 Foundation. And I would like to welcome you to the discussion of the new book by Dr. Ha-Jong Chong, Bad Samaritans, The Myth of Free Trade in the Secret History of Capitalism. Ha-Jong Chong has been described by one economist as the most exciting thinker our profession has turned out in the past 15 years. He teaches at Cambridge University where he received his master's degree and doctorate, a consultant for the World Bank, the Asian Development Bank, the UN, and other international organizations. He was awarded the Leontief Prize for advancing the frontiers of economic thought in 2005. His book Kicking Away the Ladder, Development Strategy and Historical Perspective, which received the Myrdal Prize, was acclaimed by the imminent MIT economist Charles Kindleberger as a, quote, provocative critique of mainstream economist sermons directed to developing countries. He is also a senior research associate at the Center for Economic and Policy Research, CEPR, a co-sponsor of this event with New America Today. Please join me in welcoming Dr. Ha-Jong Chong. Thank you, Mike, for that very generous introduction. Let me start my talk with a little story. In 1958, Japan tries to export its first passenger cars to the U.S. market. The company was Toyota, the car was called Toyo Pet. And as you can guess from the name, it was a very cheap, small, subcompact car, more of a four-wheel-sign and an ashtray kind of thing, which Toyota hoped rich American consumers could pick up as an afterthought after finishing their grocery shopping with the changes left. Unfortunately, it was a total flop. So much so that Toyota actually had to withdraw the product, and in the realm of failure, this is like the biggest thing, and it's not just not selling well, it had to be withdrawn from the market. And this provoked a very heated debate in Japan. The free trade economists centered around the Bank of Japan, the central bank, said, look, this is what happens when you go against the theory of comparative advantage. You know, in a country like Japan, which in relative terms has lots of labor and little capital, we shouldn't be producing things like motor cars, which are very capital-intensive in production. And of course, at the time, Japan's biggest export item was silk. So case proven already. And they said, and don't tell us that you couldn't succeed because you didn't have help. Because you had 25 years of very high tariff protection. We kicked out all the foreign car makers 20 years ago and didn't let any of them in since then. And back in 1949, the central bank even injected public money into Toyota to save it from bankruptcy. So please don't tell us that you couldn't succeed because you didn't have help because you had all the help you can ask for. Today, it sounds a bit strange that the Japanese were debating on whether to keep producing motor cars. It's a bit like the French having a national debate on whether to discontinue wine production or the Scots that are deciding whether to do away with the smoke salmon industry. But if you went back in time and thought about this from the vantage point of view of 1958, actually, I think the free trade economists made more sense. What was Japan? I mean, Japan's income was basically at the same level as that of South Africa and Argentina. In 1961, as late as 1961, Japan's per capita income was $402 in current terms and Chile's income was $378. It was a very poor country whose main export item was silk. Luckily for Japan and I would say for the rest of the world, which subsequently benefited from efficient Japanese cars, the protectionists one the day and the Japanese government continued with the support for the industry and, as you all know, the rest is history. So when you meet a free trade economist next time, ask him what car he drives. If he drives a Toyota or for them at any other Japanese car, he doesn't know what he's talking about. Now, it gets better because the ironic thing is that half a century after this Toyota debacle, Toyota's luxury brand, the Lexus, has become something of an icon for free market globalization thanks to the American journalist Thomas Friedman. Well, some of you, at least, must have read this book, the Lexus and the Olive Tree. Quite a wacky title. I mean, I like wacky titles, so no problem there. But for those who haven't read this book, the title remains a complete mystery. So let me explain why he calls it that. You know, he, at the beginning of this book, he says, I went to Japan in 93 or somewhere around the time, and I went to visit the Toyota factory that manufactures the luxury brand, the Lexus. And I was bowled over. This factory was so efficient, so clean, so quiet, so everything. I saw the future. And then he said that he continues on my way back from the factory to my hotel in Tokyo, riding on the famous Japanese Shinkansen bullie train, eating my sushi bento lunch. I was reading the International Herald Tribune and come across yet another article about killings in the Middle East. And then here's an epiphany. He says, then it really hit me. You know, half the world is either making things like the Lexus or at least trying to earn money to buy things like the Lexus. And the other half is stuck in the past. I mean, these people in the Middle East are fighting over who owns which olive tree. These people should wake up. There's a whole new world out there. Well, to be fair to him, I mean, he says that this olive tree world could exist with the Lexus world in the same country, in the same person and so on. So I mean, I don't want to be unfair to him. But basically his message is that these countries who live in the olive tree world need to wake up, put on what he calls the golden straight jacket, basically a set of pro-market neoliberal policies made of tough control on government spending and inflation, liberalized international trade and investment, privatization of state-owned industries and state pensions and so on. And he says, this is the only way to survive. I'm sorry if this golden straight jacket isn't comfortable. But unfortunately, this is the only model that is available in this historical season. And later in the book, he also talks about in the ice cream shop there being no more mint chocolate chip and there's only one flavor that is vanilla. Tough if you don't like it, but that's the only flavor of ice cream that you are going to get. So this is very much in line with the former British prime minister, Mrs. Thatcher's Tina argument. When she was in the early days of a rule attacked by her critics, her response was, Tina, which was, there is no alternative. Now, the crazy thing is go back to the earlier Toyo pet example. When you think about that, basically if Japan followed Friedman's kind of advice in the 1950s, 1960s, the Japanese would not be exporting the Lexus because Toyota probably would have been either wiped out or more likely taken over by General Motors and made into some secondary producer. They won't be exporting the Lexus, but they'll be still fighting over who owns which mulberry tree, the tree that feeds the silkworms. This is so crazy. It's a bit like someone writing a book on self-made men and then the first chapter is Henry Ford II. I can give you any number of example like this from Japan, from Korea, and so on. And people immediately say, yeah, well, okay, well, I mean, in the old days, some people thought even Japan, Korea, and so on, all developed on the basis of free market. But now, I mean, at least that is admitted, but the usual response is, okay, I mean, there are one or two countries out there who did it differently from free market orthodoxy. But all the other countries that did it through free trade and free market. And what makes you think that today's developing countries can defy this historical regularity? My answer to that is, well, actually, the historical regularity happens to be the almost exact opposite of what you think it was, because in the current conventional wisdom, up to 30 rich countries, maybe there are two, three countries, Japan and Korea, certainly maybe Taiwan, which succeeded through protectionism, subsidies, and other government intervention. And all the other countries developed on the basis of free trade and free market. The book and my other work show that actually is almost the exact opposite. There are two or three countries, the Netherlands, Hong Kong, and Switzerland, until the First World War, who developed on the basis of free trade policy, but the rest used the so-called heterodox policies based on protectionism, subsidies, and other allegedly bad ideas. And what is even more interesting is that the first person who actually invented this theory of so-called infant industry promotion, the idea that relatively backward economists need to protect and nurture their industries before they open the border and engage in full competition with more advanced producers from abroad, was invented by someone who used to live here, Alexander Hamilton. Well, you must have seen this guy thousands of times. You probably didn't quite know why he was there. Okay, he wrote those Federalist papers, but what is so great about him, what is great about him is that he actually is the architect of modern American economy. Let me tell you about this a bit. Hamilton becomes the Treasury Secretary or what would be called the Finance Minister in other countries in 1789 at the outrageously young age of 33. And two years later, he submits this report to the U.S. Congress where he advances this theory of infant industry promotion. And this wasn't actually just about tariffs, as people typically think. If you have a chance, please go and read it, because it is a very comprehensive and very theoretically sophisticated, well, the languages of it are cake, but theoretically very sophisticated industrial development plan. So he not only talked about tariffs, he also talked about the development banking system. Thomas Jefferson used to think that banks were vehicles of exploitation. He was against the banking system. He was arguing for the development of the pattern system, government bond market, investment in infrastructure, education. This was a very modern industrial development plan. And the idea at the core of it is that you need to build up capabilities before you join the international competition. In the book, I explained this idea with this little story. I have a little son who is well written up as a 60-year-old boy in the book, but these children have this annoying habit of growing up. So he's now almost eight, but the point still remains. He's a total sponsor. I pay for his room, food, education, healthcare. And do you know how much those Nintendo game packs cost? So I got thinking. I got thinking and told myself, look, actually, there's no reason why this guy shouldn't be working. I mean, you go to Pakistan, you go to Ecuador. There are children working from the age of four or five. So if I send him into the labor market, I can not only save on all these costs, he will possibly bring in more money. And most importantly, it will whip him into productive attitude. Competition is good. You need to give this guy the incentive to remain efficient. Of course, I don't do this because he's quite a clever kid. So if I finance him for another 12, 15 years, God knows what he might become. I mean, nuclear physicist, brain surgeon. And even from my purely selfish material point of view, it would be much better if I actually signed a contract with him, saying that my father will finance my education. And when I begin to earn money, I'll give him half my earning. Because if I push him into the labor market today, what's he going to become? Well, he'll of course start as a shoeshine boy and possibly graduating into a quite prosperous owner over, I don't know, the street stall selling chicken satay. But it's very unlikely that he'll be a brain surgeon. Anyway, you get the idea. So Hamilton argues for this. And what she, because in arguing for this policy, he was going directly against the world's greatest economist at the time. What is that thing doing? Anyway, that in the pages of body wealth of nations, Adam Smith argued explicitly against the USA trying to develop manufacturing. He said, don't do this. This is actually bad for you. Of course, this is exactly what the IMF and the World Bank tell the developing country. Don't do this. Don't protect your economy because it's bad for you. And what impudence. I mean, this guy never studied economics. He had a liberal arts degree from what then was considered a second-rate college called King's College of New York. Do you know what that place is called today? That's right, Columbia University. But it wasn't such a good college, apparently, at the time. And he studied, well, I mean, what I would call more of a dog's breakfast kind of degree because he did a bit of anatomy, a bit of Latin, a bit of mathematics, and no economics. But he had the guts to say the world's greatest economists, well, thank you, but no thank you. I know what is good for my own country. And of course, other Americans are totally impressed. I mean, especially his arch enemy, Thomas Jefferson and his friends argued, look, I mean, this guy's being ridiculous. Why should we finance all these inefficient young producers when we could sell our tobacco and cotton to Europe and import things that are much better and much cheaper? So initially, his ideas were rejected. And, well, I mean, it was accepted in a very lucrative way. So the Congress granted a bit of a rise in the tariffs, but that was about it. And unfortunately, Hamilton was at the killed in a duel in 1804. He was shot dead by the serving vice president called Aaron Burr, who used to be his friend, but turned enemy. You know, that was a wild time. I mean, the serving vice president choose the ex-finance minister dead and no one goes to prison. So unfortunately, Hamilton doesn't see the realization of his proposal. But from after the Anglo-American War of 1812 to 16, US starts to move towards protectionism. And by the 1830s, it establishes that little box is quite annoying. But yeah, the first column is 1820. From about 1830s, it basically establishes itself as the most protectionist economy in the world and continues with that position until the end of the Second World War. Now, some of you might be saying, hang on a second, that guy only has about 15 countries in the table and he talks about the world. But when it comes to tariff, this was actually about the whole world because during much of this period, most countries that do not appear in these table or colonists and therefore didn't have tariffs almost by definition. And even those who are not official colonists were forced into the so-called unequal treaties, which basically deprived them of the right to set tariffs. Yes. Oh yeah, R means restricted data. But you could look at some other sources and get some idea of, for example, the Harvard history and John Nye estimated the French tariff of the early 19th century. And if you look at his estimate in 1820, it was about 20%. So R doesn't necessarily mean that it's higher or lower than any other number that appears in the table. It just means restricted data. Anyway, so America continues that this protectionist policy throughout this industrialization period. And you will also notice that in the earlier period, Britain, which is supposed to have invented free trade, actually had higher tariff rate than the US. And of course, there was a good reason for that because although Hamilton was the first guy to theorize this idea, the practice he actually copied quite a lot from this other one. This is Robert Whirlpool, the so-called first British prime minister. These days is known as Mr Corruption, which he was. But he was also a very visionary economic manager. So he basically implemented an industrial development plan based on various tariffs and subsidies. He set up the government bond market and so on. And Hamilton was quite directly inspired by the Whirlpool. Whirlpool became prime minister in 1721 and basically for the next century and half, Britain maintained quite protectionist policy and moved to free trade only when its position as the world's economic superpower was secure. Now, you can tell this kind of story for all the other countries. I mean, I don't have the time to go into the detail, but Germany, France, Sweden, Belgium, there are only two countries which could be described as having posted free trade policy. And they are the Netherlands and Switzerland and in the Swiss case only until the First World War. Well, this is a lot of fun, but I haven't got enough time to go through them. But basically, I call these pictures the presidents who not have got a loan from the IMF if they applied to them. Because they did a lot of bad things. I mean, I don't have time to go through them all, but let me give you a few examples. I mean, on the $1 bill there's George Washington. Of course, he appointed Alex and Hamilton as the chief economic officer, fully knowing what that guy was about. But also interestingly, he refused to wear imported clothes in his inauguration ceremony. I mean, there's a very nice little episode about him insisting that he wants to wear American clothes even though it's lower quality and so on. And they got some weaver in Connecticut to make special clothes for him and so on. Thereby, potentially violating the new WTO regulation on the transparency of government procurement. Lincoln was a well-known protectionist. I don't have time to go into that, but you know, while he was very strong on protection, he was quite relaxed about slavery. I mean, basically, here he is saying that I don't really care what happens to the slaves. I mean, as well as I can keep the country together. And what was tearing the country apart? Well, of course, there were issues like land redistribution, but the most important was the tariff issue. There's Robert De Niro. No, sorry. It's Ulysses Grant, who somehow looks like Robert De Niro. And I mean, here he says, Britain tells us to do free trade. Yes, we will do free trade, but only 200 years later, when we are as rich as they are. And what a modest man, because within 70 years of him saying this, America actually took over Britain as the world's greatest economic power. And then Thomas Jefferson, you know, he even though he was a free trader, he famously was against the pattern system. Thereby, he goes against the WTO trips agreement. Andrew Jackson of his many unorthodox crimes that one interesting episode was in 1836, he refused to renew the license for the semi-public bank called the Bank of the United States of America, on the ground that this is too much owned by foreigners. And how much is too much? 30 percent. Now, even Hugo Chavez doesn't do that kind of thing. Can you imagine if he canceled the license for Citibank in the Caracas on the ground that is too much owned by Americans, it will make headlines in the Wall Street Journal. Anyway, so, well, let's skip Franklin. Basically, to give you a quick summary of things that today's rich countries did when they were developing in terms of trade policy, they all, except for the Dutch and the Swiss used protectionism. Britain and U.S., which are known as the homes of free trade, were actually homes of protectionism. Now, this is the most amazing kind of disappearing act in history. You know, he said that, I don't know, a bit like Hitler reinventing himself as an advocate of Jewish human rights. Because these war countries that really invented the protectionist industrial development program. In contrast, these other countries which are usually associated with protectionism use much lower tariff protection. Okay, they did some other things which were more interventionist, but when it comes to tariffs, they are much less protectionist than Britain or the U.S. And so on. Let's skip some of this. Regulation of foreign investment. Once again, basically, when countries received foreign investment, they all regulated foreign investment. So, in the 19th century, U.S. was a net recipient and it very heavily regulated foreign investment, especially in finance and natural resource, especially in banking. The only American citizens could become directors in a national as opposed to state bank. You go to developing countries these days. I mean, there are many banks who are internally run by foreign nationalists. Foreign shareholders could not even vote. I mean, they were allowed to withdraw the dividends, but they couldn't vote in annual general meetings. Japan, Korea, Thailand all used quite strict measures against foreign investment. The best thing is that the story is the Finnish story. Between the 1930s and 1980s, the Finnish government classified all enterprises with more than 20 percent foreign ownership as dangerous enterprise. These are official Finnish terms. I didn't invent them. And of course, the foreigners got this subtle hint kept away from Finland. State ownership, they all, when they felt it was necessary, used the state ownership. Although emphasis on state ownership wasn't as widespread as the use of protectionism or subsidies. The most interesting example is Singapore. When you hear about Singapore today, you only hear about this free trade policy, which it has, of course. But did you know that 20 percent of Singapore's GDP is produced by the state-owned enterprise sector? The international average for that is about 9 to 10. Just one second. And the Singapore government owns all the land, supplies 85 percent of housing. And you think this is an example less fair free enterprise economy. Yes, oh, most probably. I mean, they own all the land, so quite probably. And anyway, another interesting country is Taiwan, which has the same kind of arrangement as Singapore, although somewhat less. And basically, all the French firms that you have heard about are either still state-owned or state-owned until five to 10 years ago. Even when they are nominally privatized like the Karmic or Renault, the French government still controls 30 percent of the voting shares. It's basically controlled by the French government. Intellectual property rights, once again, when countries needed to borrow ideas from other people, they were quite lax in protecting other people's intellectual property rights. So in the 19th century, in many countries, including this one, you could explicitly take out patent on someone else's invention, as well as that someone else was not your own compatriot. 19th century, Germans mass produce fake made in England products in the same way the Koreans did with the fake made in USA products in the 1960s, and the Chinese are doing with the fake made in Japan and made in Korea products. I mean, this phenomenon was so severe that the British parliament even revised its trademark law then called Merchandise Act in 1862 and demanded that the trademark description includes the place of manufacture. But then of course, the Germans were far too clever for that. So for example, I read this hilarious story of a German firm producing industrial sewing machine with letters North England machine splashed on the body and the world made in Germany on the knees, only that this machine was so heavy, you needed six people to lift it. Was never checked. The Swiss and the Dutch refused to protect patents until the early 20th century. So the Swiss pharmaceutical industry, which is the biggest defender of intellectual property rights disease together with Disney was essentially based on stolen German technology, Philips, the Dutch electronics makers started out as a firm manufacturing light bulbs whose patents were all held by Thomas Edison. But at least these countries are quite consistent because they said we are free trading nations, which they were, unlike Britain and the US. And therefore, we are in favor of unlimited competition. And we find it unacceptable that the government creates artificial monopoly called patterns and that blocks this competition. Now today, many free trade economists on the one hand argue for free trade and on the other argue for protection of intellectual property rights. So these people at least are more consistent than free trade economists of today. The US refused to protect foreigners' copyrights until 1891. So the story has it that Charles Dickens sold more books in America than in England, but he never saw a penny of it. I'm quite glad that I wrote this book in 2007 and not in 1889. And I mean, I could go on and on with these kind of things, but now you get the picture. Basically, the developed countries have developed using all kinds of policies that go against free market orthodoxy and that are basically the opposite of what they recommend to or even force upon the developing countries today. And I mean, this is what the German economist Friedrich Lester, who is mistakenly known as the father of the infant industry argument, describes as kicking out the ladder. In 1841, the British tell us the Germans and the Americans to do free trade, but how did the British develop? They develop on the basis of protection and subsidies. This is like kicking out the ladder with which one climbed to the top. I mean, you don't need to read this quote because it's all very neatly summarized in this cartoon, which is the cover of my earlier book. The rewriting of our histories so complete, we don't even know that it has been rewritten. And then, I mean, it's a bit like this. I mean, I'm sure some of you know some of these guys. This is, of course, Lenin Trotsky, prize for someone who can guess what the guy with the specs and mustache is called. No, you'll have to be a cornerstone of Russian revolution to know it. This guy called Kamenev, who was Trotsky's brother-in-law. He was married to Trotsky's sister and was the editor of, I think, Izvestia, one of the big papers. One of the leading figures in early Russian revolution politics. And of course, when Stalin came to power, he couldn't let this kind of photo to be seen. So he doctored it and said, this was all done by Lenin. It's always like this. I mean, in the history of capitalism, of course, at the center was the market, but then there was also protection and regulation. But today, you know, they say it has all been done by the market. I'm not suggesting that there's some sinister committee sitting in the basement of the Pentagon or the IMF, rewriting history. You know, the thing is, history is first of all written mostly by the victors. And secondly, that we write, well, think about, interpret and write about the history from our present vantage point of view. So we talk about the Renaissance Italy, despite the fact that there was no country called Italy until 1871. If you probably went to, I mean, using a time machine, went to Florence in the Renaissance times and said, one day you will live in the same country with those guys in the city of Siena, probably they would disembowel you. My children go to British school. You know, they learn about English kings and queens. And English kings and queens include what? I mean, the present royal family who are really Germans, but more importantly, the Norman conqueror kings. Those were basically French speaking Scandinavians. I mean, did William the conqueror call himself William? No, he was Guillaume. I mean, his son Henry I was not Henry, Henry. But you know, we talk as if these guys were English. We do that because subsequently a new identical English has been forged out of all this. So I'm not saying that this is complete that sort of fantasy, but you know, I mean, this is just some examples to show that history gets written from today's vantage point of view. And through that process, we are given this version of history, which is, I wouldn't say it's completely false, but very partial and very distorted. Okay, I need five moments. When you give this historical evidence, people, well, first of all, tend to refuse to accept it. But even when they accept it, they usually say, yeah, well, maybe those things worked in 19th century Europe, but you know, didn't the developing countries monumentally screw up when they tried these policies in the 1960s and 70s under the banner of, you know, import substitution? Well, yeah, we should look at these facts and the facts are the following. You know, in the 1960s and 70s, in the bad old days of protectionism and regulation in developing countries, pro-capita income used to grow at about 3% per year. In the following 20 years, growth rate was basically half, despite the fact that this is a period when the two giants, India and China, started to grow very fast. They, of course, are liberalized, but they didn't embrace the free market, free trade agenda. So despite that, growth rate was more or less half, and growth slowdown was both severe in those countries where free market, free trade reformers are most diligently applied for various reasons, namely Latin America and South Africa. You know, Latin America used to grow at 3.1% in the bad old days. And then the next 25 years, growth rate fell to 0.5%. I'm quite happy to take out the 1980s as a decade of adjustment, and then on the recognition that some of these adjustment problems had been created by bad policies of 1970. But even if you did that, Latin American growth rate in the last 15 years was only about 1.2%. Basically, one third of what it used to be. Things in Africa have been even worse. Now, of course, I can give these arguments, but you know, people are usually not very happy to let evidence get in the way of a good argument. So they find all kinds of other reasons. You know, when the IMF World Bank Structure Adjustment Programmers first introduced in developing countries and produced bad results, they said, oh, we need more time. Yeah, of course, you need more time. And then later, they had time, and then the results were still not coming out. They said, yeah, well, you know, this is because the countries haven't really implemented these policies faithfully. They need to do more. Okay, so they were made to do more. It still didn't work. So what do they say now? Instead of saying, well, maybe there's something wrong with our theory. Now they say it's the countries that are wrong, not the theory. They are corrupt. They have bad culture. They have bad geography. I mean, you don't believe it, but there are economists making living out of running statistical analysis, trying to prove that if you are closer to the equator, you grow more slowly. Now apart from all kinds of other high-brow issues involved in this debate, what is totally unclear to me is what the policy implication of all this is. Because the only thing I can think of is that Uganda should invade Norway and colonize it. Because otherwise, how do you move your country? Anyway, I deal with some of these things in the book. I have a whole chapter devoted to issues of corruption and other political things. And I have another chapter on the role of culture, provocatively titled, lazy Japanese and thieving Germans. So I mean, please take a look at them if you're interested, but I don't have time to go into them. So all of this, however, gets swept away in real life, if you like, at the political negotiations. You go to the WTO, you can give them statistical evidence, you can give them historical examples. They still say, well, we still need a level playing field. Don't you think it's grossly unfair that US and Japan have only 3% tariff and India has 33%? Now it's very difficult to argue against this idea of level playing field because it sounds like you are in favor of unfair competition. But I would say that the level playing field is the wrong principle to apply when the players are on equal. Suppose in a football game, or what you call soccer in this country, one team is the Brazilian national team and the other team is made up of my 12-year-old daughter's school friends. I would say it's only fair that the girls attack from up the hill and the Brazilians defend from down there. Of course, in real life, you don't see this kind of tilted playing field, but then that's not because the idea of tilted playing field is wrong. It's because these unequal players are not even allowed to compete against each other. The Brazilians will never be allowed to officially compete against a bunch of 12-year-old girls. It's not just the agent gender. I'll give you an extreme example, but a lot of sports have weight classes, boxing, wrestling, weightlifting. Do you know how fine these classes are? In the lower weight boxing like the flyweight, banterweight, and so on, the weight bands are basically between two and three pounds. In boxing, you think that it is so grossly unfair that one guy who is four pounds heavier than another guy, boxes the right guy, you make it structurally impossible by saying that these people belong to different classes and they cannot fight against each other. While in international trade, you think, of course, Honduras should compete one equal terms with the United States. This is the kind of distorted idea that we have. What I argue in the book is basically that global economic competition is a game of unequal players. In this situation, it is only fair that we tilt the playing field by allowing the weaker countries to protect and subsidize their producers more vigorously and do other things that help their development, like more weakly protecting intellectual property rights. Without doing this, you can give all the lip service that you can to economic development, millennium economic development goal, lifting people out of poverty, but we will never be able to allow these countries to genuinely develop. Now, finally, this book is meant to be very user-friendly and in order to make it as interesting as possible, well, given that it's an economic book, I enlist the help of many kind of popular cultural figures. This is also in Wales, but yeah, he has some interesting thing to say, but I'll skip that and show you other pictures. So I have the full Monty, Monty Python, Isaac Newton, Jonathan Swift, the author of Gulliver's Travel, Deng Sherping, Henry Ford, Cicero, the Roman politician and philosopher and the current British prime minister, Gordon Brown. But did you ever read an economic book with Tom Cruise in it? Because he's there. I mean, I'm sorry for those who are taken by his looks because there's no photo there, but he's there, yeah? Chapter seven, yeah? Mother Teresa, Daniel D. Ford, the author of Robinson Crusoe, who actually has a whole chapter titled to his name, Charlie Chaplin, Animal Farm, Albert Einstein, and last but not least, Muhammad Ali, yeah? You might violently disagree with what I say in the book. That's okay by me because I violently disagree with some other people, but I can guarantee that this book will not be boring. So please take a look. Thank you. Yeah, sure. No, I'll do my own Q&A. Yes, please. Because you sort of wrote this historically, I was going through some hill publication during the Peruge pre-trade agreement and I think the electronic manufacturer association, some industry group had taken out an ad that showed a red line from the Great Depression and it said, you know, the last time Congress did protection in smooth holly, you know, we ended up with the Great Depression. If you can, that is, you know, in terms of historical context, that is the singular talking point. It comes up in Republican presidential debates. This was the cause of the Great Depression and any move, you know, even with this marginal trading partner like Peru is going to sort of address. Yeah, no, smooth holly is another myth that then needs to be destroyed. First of all, it is logically impossible that it caused the Great Depression because Great Depression started in 1929 and smooth holly was 1930. So unless the Americans invented the time machine, sorry, 30 I think, well 30, 31. Anyway, it was after the Great Depression. And secondly, you know, smooth holly raised tariff rates, but it raised tariff rates from about 37 percent average to 48 percent. Now, American tariff, gosh, it will be a long way to go back. But basically, throughout the 19th and early 20th century, average American tariff was between 35 and 55 percent. So yes, smooth holly kind of brought it from the lower end of that, you know, historical range to the higher end, but it wasn't like the seismic shift. You know, that you read those people who usually use smooth holly as an example, you think that America used to have like zero tariff and then smooth holly suddenly made it 60 percent. No, it wasn't like that. So, I mean, this kind of propaganda, I mean, gets unquestioned because we have been blinded so much, we don't even, you know, this might be a useful point where I can bring in this also known as a story, you know, that also appears as this evil character called Harry Lyme in the movie The Third Man. The script of the movie was written by Graham Green, the British novelist, but also in Wales wrote one particular passage, which is where the character Harry Lyme praises evil. And what he says is this. He says, in Italy, for 30 years under the Borges, they had the mother terror, torture, bloodshed, all the bad things of a human nature. The Swiss, on the other hand, had 500 years of brotherly love and democracy. And what did they give us? The Cuckoo Club. This is the typical image that people have of Switzerland. You know, on a bad day, you think it's a country that lives off the black money deposited there by third world dictators and selling tacky souvenirs like Cuckoo Club and Cowbells to unsuspecting American and Japanese tourists. On a good day, you think that, well, this is an example of post-industrial prosperity, because it basically lives off finance, tourism, and other service industry. But did you know that this country is literally the most industrialized country in the world? It has the highest industrial power capital output measured in value-added terms, 24% higher than the second highest one, which is Japan, 2.2 times that of the US, 34 times that of China, the so-called workshop of the world, and 220 times that of India. Once again, I mean, I didn't have to hack into some secret database in the IMF to get this data. You can go to the UNIDO website. UNIDO is a UN organization in Vienna called United Nations Industrial Development Organization, download this annual report in two minutes, and it's all there. But why do people not know this? Because we have been fed so much propaganda that Switzerland is a post-industrial society, smoothly ruined the world, British empire invented free trade. No, I mean, we need to all go back on history and destroy this myth, because as far as smoothly is wheeled out every time when someone says anything about protectionism, then there cannot be any rational debate. Gosh, I think I saw your hand first, which is not to say that you raised it first, but... You were talking about intellectual property rights, and it got me thinking about patents and how important it is for this debate that's going on right now about harmonizing our patent system with the rest of the world. So I was wondering if you could talk about that for a moment, and since we live in this knowledge economy and protecting our creative output is so important, where this is going to play. Yeah, well I have a whole chapter on patents, but you know, first of all, as I said earlier, patents are incompatible with the principles of free trade. As a protectionist, I can defend patents, but not the free trade economies, because patents and the infant industrial protection are exactly based on the same idea. Patents creates monopoly. That's bad, but in return you get more knowledge, and in the hope that the additional benefit that you get from new knowledge cancels out this cost of monopoly you adopt the patent system. In the same way, we protect our producers in developing countries, fully knowing that this is costly, because in the short run free trade is usually more efficient, because we believe that they'll raise their capability and bring us more returns. Now, patents are in that sense very deliberate social construction, and if you look at the history of patents, which I detail in one of my chapters, basically the balance between the rise of patentees and the rest of the society have been tilted too much to one side. For example, since 1983, it has become very easy to get the patent in this country. Between 1960 and 1982, the number of patents that used to grow at about 1% per year in this country. From 1983, the growth rate has shot up to 6%. Did Americans take some collective drug in 1982 and suddenly became six times more inventive? No. This happened because the patent sort of quality power is lower. So you have ridiculous cases like some five-year-old boy getting a patent on a method of riding on a swing, and it's all there in the book. So that's the first point. I mean, is the American patent system solving its own interests even? And secondly, different countries at different levels of development need different kinds of patent protection. Let me put it in practical terms. I mean, you write a certain law, you cannot expect it to run itself. So if you want Mali or some poor country to introduce serious patent law, you need to hire and train patent lawyers, scientists and engineers who go through patent applications, inspectors who go out and detect violations, and these take money. Do these countries need those people more than school teachers and nurses and doctors? Maybe they do. I mean, I don't want to jump to the conclusion, but basically what I'm arguing is that you have to look at the cost and benefits. And finally, it is totally dishonest for the patent lobby to say that without patents, there will be no new knowledge. First of all, did Schumpeter, the guy who is the biggest historical authority on innovation, did he ever write about patent? No. I mean, in thousands of pages he wrote, he mentions patent like three, four times. Why? Because there's an inbuilt mechanism in capitalism that drives technological innovation. You cover with a new technology, it takes others to catch up with you, and therefore you get huge monopoly profit during the period. The whole point was that capitalism is productive exactly because of them. Now, there are some industries like pharmaceutical, software and so on where hoping is very easy. So they might need extra protection, but the unfortunate thing is that they've been driving it too far. Basically, three industries have been driving the whole international patent agenda, which have created problems with dealing with HIV-AIDS crisis in Africa, which have made it difficult for developing countries to develop new technologies. Anyway, I cannot explain all this now. Please take a look in my book. Yes. GDP would be higher than that of the United States in four years in about 2012. What should the United States do? What sort of policies? I'm talking any range of policies, protectionism or anything else. What do we do to survive and maintain our power in the future or at least to have an influence that in the future commensurate to our intellectual and other difficulties? Yeah, you know, the US actually is a unique country because it is the first empire in human history which allowed other countries to rise together. The Romans, the Chinese, the Mongols, the British, the French, they never let others to rise together. And I'm talking about the period when this country had the Marshall Plan, ran an international economic system where it wasn't pushing the developing countries to adopt free market trade policies, basically the period between 1948 and 1975. Now this didn't come completely naturally because the natural instinct of the empire is to suppress other people. So when the Second World War was finished, there wasn't the Marshall Plan. In the beginning, there was the Morgan plan named after the Treasury Secretary. And what was Morgan's plan? It was a plan to de-industrialize Germany, de-industrialize Germany and make sure that it can never wage another war. And of course, Joseph Stalin jumped on it because he said, yeah, this is a great idea. Give us all the machines. Yeah, so during that period, the American army was, well, I mean, together with other guys dismantling German machines which Stalin took to Russia. And the economy started to collapse. Hoover, the ex-president, was sent as an envoy and he came with the report saying, yeah, this plan is viable. Well, the minor problem is that you will have to reduce the German population from about 65 million to 45 million. And then the Americans woke up, can't do this. And then Marshall Plan and the whole new thinking started, which is the first time in history. So I give credit to that. Unfortunately, that hasn't been followed in the last 25 years. Now, but I think that it is in the long-term enlightened self-interest of the rich countries to allow the poor countries to develop. Just suppose that Mr. Deng Xiaoping accidentally picked up a copy of Milton Friedman in 1978 and was persuaded by it and implemented Russian-style shock therapy free market capitalism. I don't think China would have grown at 10%. But because of that rapid growth, the Chinese economy is now more than 10 times bigger than what it was in 1978. The US and other rich countries have a market that is 10 times bigger to sell to. Now, I know as a security advisor that you are worried about the military implication of all this. And as a good Korean, I am not overjoyed by the rise of China. I mean, I'm really not sure whether the world dominated by the Chinese will be better than the world dominated by the Americans. So that military side, I won't comment on. But you know, even internally, I mean, don't just that kind of wine that the Chinese are wiping us out. I mean, you know, after this country has the greatest technological capabilities in the world, you can deal with it as far as you find a good mechanism to do it. I mean, one reason why free trade is becoming such an issue in this country compared, for example, to Europe is because you don't have a good welfare state. You know, I live in Europe. I see it. I mean, people are not that worried that this or that particular industry goes down because those people are not going to be thrown to the scrap people of history. They'll be guaranteed minimum level of living. And in countries where this is especially efficiently done, like Sweden and Finland and so on, they get retrained and relocated. The government will help you find the job. So they are not that worked up about. I mean, this or that industry going, whereas in this country, people know that if this auto plant in Michigan closes down, that's the end of life for them. So you need to create these mechanisms internally to deal with this problem because otherwise, yes, I mean, you cannot expect people to, you know, I mean, as they say in England, I mean, you cannot expect the Turkish to vote for Christmas. You cannot expect people to vote for measures that will destroy their lives. Yeah, can I? Yeah, this is sort of a follow up on that. A lot of my colleagues in the labor movement and elsewhere share your view of the ICER program. But the question is, would the reimposition of paraff walls and protectionism at this point in a highly developed economy produce anywhere near the same results that it did when it was a growing economy? In other words, it's a remedy for what hails us. Yeah, no, no, no, it's not. I mean, there's a big difference between tariffs in rich countries and tariffs in developing countries. Developing countries need them to create a space in which they can increase their capabilities. In the developed countries, that's not the central problem. The problem is if you like distribution problem. Okay, I mean, you know, by definition almost that by having trade with China, America benefits, but is that benefit equally distributed? No, I mean, that is the center of the problem. And for that reason, I mean, I'm not totally against the idea about America and some other rich countries using tariffs, but that's only for the transitional arrangement. Because sometimes the adjustment that needs to be made is so large, I mean, the tariff is necessary. But this is not going to take you to where you want to go. I mean, this is an extra kind of cushion. Yeah, so I mean, maybe for a limited period of time, you can have a bit of tariff to ease the transition. I don't support using tariff forever to block structural adjustment. But I'm quite happy to see it being used for temporary purpose to make this transition easy. Because you know, I mean, I fortunately have a job that has a lifetime guarantee as a university professor, but I just cannot imagine that how people will feel when they lose their jobs and they are not sure about their mortgage and their children's school bill, their health care bill, you know, I mean, these people need to be supported through this period. But it shouldn't be done in a way that, okay, I mean, you have this job for life. You need the transition help and tariff can be quite useful for that. Yes. Hi, I'm Jonathan Jacoby. I'm a think tank at the Center for American Progress. You've written before, and now this is kind of seems to summarize your finding that developing countries need more policy space. Like you said just now, the space to develop their capabilities. So does that then work like for the role that the U.S. can play in that process? Is it just a matter of doing no harm? It sounds like the language is to allow policy space. Or is there a way that the U.S. can partner with developing countries to build the space, to utilize the space, to build the economic institutions, some of the way that we built them in our own history. Part of our story is Progressive Era, the New Deal, the Great Society. Absolutely. We built our own institutions to spread the gains. So does it amount to saying, you know, harm? Are you also saying that there is some constructive partnering that the U.S. can have for the new administration? Yeah, well, I mean, you know, after this is a country that has been the most successful developer in human history. There are lots of lessons that you can teach other people. Of course, I mean, there's always this problem that in the past, this country tend to say that we have the right solution that everyone has to use. Golden straight jacket, one model, best practice, whatever you may call it, global standard. That is wrong. But there are so many useful policy lessons that you can give to developing countries, so many technical help that you can give, so many help with the institution building. I mean, the Progressive Era is a very good example. A lot of developing countries are struggling with the problems of corruption, monopoly, and military, and sort of industrial collusions. And there are lots of good lessons that this country can give. So yes, I mean, at least do no harm. But if you can help more, but unfortunately, I mean, it has been moving in the wrong direction. So A, you restrict the developing country's space and B, as far as you give help, that help is very narrowly defined in terms of what you think is right rather than what the country needs and what you can develop through dialogue with that country. Please join me in thanking Dr. Haudenosaun. Yeah, I'll be happy to kind of take some questions individually outside, but the formal part has to be, yeah. Thank you.