Free Market and Free Trade Policies- Are they right for developing countries?
In reviewing Africa’s inherited capitalism model, there is a need to re-examine some of the popular narratives about how countries like Britain and the US developed, as well as the role their governments play in their economies especially in times of crises.
In the first place, the idea that these countries became economically strong because of free market ideology and free trade economic policies could be considered as somewhat misleading. Misleading especially for developing countries because these two concepts or ideologies seem to be models they are unwittingly following without bearing in mind that their contexts are far different from those of the advanced economies.
Free market simply put, is government not interfering in the interaction between buyers and sellers in an economy as they interact with one another and as prices are set through demand and supply of goods and services.
Free market ideology goes on to tell us that people should be left to choose and that government getting involved will affect the flow of resources and people’s needs won’t be met.
Obviously, different markets have different sets of rules and conditions put in place by governments, so perhaps the word free should be removed from markets as the Economist, Ha-Joon Chang suggested in a YouTube interview, averring that free market is in fact a myth!
Additionally, free market economists advocate privatisation of government-owned firms and reduced government spending especially in recessions. Although, following the 2008 financial crisis, the UK, US and EU governments stepped in to stimulate their economies by rescuing banks and increasing government spending, in line with the teachings of the British Economist, John Maynard Keynes, who was considered revolutionary in the 1930s because he advocated government spending in economic down times, unlike free market economists, who advise that the market be left to correct itself.
The so-called rescue or stimulus packages allowed these countries to bounce back swiftly between 2008 and 2009. Incredibly, these packages also involved monies that were given to the reckless banks involved in value-extracting activities, without conditions. These bank’s received free money from their governments despite the fact that they were heavily involved in the sale of bad mortgages to back their numerous derivatives! Yet, the International agencies routinely place stringent conditions on developing countries before giving them loans. For example, in the 1980s developing countries were made to implement free market policies, in the form of Structural Adjustment Programmes (SAP), despite having fragile and weak industries.
SAP involves countries following free market regimes -by governments selling state-owned businesses to private individuals; removing regulations to attract investments from foreign investors; and reducing government spending on things like education and health. These policies were imposed on countries like Nigeria, which have left them struggling with underdevelopment to date! Granted, some growth has taken place in Nigeria, mostly due to foreign investors, but its manufacturing sector today is still grossly underdeveloped because it has been largely left to the private sector, following the dictates of free market.
President Trump’s protectionist chants makes one think about free trade policies. Free trade is all about a country allowing goods to be imported from abroad without imposing tariffs, taxes or duties. Going back in history, that Britain and US imposed tariffs on imported goods at the developing stages of their history through protectionist policies.
It is interesting to learn that America, before its independence, was actually rebelling against its colonial master, Britain, who had also practised infant industry protectionism in its woollen industry, which was at its infancy stage in the mid eighteenth century, when it felt threatened by Belgium and the Netherlands. Protectionism actually allowed Britain to build its supremacy leading to its industrial revolution (1760-1840) and it also helped the Asian Tigers (Hong Kong, South Korea, Singapore and Taiwan) to build their industries.
America seems to see the merit in protecting their industries by advocating high tariffs on billions of dollars’ worth of goods from the EU, Canada, and China, as was the case in early days America. On the other hand, developing countries are often directed to employ free trade policies by Western institutions. This has left many of their local industries crippled because they have been cannibalised by imported foreign goods.
In his article , free trade supporter, Arvind Panagariya, claims that growth from protectionism is a myth. Still, the fact remains that developed countries, initially, insulated their infant industries prior to opening up their markets and as such one can only agree with Ha-Joon Chang’s article titled- Only Protection Can Build Developing Economies.
With this in mind, developing countries, especially in sub-Saharan Africa, need to stop copying and pasting western policies and start cultivating their own economic models, starting with implementing policies to shield their local industries. Also, with the onset of Brexit, African Union members should engage in more trade with each other and collectively bargain with rich nations for favourable terms for growth, because economics is fundamentally political.Business Day Publication