately, conditionalities became synonymous with IMF loans and their ''Structural Adjustment Programs".

According to Chang H-J (2007), with respect to developing countries, the neoliberal agenda has been advanced by a coalition of developed country governments, spearheaded by the USA and the troika of international economic organisations which they disproportionately control ie the IMF, WTO and the World Bank. These developed countries use access to their home markets and aid budgets to induce the adoption of neoliberal economic policies. Occasionally, this is to the benefit of a few firms in developed countries which lobby for certain outcomes to take place, but generally, to set the scene in the developing countries concerned: an environment which is friendly to foreign investment and foreign goods. The IMF and World Bank come to the fore by attaching conditionalities to loans made to developing countries, i.e.the adoption of neoliberal policies. The WTO, on the other hand, sets trading rules in favour of developed countries in spheres where they are strong, but not where they are weak.

Chang H-J (2007) also notes that these governments and organisations are supported by ''an army of ideologues". Some of these ideologues are highly trained academics who ought to know the limits of their free-market economics but tend to ignore them. The collaboration between these bodies and individuals forms a "powerful propaganda machine, a financial-intellectual complex backed by money and power" (Chang H-J 2007). This unitary, blinkered approach to Economics creates what Economic Historian, Lord Robert Skidelsky referred to as intellectual arrogance (Skidelsky 2015). This previously mentioned sentiment was similarly perfectly captured by Margaret Thatcher during the 1980s, stating that, TINA, "There is no alternative" i.e. that there is no other viable system, other than neoliberalism, to manage the economy, a statement we know to not only be inaccurate, but also ahistorical.   

Professor Ha-Joon Chang provides great insights with respect to South Korea, highlighting that "The neo-liberal establishment would have us believe that during its miracle years between the 1960s and 1980s, Korea pursued a neo-liberal economic development strategy. The reality, however, was very different. What Korea actually did during these decades was to nurture certain new industries, selected by the government, in consultation with the private sector, through tariff protection, subsidies, and other forms of government support" (Chang H-J 2007). This was the case until these industries were in a position to compete with international players. In addition to this, he states that "The government owned all the banks, so it could direct the lifeblood of business- credit. Some big projects were undertaken directly by state-owned enterprises- the steelmaker, POSCO, being the best example..if private enterprises worked well, that was fine. If they did not invest in important areas, the government had no qualms about setting up state-owned enterprises (SOEs), and if some private enterprises were mismanaged, the government often took them over, restructured them and usually (but not always), sold them off again" (Chang H-J 2007).

South Africa's Democratic Transition

The territory currently referred to as South Africa today is one in which Africans had ruled and reigned over for centuries. The Mapungubwe, in particular were a sophisticated African kingdom based in what is now the Limpopo province in South Africa, flourishing between the 11th and 13th centuries (Cartwright 2019). The society's wealth was based on sophisticated metallurgy, mining and vast trade networks, with locally mined gold, iron, copper and ivory being central to trade with countries such as Egypt, China and India.

 In line with a history of trade with other nations, the Cape, based in what is now the Western Cape province of South Africa, served as a key trading "proto-port" where travelers would victual their ships with fresh fruit, vegetables, cattle, sheep and fresh water, trading with Africans stationed in the Cape, as they embarked upon voyages to and fro. On 4 November 1497, Portuguese Explorer Vasco da Gama docked at St Helena Bay (approx.. 150 km north of Cape Town), where he had a skirmish with the Khoi, because his men attempted to expropriate fresh water without permission. About a decade or so later, strangely enough, another of his countrymen, one Portuguese Viceroy of India named Francisco de Almeida landed in the Cape of Good Hope in the early 1500s to victual his ships, en route to his homeland of Portugal. Initially, he and his men had traded with the Khoi, to the satisfaction of both parties: trading iron for cattle. However, when de Almeida's men tried to steal numerous cattle at a Khoi village they had visited, the plunderers were chased away back to their ships. After being persuaded by his men to take revenge upon these Khoi, de Almeida led a party of 170 men with weapons to carry out this act of revenge on the village. It was then that he, together with 10 of his generals and 64 of his men, were routed by the Khoi warriors, never to return to Portugal alive (Van de Aa 1707).

Data from the Huygens Institute, which shows historical logbook data of Dutch ships, shows that approximately 1000 Dutch ships alone sailed the route between the Netherlands and Asia via the Cape between 1600-1652.. In addition, historians also posit that European nations such as the French, Portuguese, English, Dutch and Danish consistently used the Cape before 1652 on a systematic, regular basis for the purposes of victualing their ships and for trade between Africans and Europeans. Furthermore, Patric Tariq Mellet posits that a conservative figure of 120 000 travelers docked their ships at the Cape between 1602-1650, further underscoring the established system of trade in place (Mellet 2002). 

Emeritus Professor of Economics Sampie Terreblanche illuminates that South Africa experienced 4 main political-economic systems thereafter:

1. The VOC period/ Dutch colonisation (1652-1795)

2. British colonialism during the 1800s

3. The Mineral Energy Complex (MEC), Union of South Africa (1910) and various other SA governments during the first half of the 20th century

4. The MEC and National Party/ Apartheid government from 1948-1994 

Tembisile Martin 'Chris' Hani with MK in 1991 (Britannica)

This period of colonial-apartheid was fiercely resisted by Africans (Klaas JJ 2023, Stapleton 2016, Biko 1978). The US abandoned the Gold Standard in 1971. Prior to the official fall of Apartheid in 1990, Terreblanche (2012) states that there were 4 events which were of great significance during South Africa's transition period in 1986. First, the Chernobyl nuclear disaster of 26 April 1986 laid bare the dearth in the nuclear technological expertise of the Soviet Union. The second event was the declaration of a state of emergency in South Africa on 12 June 1986. The third event was the Comprehensive Anti-Apartheid Act passed by the US Congress and Senate, which imposed severe economic sanctions on the Apartheid government of the White minority in Pretoria. The fourth event was the summit in Reykjavik between former US President Ronald Reagan and former Soviet President Mikhael Gorbachev, which took place in October 1986. 

The confluence of the abovementioned events led to pressure being put on the White minority government by the US and the ANC was encouraged by Gorbachev, to find a political solution or negotiated settlement. In addition, South Africa's economic growth rate gradually stagnated, falling from an average of approximately 5.5% between 1946-1960 to an average of between 1.2%-1.5% between 1980-1990. It was also during this period that neoliberalism was on the rise globally and was sold with gusto to South Africa. Professor Terreblanche argues that the abovementioned circumstances were a harbinger for South Africa's transformation.

In light of the dynamics prevalent at the time, the Mineral Energy Complex played a massive role, together with key African National Congress leaders, in facilitating South Africa's transformation from a political economy perspective, taking place in the mid 1980s. However, in doing so, they had to grapple with numerous challenges which they saw as stumbling blocks to South Africa's transition.

Of Licks and Ladders: An Analysis of Industrial Policy of Developed and Developing Countries (Part 2 of 4)

Britain 

By: Siyanda Pali 

It is perhaps common knowledge that Britain was the first country to undergo an industrial revolution in the 18th century, commencing around 1760. However, it is also perhaps prudent to explore the background for some details on how this may have been achieved, amongst other things. 

To paraphrase (Chang H-J 2002, Defoe 1728), "Other elements were deliberately created by the state...It is difficult to establish the relative importance of the abovementioned factors in explaining the British success in wool manufacturing. However, it does seem clear that without what can only be described as the 16th century equivalent of modern infant industry promotion strategy put forth by Henry VII and his successors, it would have been very difficult, if not necessarily impossible for Britain to achieve this initial success in industrialisation. Without this key industry which accounted for about 50% of British revenue during the 18th century, its industrial revolution might have been very difficult, to say the least." 

Industrial Textile Machine (Dreamstime.com)

(McCusker 1996) also adds that cloth exports, mostly woolen, accounted for approximately 70% of British exports in 1700, and were still well above 50% of total exports by the 1770s. The above are brief explanations of not only its integral nature, (state-facilitated), but also how Britain went from being a fairly backward economy in the 13th to 14th century, relying on the export of raw wool to the then Low Countries, often referred to as the Benelux, which were more advanced at the time (Belgium, Netherlands, and Luxemburg), referred to as such because of their extremely flat terrain or geography, to eventually having an economy which comprised of the most remarkable wool manufacturing industry the world over (Davies 1999, Defoe 1728, Ramsay G.D. 1982). For the sake of clarity, such a dynamic transformation was not purely as a result of laissez faire economics as others may wish for us to believe, but rather, included state intervention such as sending royal emissaries to other nations in order to identify suitable regions for wool manufacturing, the poaching of talent from the Low Countries (Belgium, Netherlands, and Luxemburg), increasing duties on the export of raw wool, as well as a preliminary ban on the export of raw wool (Ramsay G.D. 1982).

The pivot point for Britain's industrial period was the 1721 law introduced by Britain's first Prime Minister, Robert Walpole during the reign of George I (1660-1727). While Britain's policies prior to this were dedicated to capturing trade and increasing government revenue, the policies after 1721 were aimed at promoting manufacturing industries (Chang H-J 2003). Presenting the new law to parliament through the King's address, Walpole stated that, "It is evident that nothing so much contributes to promote the public well-being as the exportation of manufactured goods, and the importation of foreign raw material" (List 1885). 

According to (Brisco 1907, Davis 1966, McCusker 1996) the legislation which came into effect in 1721, together with other policies was as follows:

1. A reduction on import duties of raw materials used in manufacturing, or eliminated completely

2. Duty drawbacks on imported raw materials for exported manufactures were hiked

3. Export duties on most manufactures were repealed

4. Foreign- manufactured goods fetched increased duties

5. Export subsidies were widened to also include other items such as silk products and gun powder, while subsidies which prevailed at the time for refined sugar and sailcloth, were increased.

6. Regulations to control the quality of manufactured products, especially textiles, was introduced, in order to protect the reputation of British manufactures in foreign markets, policies which were similar to those employed by South Korea, Taiwan and Japan during the post-war period (Chang H-J 2003)

In spite of Britain's widening technological gap with other countries, it continued its industrial promotion policies well into the early nineteenth century, (Bairoch 1993) equating to some 50 or more years or two generations after its industrial revolution. 

The revocation of the Corn Law in 1846 created a semblance of 'free trade', which would be considered a cause for celebration by subscribers of the classical liberal economic doctrine (Bhagwati 1985). However, numerous historians see it as an act of "free-trade imperialism" designed to "halt the move to industrialisation on the Continent by enlarging the market for agricultural produce and primary materials." (Chang H-J 2002, Kindleberger 1978) 

The latter is precisely the rationale by certain politicians at the time, e.g. John Bowring and Richard Cobden vis-a-vis the repeal of the Corn Law as their campaign. 

Britain's Early Example of Kicking Away the Ladder

England vigorously opposed the industrialisation of its then colonies, in numerous ways (Chang H-J 2003):

1. Export subsidies (bounties) were used to encourage primary production in the colonies, while import duties produced in the abovementioned were prohibited. 

2. High value-added manufacturing activities in the colonies were forbidden.

3. Exports from the colonies which competed with British products were barred eg cotton textile imports from India as well as woolen cloth imports from Ireland and the USA were both banned by Britain in 1700 and 1699 respectively.

4. Tariff use by colonial authorities was outlawed, unless deemed appropriate for revenue purposes. Even so, such tariffs would still be annulled in numerous ways. 

Through 'unequal treaties', any tariff autonomy of colonies was eroded, with levels ranging between 3% - 5%. Starting with Brazil in 1810, Latin America in its entirety, including Persia (now Iran), the Ottoman Empire, China, Thailand (formerly Siam) as well as Japan up until 1911, were included in this group of countries. 

To quote the distinguished economic historian Paul Bairoch, "In short, contrary to popular belief, Britain's technological lead that enabled this shift to a free trade regime (1846) had been achieved behind high and longstanding tariff barriers (Chang H-J 2003, Bairoch 1993). 

It is also for this reason that German economist Frederich List draws his comparison of Britain to one who ascends the summit, then, 'kicks away' the very ladder which they had used to ascend, depriving others of enjoying the same opportunity. Perhaps it is prudent to quote him in copious amounts, to further indent the point:

"It is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, depriving others of the means of climbing up after him. In this lies the secret of the cosmopolitan doctrine of Adam Smith, and of the cosmopolitan tendencies of his great contemporary William Pitt and all his successors in the British government administrations.       Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and raised her navigation to such a degree of development that no other nation can sustain free competition with her can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the path of error, and has now for the first time succeeded in discovering the truth" (List 1885).

Of Licks and Ladders: An Analysis of Industrial Policy of Developed and Developing Countries (Part 1 of 4)

By: Siyanda Pali

The continent of Asia is considered to have the world's highest total GDP figure, coming in at over $42 Trillion US. North America, on the other hand, leads the world when it comes to per capita GDP, which currently exceeds $71 140 US according to the International Monetary Fund. Nevertheless, the continent of Africa is the wealthiest continent on earth when it comes to its resource endowment, with the United Nations stating that it possesses 30% of the world's mineral reserves.

San Francisco (Popular Science)

The African continent is endowed with 8% of the world's natural gas, 12% of global oil, 65% of all uncultivated arable land, as well as more that 70% of the world's platinum and cobalt deposits. In addition, while other continents such as Asia face overwhelming population decline, Africa has the world's youngest population, with approximately 1 in 4 (25%) of all young people on earth aged 15-35 projected to be African by 2050. Nevertheless, despite these impressive fundamentals, the continent has not translated its potential from the end of the colonial era to significant present-day gains for the population at large, accounting for about 2%-3% of global GDP to date. This necessitates inquiry. 

To paraphrase South Korean-born Economist, Prof Ha-Joon Chang, the aim of this article is to 'discuss a contemporary problem with the help of history', mainly, how a large number of mature economies today followed a certain trajectory or path of development in order to achieve industrialisation, and later, when they had ascended the summit, prescribed a totally different recipe for success to newer entrants or developing economies following their independence from colonial rule, with Bretton Woods Institutions such as the World Bank and International Monetary Fund being central actors. The impact or outcomes of such industrial policy will also be examined and discussed. 

Industrial Policy in Action

One would be forgiven for thinking that bastions of 'free market' and neoliberal economic policies such as OECD nations eg the United States of America and Britain developed their economies along such lines from the outset. Alas, the record of history portrays a markedly different approach. In Professor Ha-Joon Chang's "Kicking Away the Ladder: The Real History of Free Trade", a reference is made to "Economics and World History: Myths and Paradoxes" by Paul Bairoch, which illuminates how the levers of industrial policy, ie targeted state intervention, were used to protect or boost certain domestic industries, ultimately shaping their economies.   

Bairoch (1993)

The table above with data provided by Bairoch (1993) provides approximate average percentage levels of custom duties (tariffs) on manufactured goods, as a weighted percentage of value for specific nations during the early years of their industrialisation period. From the above, it is clearly evident that in the early 19th century, the United States of America and the United Kingdom had some of the most well-protected industries and economies, with tariff regimes which ranged from 35% to well over 50%. In line with above, a nation such as Belgium, despite having an average tariff rate of 9%-10% in the late 19th century, in reality, had tariffs as high as 60% and 80% for industries such as iron and textiles respectively. In the early 20th century, Italy had customs duties averaging 46% and Russia had duties averaging 84% in the same period. Similarly, Spain had tariffs averaging 63% in the early 20th century. Furthermore, the 'R' in the abovementioned table denotes the word, 'Restricted', meaning that highly restrictive import barriers existed, or that outright import bans were in place. Thus, calculating an average tariff rate in those years was not possible. This was the case for Austria, Japan, France, Russia, Spain and Sweden in the early 19 century. Therefore, it is evinced that protectionism was not the exception, but the norm, as a means to industrialise what are now developed nations today.

(Bairoch 1993)

The abovementioned trade policy remained in the aforementioned countries, all the way up until the second world war. After this point, it is only then that tariff rates started to decline. It was only in the 1970's that developed nations had tariff regimes which are similar to today's tariffs. Therefore, it is important to note that by the time that the relaxation of high tariff rates occurred, these nations were already well-off, having obtained decades, if not over a century of protection from international competition. In addition to a copious use of high tariffs, the range of industrial policy instruments was widened from the 1950s to the 1980s in nations such as Norway, France, Finland, Japan, Austria and Italy, strictly regulating foreign direct investment, in order to protect domestic industry. Japan and Finland in particular had highly regulated and restricted foreign direct investment up until the 1980s. In fact, it was not permissible without special government approval. The former-mentioned countries, bar Japan, used State Owned Enterprises in specific sectors at the time.

In an attempt to thresh out their economic vision for the future, Japan and France had indicative 5-year plans, pointing out which industries would be promoted, what type of support they would receive from the government, as well as how these priority industries would link or relate with other industries. Regional governments in Germany and Japan also used industrial policy to promote and support small enterprises. eg the Germans used publicly owned banks to provide affordable, long-term financing for SMMEs (Chang H-J 2019). There was also a synergy with local industry associations to supply inputs which are normally too expensive for individual firms eg research and development, worker training, and export marketing, which normally require large, fixed costs upfront, a notable barrier for small firms.  

The Role of the State

The United States of America, contrary to popular belief, actually had one of the world's strongest industrial policies, albeit it being called R & D Policy. As per Mazzucato (2011), although the level of technological innovation is critical for economic growth, there is no clear correlation between the size of companies, R & D spend, the number of patents and the level of innovation in an economy. However, what is unequivocal is that a requisite precursor for innovation to occur is a highly networked economy with dynamic feedback loops between individuals and organisations, in order to facilitate information  exchange and for its barriers to be broken, and for its horizons to be broadened ie what in literature is referred to as a ''national system of innovation''.  

At the forefront of knowledge, simply possessing a system of innovation is not enough. With time, more substantial or remarkable results can be achieved when the state is a significant, active participant within the system (Mazzucato 2011). The state can, through its different laboratories and agencies, be agile, utilising its commissioning, procurement and regulatory functions to steer or direct markets, and to propel technological advancement. Thus, it can be a protagonist for change in a networked system which already has the potential to spread new ideas rapidly. 

The Defence Advance Project Research Agency (DARPA) is a classic example of the similarity of the United States of America with other developed countries, with military involvement playing an important role in economic growth and development. In Germany, automobile maker Volkswagen was formed in 1937 as a state-owned company meant to meet the transportation needs of the German population. The Manhattan Project was a major scientific collaborative effort between the governments of the USA, Canada, and the UK, leading to the creation of the atomic bomb. The US experience in latter decades has been to apply lessons learnt in broader industrial policy. 

Contrary to the prominence given to Franklin D Roosevelt's New Deal as a turning point in US economic history by laissez-faire stalwarts, World War 2 became a period of great significance for development and innovation in the USA. It was after World War 2 that the Pentagon collaborated with other national security agencies such as the National Aeronautics and Space Agency (NASA) and the Atomic Energy Commission which then precipitated the development of technology such as jet planes, computers, biotechnology, civilian nuclear energy and lasers (Block 2008, Mazzucato 2011). This was championed by the Advanced Projects Research Agency (ARPA), a Pentagon-spawned office in 1958.

Established with the aim of giving the US supremacy in certain industries or sectors, DARPA has a budget of over $3 billion US per annum, 240 staff members and variable or limited overheads. It has successfully managed to recruit skilled programme managers who have the license and willingness to take risks. The formation of DARPA also led to a portion of US military R & D spend being allocated for 'blue sky thinking' ie, ideas which went beyond normal time horizons, and might not achieve results in 10 or 20 years. Consequently, DARPA's mandate allowed it to prioritise the propagation of innovative technological development with nuanced strategies. 

Such is the history of industrial policy in what are now developed countries. Targeted state intervention through protectionism was a mainstay during the early years of their industrialisation. Following this, there were specific measures which provided targeted support, further fostering the growth and development of certain sectors and industries. It is difficult to imagine what might have been of Silicon Valley and other conglomerates today, were it not for the decisive role of the state.