Friday, August 01, 2008

Hari on economic history

Johann Hari has written a piece arguing for a global system of tariffs and trade barriers designed to protect emerging market economies. This might be considered a bit 'Forward to the 18th century comrades!' so in order to protect himself Hari has based his argument on the historical benefits that protectionism has given its proponents. And he's thrown a bit of a doozy. Leaving aside the tear-jerker intro about a poor little Peruvian girl who has to live by scavenging rubbish, Hari proposes that emerging markets should espouse protectionism and that those who propose free market economics are wrong.
To help Adelina [that poor little Peruvian], we need to start with a basic question: how do poor countries turn into rich countries? The institutions that dominate world trade – especially the World Trade Organisation (WTO) – have a simple answer: all markets, all the time. They tell poor countries to abolish all subsidies, protections and tariffs that protect their own goods. If you fling yourself naked at the global market, you will rise. If the poor countries disagree, they are cajoled to do as we say.
There's just one problem: every rich country got rich by ignoring the advice we now so aggressively offer. If we had listened to it, Britain would still be an agrarian economy manufacturing raw wool, and the US would be primarily farming cotton.
The historical heavy lifting is carried out by two case studies: Britain up until the nineteenth century, and South Korea after the Second World War. I'll address South Korea in a separate post, but I'm going to look at British history first - since I know what I'm talking about.
Until the Tudors, Britain was a backward rural country dependent on exporting raw wool. Turning that wool profitably into clothes happened elsewhere. Henry VII wanted Britain to catch up – so he set up manufacturing bases, and banned the export of wool, so clothes were manufactured here. It's called protectionism. His successors kept it up: by 1820, our average tariff rate was 50 per cent. Within a century, protected British industries had spurted ahead of their European competitors – so the walls could finally be dismantled.
This is joyfully, blissfully wrong in almost every particular. The English (Britain not of course existing save as a geographical abstraction until the 18th century) wool trade was indeed a profitable one, but the quality of English woollen cloth was famous from Roman times onwards. To state that all England exported was raw wool is absurd. To state that all clothing was manufactured overseas is ridiculous. It is certainly true that Henry VII significantly increased export tariffs on wool, but he did so largely because foreign demand for English wool was considered to be so high as to be virtually price inelastic. The tariffs were raised mainly in order to pay for the increase in the Royal Navy and the army. However, Henry VII banned the sale of wool only to the Netherlands - in 1494 - while England was at war with them. Indeed so much was there not a ban on the raw wool trade, that Henry's treaty with Florence creating a market for English wool is considered one of his greater achievements.
Apart from Hari's lack of knowledge on Tudor trade policy, he is right to describe medieval economic policy as based on protectionism. And also right to state that by 1820, average tariffs in Britain were 50%. But where he goes spectacularly, unbelievably wrong - so wrong that it is hard to believe that it is accidental - is his next sentence: Within a century, protected British industries had spurted ahead of their European competitors – so the walls could finally be dismantled.
What Hari has done, by jumping from 1820 to 1920, is miss out two coterminous periods: Britain's period of greatest growth in wealth and prosperity and Britain's adoption of free trade policies that made this growth happen. Turning from my poor analysis to one of the better British economic historians - Peter Cain - it is possible to see that British tariffs vanished almost entirely between 1846 (with the repeal of the Corn Laws) and 1860. The walls were pulled down some 20 years after Hari's airy 'within a hundred years'. To add a nice touch of irony, 100 years after Hari's start date, 1920, saw a time when free trade had lost its popularity in Britain, and there was a serious movement to re-impose protectionist barriers.
Now, simply because Hari isn't a historian, indeed wilfully misstates and misleads in his historical analysis, is not to say that his economics are wrong - but he should examine the principles of free trade a little more carefully before dismissing it as a rich man's argument against poor men. Gladstone was a free trader because he believed protectionism was an argument for special interests - the agricultural lobby, the industrial lobby and so on. I am painfully aware that, despite my pitiful A-level, I am not an economist. I'd like to think that I am an historian. It's pretty clear that Hari is neither.

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