The China-Pakistan Economic Corridor: Free Trade or Protectionist Policies?

China is seeking to invest $46 billion in Pakistan. Intuitively this may seem like a good idea, however, by applying Ha Joon Chang’s ideas, Asad Abbasi believes we should re-consider the supposed virtues that this foreign investment will bring to Pakistan.

In Pakistan, the China Pakistan Economic Corridor (CPEC) is seen as the next big thing.  It is seen as a developmental messiah that will take Pakistan towards a modernized and developed state. A reading of Ha Joon Chang’s Kicking Away the Ladder suggests that Pakistan should concentrate on building its industries if it wants to develop. Without industries, no country can develop.

CPEC has generated much enthusiasm in Pakistan. China is investing around $46 billion dollars in Pakistan. The energy sector will get approximately seventy five percent of the investment. Approximately twenty   five   percent will be allocated to the transport sector. The remainder will be invested into fiber optic and improvement of the Gwadar Port.

The exact details of the plan are not available but political opinion is seething with optimism: From the Prime Minister’s perpetual support for CPEC to the Army Chief’s vow to protect this project ‘at all costs’. It is no doubt that CPEC has political connotations but does it make economic and, more specifically, developmental sense?

A consortium of 35 Chinese companies were formed that will be investing in Pakistan. If Chinese firms and corporations will be investing in Pakistan then, theoretically speaking, it should pose no developmental problem. Open borders should benefit everyone. Ha Joon Chang would argue the contrary.

Chang’s Argument

In Kicking Away the Ladder, Ha Joon Chang looks at historical evidence and finds that countries develop by protecting their industries. Chang prescribes similar policies to developing countries. Protect industries now, free trade later. Free trade policies were successful, Chang argues, when countries were already developed.

Chang, I felt, is giving parenting advice: care for them at first, give them all the help you possibly can and when you feel confident and when they feel confident, let them compete with the world.

Jose Camoes Silva/Creative Common License

Jose Camoes Silva/Creative Common License

 

Only by protecting industries can a developing country prosper. Letting
developing countries grow, according to Chang, is beneficial to all. In the long run this ‘will bring greater benefits to the developed countries as well.’ The policy recommendation for development is simple— to protect the infant industries and focus on growth.

A Game of Ladder

The name of this book comes from Friedrich List’s observation. Writing in the 19th century, List observed that old economies achieved success in ways different from what they preached to the new economies.  List writes, “someone who attains greatness kicks away the ladder so others cannot pursuit them easily”. With new historical evidence, Chang shows that List’s observation is even truer for our contemporary time.  All the developed countries achieved growth by protecting their industries and now they have become fervent preachers of free trade.

Key Concept

The policies that helped now developed countries (NDC) to grow in 18th and 19th   centuries were strongly protectionist. The protectionist policies were unique, suited to the characteristics of each country. The policies included: “export subsidies, tariff rebates on inputs used for exports, conferring of monopoly rights, cartel arrangements, directed credits, investment planning, manpower planning, and research and development and promotion of institutions that allow public–private cooperation”.  When an industry matures, only then should countries opt to remove trade barriers and follow a free trade policy.

In the 18th and 19th centuries all the now developed economies (NDC) adopted infant industry promotion except Switzerland and the Netherlands (the Swiss and Dutch were already advanced economies in the 18th century and therefore could afford to have open trade policies). The economic corridor will not allow Pakistani industries the luxury of protectionism.

Growth and Development

The idea of protecting industries is just one part of Chang’s overall argument. In this book, you can discern between Chang’s view on development and Sen’s Development as Freedom. Whereas Sen argued for  freedom  to  be  soul  of  development  policy,  Chang  believes  that economic growth is the key ingredient for development. The developmental process is multi-dimensional, argues Chang, but without growth it is difficult to imagine any type of development.

Growth will be achieved only through protectionist policies— just like developed countries did in the past. Except, this time policies of developing countries have to be even more intensive to achieve any result. This is because gap between rich and poor countries is too large and only a very intense protectionist policy will have any effect.

Institutions and development

In Pakistan’s case, just protecting industries will not suffice. Corruption, tax evasion by individuals and corporations are few of the several economic issues that require robust regulations.

With development, Chang argues, governance and institutional issues will be resolved. According to Chang, institutions are not the engine of growth. Institutions as they are now defined were present, in a vague form, but took “decades if not centuries” to develop into useful parts of the economy. Improvement in democracy, bureaucracy, judiciary, property rights, corporate governance, financial institutions and welfare are few of the effects, and not causes, of developmental process. According to him, for generations, these institutions were ineffective and inefficient. These institutions became effective once a certain threshold of growth and industrialization was achieved.

This is still a big debate and counterpoint is provided by new institutionalist writers such as Douglass North, Acemoglu and Robinson and Timur Kuran.

Conclusion

CPEC is small part of ‘One Belt, One Road’ spanning across many geographical borders. Each country has to look at its developmental needs before evaluating the project. In Pakistan, CPEC, is only generating praise and euphoria but no critical discussion. When more details become public, a more comprehensive evaluation will also emerge. Chang’s Kicking Away the Ladder is a start of this critical evaluation.

Asad Abbasi has a Master’s degree in Political Economy of Late Development from the London School of Economics.


The views expressed in this article are those of the author and do not necessarily represent the views of Development in Action.

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