An Interview with South Korean Economist Ha-Joon Chang:
Nestled amongst the leafy streets of Cambridge is the University’s Economics faculty. This, unassuming 1960s building, plays host to one of the world’s leading development economists: Ha-Joon Chang. An international best selling author, Chang is no stranger to controversy, he is known for his critical analysis of economic orthodoxy and draws upon economic history in much of his work. His most recent book “23 things they don’t tell you about capitalism” gallantly contributes to the ongoing critique surrounding our global economic system. In 2005 the South Korean born economist was awarded the Wassily Leontief prize for Advancing the Frontier of Economic Thought for his book “Kicking Away the Ladder”. I enter his office, quaint and amassed with books. His manner, affable and upbeat, we begin.
You co-wrote a paper entitled “Industrial Policy and the Role of the State in Egypt” which outlined an alternative development policy, comparing Egypt to the East Asian experience, can you tell us a little about your vision at the time?
“We wrote it in 1995/4, it was a time when they [the IMF] were accelerating liberalization and privatization. We felt that in a relatively closed economy like what Egypt was before, liberalizing and opening can bring some benefits because you have more competition and foreign exchanges and so on. But we were worried that this brought, at best, short-term benefits. You really need a long-term strategy to take your country to another level. Back in the early 60s Korea and Egypt had similar levels of income, two of the poorest countries in the world. Today Egypt still is a poor country, with a per capita income of $2000 compared to South Korea’s $20,000. So, what happened during those 50 years that made such a huge a difference is an important question. Of course, there were problems with the earlier economic strategy under Nasser. In my view, it was too closed – but, liberalising everything without any strategy and privatising, without any clear view of what should be done was not a very promising strategy. Unfortunately we have been proven right in that sense because they’ve done a lot of things since the 90s, but where did it end up?”
The IMF recognises that, although growth rates remained stable after further economic reforms in 2004, and, during the world financial crisis, unemployment and poverty persisted…
“To me, it is basically the lack of a coherent growth strategy, especially the lack of a coherent industrial policy, that has led to this situation. Egypt is not one of those very poor African countries where they start with 7 people with university degrees in the whole country or with a literacy rate of 20%. You know, it was, still is, a country with a long tradition of education and high quality human capital, you have world class people with degrees in engineering and economics and so on. It’s not because they started with such poor conditions that they couldn’t do what South Korea did. There were probably a lot of people in the 60s that thought that Egypt had better prospects than South Korea.”
There is much talk, including from the IMF, about Egypt’s mounting budget deficit. Now, looking at Greece, how likely are we to see European style spending cuts and austerity?
“Worrying, isn’t it. I mean in Europe as well. What people need to see is that a budget deficit has two elements; it is a gap between your spending and your revenue. So, why can’t you reduce it by increasing your revenue? The best way to do it is by generating growth. This is the critical failure of so-called austerity economics, they only look at one side of the equation, they have to look at the other part. Very often when you have a large budget deficit problem like in Greece, actually cutting spending might reduce your revenue - in the sense that it kills your growth and reduces tax revenue. It reduces the yearly budget deficit a bit, but, in the long run, since you’re not growing and all these debts are collecting interest, your debt to GDP ratio might actually rise - which has happened in Greece. Egypt should take this as an important lesson. I don’t know what the current thinking of the IMF about Egypt is; do you know what they say?”
They say that Egypt would have to reduce its budget deficit and do that by implementing VAT and a one off sales tax…
“Well yeah raising tax is an option. But the problem with VAT is that it is actually quite costly to administer because you need all the receipts, and who issues receipts in Egypt apart from the largest firms? It is a common problem in developing countries…”
Because they have a large informal sector…
“That’s right – it’s difficult to implement. They need to find some other way, implementing VAT can help but it will not be the main solution. More importantly once again look at the denominator, how do you increase growth and so on. Also, this idea that somehow the budget should be balanced every year is quite idiotic. Because, if you balance your budget every year, why not every quarter, every month or every day? That is absurd. You want to balance your budget over economic cycles.”
In your work, you draw many lessons from economic history, particularly with regards to protectionism. Egypt lost its competitive edge in the production of cotton partly due to global prices that were brought down by huge subsidies given to American cotton farmers…
“Yes. I still remember, 6 or 7 years ago, I was in a meeting organised by former US president Jimmy Carter. He said his neighbour was a cotton farmer - he himself used to be a peanut farmer – but, this guy, the previous year, got $1 million just for subsidies. In situations like this, how do you compete? But, the more important point is that Egypt, yes, has one of the best quality cottons, but they somehow fail to make the best clothes or fashion. They need to find a way to add value to their cotton, especially when they already have that reputation of “the best cotton in the world”. Why not try to build a series of industries from cotton textile to fashion industry?”
Would that kind of industry model work well for Egypt? They have a lot of micro enterprises but these don’t seem to have linkages to medium and large firms…
“Yes, that’s the trouble with micro farms, they might do some interesting things but the trouble is entering, especially entering markets that will give them good value for their products, particularly export markets, is very costly. They need to work with bigger firms to be able to export for example, or to engage in research and development. This is how all the small firms, producing furniture and designer clothes in Italy, have developed. Something like agricultural co-operatives, that are independent companies, who pool some amount of resources to have this co-operative organisation engaged in export marketing, market research, a bit of R&D and so on.
In the end, these micro enterprises – most of which are just survivor strategies - need to be upgraded if they are going to become the source of productive growth. To put it bluntly, what in the end distinguishes countries like Vietnam or Ecuador from say Germany or the US, is not that Germans have more people with Engineering degrees and the Americans have more Phds. But that, the Germans have their Volkswagen and Benz, and Americans have Boeing. It’s not enough to have this raw entrepreneurial energy, which is being exploited, both in a good and bad sense, through this micro enterprise system. They need more than that, they need a bigger economic system to work and upgrade them.”
Do you think this is currently achievable given the current economic climate and restrictions by the IMF on economic policy and so on?
“It’s tough, but it’s not as though there were no restrictions in the 1960s and 70s when countries like South Korea were trying to do this. But yes, there are more restrictions on what kind of subsidies you can use and what kind of protectionist policies you can use, so it’s tougher. On the other hand, you now have more experiences to learn from because you’re starting late.
One point that I may emphasise in this context is that they really need to look at other experiences. As I keep telling my students, life is often stranger than fiction. Think about Singapore, if you read things like the Economist magazine or the Wall Street Journal you would think that it is a model free market and free trade economy. Of course it has free market and free trade, but, you will be surprised to know that all the land is owned by the government, 85% of housing is provided by a government owned housing company, and something like 22% of GDP is produced by state owned enterprises. So I tell my students, look, if someone told you to invent a well working economic system on the basis of an economic theory, whether it’s Neo-Classical, Keynesian or Marxist. You would never be able to invent something like Singapore, because it combines elements of Marxist thinking with the most extreme free market thinking, so, what is it?
My worry is, that in countries like Egypt, with this new transition, there is a degree of impatience internally, and also, of jerking from the outside to basically capture the country before it finds its own direction. The Egyptians need to sit together, study some of these experiences and decide what direction they want to take and where they can learn lessons. Sorting this out might take two or three years, but what is two or three years compared to the next two or three centuries? Otherwise, the IMF will carry on its usual strategy and what has that given Egypt in the last 20 years? Nothing.”
Egypt is still in the process of transition and the future seems uncertain. What advice would you give to the many young people hoping for a better future?
“Well, the youth of Egypt have made this big achievement of bringing democracy to the country, so first of all Kudos to them. Now they have an even bigger task of taking the country to another level. But, you know, if you could kick out Mubarak, I’m sure that you can do a lot more! I think that the young people need to be patient, not in the sense of putting up with unemployment for years, but in the sense of really thinking through these strategies and trying to come up with a consensus behind it. I was like that too, when you’re young every month counts! But, in the grand scheme of things, it’s better to do it one year later than doing it in a rush and botching it up.”