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Friday, July 9, 2010

Bad Samaritans

When I was nineteen years old, I became a confirmed believer in free trade (Yes, I was a wild young man!). The concept, in brief, is that our economy and our newly emerging global marketplace should produce the greatest good to the maximum number of people. If each nation on earth can do what it does most efficiently and sell it without restriction anywhere, then prices are lower and a large number of people benefit. Frederic Bastiat, a 19th century French economist, converted me with his withering attacks on tariffs between nations. He remains the wittiest economist that I have ever read. Admittedly, Bastiat was not in a very competitive race on economic humor. His main talent was firing some acidic ridicule at those putting up trade barriers.

In recent years I have developed the habit of reading extensively in areas that challenge my long held beliefs. It is a marvelous exercise as it makes you re-think all of your assumptions. Most of the time, I stick to my beliefs but such reading often raise some doubts or I find different shades of gray creeping into my thinking. This happened a few weeks ago, when I read “Bad Samaritans, The Myth of Free Trade and the Secret History of Capitalism.” It was authored by Ha-Joon Chang, a long time development economist at Cambridge University and native of Korea.

Chang brings many fascinating anecdotes into his story and, for the first time, provides hard historical data surrounding the success of countries and their position on free trade. As you might expect, the success does not all center around the presence of free trade. One example is Finland which had the distinction of keeping foreign ownership and trade at lower levels than any other western democracy. There was a Finnish “conglomerate” that was struggling with particular weakness in its electronics division. The government propped it up and, over time, the electronics division turned around. That company is now Nokia and most of us, according to Chang, would place it in a globalization Hall of Fame.

A second example requires extensive quoting from the book itself: “The leading car maker of a developing company exported its first passenger cars to the U.S. Up to that day, the company had only made shoddy products—poor copies of quality products made by richer countries. The car was nothing too sophisticated—just a cheap subcompact. But it was a big moment for the country and its exporters felt proud.”

“Unfortunately, the product failed. The car had to be withdrawn from the US market. This disaster led to a major debate among the country’s citizens. …..If the company could not make good cars after 25 years of trying, they should go back to their original business of making simple textile machinery. The government had ensured profits for them by high tariffs and draconian controls on foreign investment in their car industry.”

“Others disagreed…. And argued that no country had got anywhere without developing “serious” industries like automobile production. The year was 1958 and the country was Japan. The company was Toyota.”

Chang’s point is that in developing countries emerging companies are a bit like children. They need to be nurtured, encouraged, and protected before they can stand on their own in a global marketplace. Both Nokia and Toyota would have been shut down early had their governments had a Darwinian “survival of the fittest” mentality along with a pure free trade approach.

He posits that free trade often helps rich countries and brings poor ones along very slowly with low paid and underage workers making products for wealthy (Western) consumption. One could argue that for many factory jobs are a way to survive but, to most of you, child labor is quite odious. Also, only Holland has had pure free trade over the last two hundred years. The United States really was not into it in a big way until the Eisenhower era in the 1950’s and then embracing NAFTA in the mid-1990’s.

Also, Chang raises some fascinating ideas about graft. He cites how two countries in the 1960’s, Indonesia and Zaire (now the Democratic Republic of the Congo) were arguably the most corrupt places on earth. Thirty years later, the Suharto family in Indonesia had stolen between $15-35 billion from the people. Over that time, living standards rose by 300%. In Zaire, strongman Mobuto stole approximately $5 billion. When he was tossed out in 1997, per capita income was one third of what it was when he seized power. So, corruption is not always a fair indicator of holding back economic success.

He gives no credit to linking the work ethic of a people and success which I find troubling. There is no mention of two amazing success stories—Switzerland and Hong Kong. The Swiss have no natural resources to speak of; not even a coal mine. Yet they have one of the highest standards of living on the globe due to a stable government that steers clear of foreign entanglements, hard working people who are very well educated and devoted to free enterprise and who today, have vast technical knowledge in a wide variety of fields.

Hong Kong may be more amazing. A tiny enclave of only 33 square miles, it has over 6 million people and even has to import all of its water. Today, only Japan has a higher per capita income in Asia than Hong Kong. How did they do it? Most observers would agree that it is the entrepreneurial spirit of its citizens and its ability to trade goods and services freely across the entire world.

“Bad Samaritans” will make you think. It is the kind of book that you wrestle with as you work you way through. I do not agree with all of it but it well worth you time.

The moral of all of this is to sometimes step out of your comfort zone. If you challenge long held beliefs, you may become a better marketer and a more understanding professional.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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