Richard Fisher recently indicated that he was a fan of Ha-Joon Chang. He specifically cited this interview of Chang in the Financial Times:
Park Chung-hee had recently seized power in a military coup. Korea established a steel industry, a seemingly eccentric choice for a country without iron ore (it had to import it from Australia and Canada) or coking coal. Yet steel became a foundation of Korea’s industrial success. Chang believes that Park, though a dictator, made some smart choices and that the only countries to have prospered are those that ignored the siren call of free markets and comparative advantage – the idea that you stick to growing bananas if you’re a tropical island – and planned their escape from poverty.
I always found these statements to be rather annoying. One could also say that the only countries to have prospered were those that adopted free market policies. Indeed that statement would probably be more accurate, as economic prosperity is highly correlated with ranking on any free market index you choose. Of course all countries plan to some extent, so Chang’s statement is true, but uninteresting.
His studies consolidated his thinking. Countries, he argued, needed to develop their capabilities, just as a child’s potential is stretched in school. In 1955, for example, when General Motors alone was producing 3.5m cars, Japan had 11 or 12 manufacturers collectively producing 70,000. “From the short-term point of view, it was madness for Japan to try to develop an auto industry,” he says. “Except that the Japanese realised, ‘We will get nowhere if we stick to what we are already good at, like silk.’ ”
So is the success of the Japanese auto industry due to planning? Well planning did occur, and the industry did become successful. For some people that constitutes a sort of proof. Like those who argue that Germany and Japan became rich because they lost WWII. How can you argue with that? On the other hand correlation doesn’t prove causation. Here’s how MITI planned the success of Honda, which was a motorcycle maker back in the 1950s:
Honda branched out into other industries in the late 1950s. In 1958 he brought out a successful electric generator, but, more important, considered entry into the automobile industry.
This was a time when the powerful Ministry of Trade and Industry (MITI) was trying to unite several small companies into a third large one to compete with Toyota and Nissan. MITI and the Department of Transportation tried to dissuade Honda from adding to the number of companies, but he persisted. The government and he were at odds ever thereafter. “Probably I would have been even more successful had we not had MITI, ” he said. “MITI was incapable of making automobiles, but I was.”
So was Honda a huge success because of wise planning at MITI? Or despite that planning? When I look around the world I see zero evidence that planning is necessary for development. Hong Kong became even richer than South Korea with a fairly low level of planning. Again, every country plans to some extent, so I’m not saying that Chang is wrong. Just that his observation is rather vacuous.
PS. Last time I looked Japan had 9 carmakers. Perhaps a few have dropped out since, but their huge success in the 1970s and 1980s occurred without the sort of consolidation that MITI preferred. Markets made Japan rich, and planning kept them at only 75% of US GDP/person, not the 100% that Hong Kong has achieved.
PPS. I very much like this comment by Chang:
“Unfortunately, a lot of economists wanted to make their subject a science. So the more what you do resembles physics or chemistry the more credible you become. The economics profession is like the Catholic clergy. In the old days, they refused to translate the Bible, so unless you knew Latin you couldn’t read it. Today, unless you are good at maths and statistics, you cannot penetrate the economic literature.”
And this one too:
“I was not trying to dismiss the importance of the internet revolution but I think its importance has been exaggerated partly because people who write about these things are usually middle-aged men who have never used a washing machine,” he replies. “It’s human nature to think that the changes you are living through are the most momentous, but you need to put these things into perspective. I brought up the washing machine to highlight the fact that even the humblest thing can have huge consequences. The washing machine, piped gas, running water and all these mundane household technologies enabled women to enter the labour market, which then meant that they had fewer children, had them later, invested more in each of them, especially female children. That changed their bargaining positions within the household and in wider society, giving women votes and endless changes. It has transformed the way we live.”