Ulysses S. Grant, the Civil War hero turned President, claimed during his stint in power that “within 200 years when America has gotten out of protection all that it can offer, it too will adopt free trade.” This statement which has a tang of defiance was directed towards the British who at that time, the late 19^th century, were pressing the Americans to adopt the tenets of free trade, a notion considered almost sacrosanct by the Western powers of today.

To some readers, this statement by a former President of the US might seem surprising, given that the present Western-dominated international institutions like the WTO so vehemently espouse free trade and the liberal world order, and tout it as the most sure and efficient path to prosperity. Such readers would be further surprised by being apprised of the fact that the US has been dubbed by an eminent economic historian, Paul Bairoch, as ‘the mother country and bastion of modern protectionism’.

So this begs the question, has the US, as the principal architect of the present global economic order represented by institutions like WTO and the IMF, historically been an exponent of protectionism, or, as is commonly believed, a votary of free trade? This in turn broaches the broader question of whether the developed world really followed the economic prescriptions during its earlier stages of development that it sermonises today to other nations?

The answers to these questions, which might be news for many readers, can be found if we rummage through the economic history of these nations.

The idea that free trade and the free market, that is the laissez faire economy, are certain recipes for economic success for developing nations seems to go against the grain of the history of economic evolution of the developed world. The 19^th century German economist, Friedrich List, known as the father of the infant industry argument, was amongst the first to point out this great chasm between what the rich nations proclaim, and the policies that they have historically adopted themselves.

In his seminal work, The National System of Political Economy, published in 1841, List argues that Britain, who in the late 1800s was ardently clamouring to nations around the globe to embrace the principles of free trade, was in fact, the first nation to perfect the art of infant industry protection.

In the beginning of the 16the century, Britain was still a backwater economy relying primarily on the export of raw wool and low value added wool cloth. The Low Countries such as Ghent, Burges and Flanders, were by comparison significantly ahead in terms of wool production technology and produced much higher value-added products. Consequently, the wool manufacturing industry, Europe’s most high-tech industry at the time, was firmly rooted in that region. Daniel Defoe, known mostly for writing the much celebrated novel Robinson Crusoe, was also the author of a very insightful work of non-fiction by the appellation of A Plan for English Commerce, published in 1728. In it he traces the economic policies of the Tudor Monarchy which were implemented with the intention of developing England’s woollen manufacturing industry.

Beginning with Henry VII and further entrenched by Elizabeth I, these policies included, inter alia, poaching of skilled workers from the Low Countries, industrial espionage in order to import the latest wool production technologies, increasing tariffs and eventually completely banning the export of raw wool and unfinished wool cloth below a certain market value in order to provide cheap inputs to local industry. The competing manufacturers on being deprived of the necessary stream of raw materials from Britain were eventually driven to ruin. On the other hand, by the end of the 17^th century, textile exports accounted for around half of Britain’s revenues.

In a similar vein, Robert Walpole, often dubbed as Britain’s ‘first Prime Minister’, who is recorded to have stated to the Parliament that “it is evident that nothing so much contributes to promote the public well-being as the exportation of manufactured goods,” introduced in 1721 a number of economic policies aimed at bolstering local manufacturers. These well-thought out measures included lowering of duties on import of raw materials, considerably increasing duties on foreign manufactured goods, abolishing export duties on most local manufactured goods, providing extensive ‘bounties’, that is subsidies, to key manufacturing sectors, and lastly the introduction of regulations for ensuring the quality of products for protecting the reputation of British goods and making certain their effective competitiveness in the international market.

As will be explained later, these policies are uncannily similar to those adopted by East Asian nations in the 20^th century during the phase of their spectacular economic rise. It was only around the 1850s, especially after the Cobden-Chevalier treaty, when British manufacturers were firmly positioned well ahead of their competitors in terms of productivity and technological capabilities, that Britain truly adopted free trade principles and emphatically urged the international community to follow suit.

As has been hinted earlier, the Americans flatly refused to comply with Britain’s demands of espousing free trade, choosing instead to adopt their own set of policies with the objective of developing their burgeoning local manufacturing industry. The man who initially provided the blueprint for the American economic system is someone who was recently dubbed by the New York Historical Society as “The man who made modern America” and who appears on the $10 bill even though he was never the President of the country. This man is none other than the Treasury Secretary of the US in 1789, Alexander Hamilton. In his Report on the Subject of Manufacturers which he presented to Congress in 1791, Hamilton expounded the policies which the fledgling agrarian nation in the nascent stages of economic development should pursue in order to develop its manufacturing industry; something he believed was imperative for ensuring the prosperity of the country.

In stark contrast, William Pitt, who served as Prime Minister of Britain, had exclaimed in 1770, that the “[New England] colonies should not be permitted to manufacture so much as a horseshoe.” In the report Hamilton coins the term ‘infant industry’ and advocates measures such as high protective tariff walls, import bans, rebates on industrial inputs, regulation of product standards, and development of financial and transportation infrastructure for promoting industry.

These policies were adhered to by the US to the hilt and average tariff rates in the 1800s were as high as 40 percent. In fact, it was this ‘American System’ which inspired Friedrich List in the formation of his political-economic views. Amongst the most zealous followers of this system in the years that followed after Hamilton were Henry Clay and Abraham Lincoln, and the civil war was as much about the emancipation as it was about the preservation of high tariff rates, which the industrialised North vigorously supported while the agrarian South fervently denounced and opposed. Protectionist policies in the US continued well into the 20^th century and served as a lodestar for other nations in the formation of their own economic policies.

The 20^th century saw the rise of East Asia’s ‘development state’ model, a term first used by economist Robert Wade. The economic catch-up model initially adopted by Japan was directly inspired by Friedrich List’s views and was squarely based on the American system as well as that of Friedrich List’s home country, Germany, which too had its history of policies to promote industry. The only difference between the policies and systems hitherto described and the policies of East Asia was that by the 20^th century the state apparatus had become much more powerful and centralized than ever before and this allowed the East Asian states to adopt even more extensive dirigiste policies for promoting and galvanising the process of industrialisation.

Like Frederick the Great of Prussia who set up ‘model factories’ in the 18^th century, the state machinery of Japan and later other East Asian nations set up large-scale heavy as well as light manufacturing industries, that were later privatised but remained heavily subsidised for considerable periods of time. Indeed, many of the world’s most successful companies started off as SOEs. POSCO (steel), Renault (automobiles), Alcatel (telecommunications), Usinor (steel; later merged with ArcelorMittal), EMBRAER (third largest aircraft manufacturer – a classic case of national drive to achieve excellence in a particular industry), to mention a few, all had their beginnings as SOEs, but are now partially or fully privatised.

Many industries in East Asian states followed a similar path. This was done not to supersede or replace, but to kick-start capitalism. As one Taiwanese official put it, the government is not to build ‘greenhouses’ of its own; it could sow the seeds and nurture the sprouts but the companies needed to be planted firmly in the market. Private sector investors generally prefer short term gains and are averse to the idea of venturing into projects that are inherently risky, large scale, require massive importation of new technologies, and have long gestation periods.

Hence, the initiative to kick-start the process of setting up of such industries can be undertaken by the state, as was done in East Asia. The key is to hand over these SOEs at the right time (and consequently right price) when it is ready to take-off and flourish as a successful venture, as opposed to the ‘fire sales’ we often witness in the developing world.

Notwithstanding the aforementioned argument, SOEs were only a part of the larger strategy of the ‘development state’ model. Directions from state and its unswerving support were also granted directly to the private sector on a gargantuan scale. The state used tightly controlled central banks to deliberately keep interest rates low in order to subsidise borrowing for investments in industry and infrastructure.

Direct credit programmes ensure a reliable flow of cheap credit to key industries. This very often proved to be the lifeblood for industries ensuring their survival and eventual success. For instance, the textile machinery manufacturer, Toyoda Automatic Loom moved into automobile production in 1933. Despite the ousting of Ford and General Motors in 1939 by the Japanese government to reduce foreign competition, Toyota became bankrupt by 1949.

At this point, the central bank stepped in as the deus ex machina, and bailed out the company. Without the support of the central bank, Toyota would probably not exist today as a quintessential global model of success. There are numerous examples in the East Asian development saga of state controlled central banks, or commercial banks heavily under the influence of the state, pumping cheap credit into key industries earmarked by the government, almost preordaining their success. This is in direct contrast to the idea of completely autonomous central banks with the single point agenda of controlling inflation by ratcheting up interest rates, something that is so passionately supported by western institutions as a panacea for poorer nations.

East Asian nations also kept tight capital controls in order to prevent siphoning off of wealth and capital to investments abroad, instead compelling them to be reinvested and ploughed back into the domestic economy. This again is in direct opposition to the western institution’s demands of maintaining liberal and open capital markets. East Asia in fact defied all such policies collectively known as the ‘Washington consensus’ which is so avidly preached around the globe by the unholy trinity of the WTO, the World Bank, and the IMF. Instead, the governments of East Asia kept on using all the fiscal and monetary tools at their behest to invigorate and upgrade their ‘national champions’ that is, their model companies in certain key industries, until they succeeded.

Poor countries are primarily poor because they lack the machinery and technological capital of richer countries which makes productivity in the form of output per worker exponentially higher. Importing machinery and licencing foreign technology requires scarce foreign currency reserves. By utilising them in the most prudent manner, the East Asian states directed these valuable resources for the up-gradation of their key industries until these became capable enough to produce high export-grade quality products that could effectively compete in the international market. This, in turn, helped them earn more foreign exchange reserves whereby they could import even more technological capital leading to even more competitive and higher quality exports, hence, setting in motion a virtuous cycle.

East Asia chose to follow the advice of Friedrich List and refused to embrace the Washington Consensus, and in doing so it actually emulated and built upon the very strategies that were employed by the Western powers themselves when they were passing through similar stages of development in the past as explained above.

Friedrich List summed up this dichotomy between what the Western nations preach and what they actually did themselves in the following words, “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, in order to deprive others of the means of climbing up after him”. Free trade and the liberal market economy make a lot of sense between nations on a similar footing of technological capabilities and industrial development, but for catch-up economies history seems to offer a different lesson.

The writer is a graduate in Economics and Finance from Warwick Business School. He is currently working as a civil servant. He can be reached at moizagha70@gmail.com