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The Tyranny of Empire

SHAKING UP INTERNATIONAL DEVELOPMENT

The Tyranny of Empire: Another View of Development


Interview with Alice Amsden
The United States has had two empires. Under the rst, from roughly 1950 to 1980, it was too busy to bother controlling the policies of the developing world. Under this regime, poorer countries did relatively well. In the second empire, which has reigned since then, it has felt obliged to set those policies, and poorer countries have done relatively poorly. Is there a connection? Yes, says this specialist from MIT.
As you describe them in your new book, Escape from Empire: The Developing Worlds Journey Through Heaven and Hell (Cambridge: MIT Press, 2007), there have been two American empires since World War II. One of them enabled developing nations
ALICE AMSDEN is the Barton T. Weller Professor of Political Economy at the Massachusetts Institute of Technology.
Challenge, vol. 50, no. 5, September/October 2007, pp. 1727. 2007 M.E. Sharpe, Inc. All rights reserved. ISSN 05775132 / 2007 $9.50 + 0.00. DOI: 10.2753/05775132500502

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Interview with Alice Amsden to grow, the other inhibited that growth. Can you briey describe them? A. One empire, you could say, arose after postwar decolonization of the former colonies of the various empires of the prewar world. The question was, how can these economies develop? Various political approaches were proposed. But essentially, and most important, the economic approach taken by the rst American empire was permissive toward the economic policies of the developing worldnot the political policies so much, which were a function of the cold war, but the economic policies. Q. And this period was roughly 1950 to 1980? A. That is correct.

But why were we permissive? Was it in our nature to be permissive? A. One explanation, the most cynical, was stated by Richard Nixon: nobody gave a damn. In a way, that was also true of Japans development after the Meiji Restoration (1865). Permissiveness was a basis for Japans economic development, and the same was true of developing countries after World War II. No one cared because the developing world was not really an economic threat as yet, nor did it provide a huge opportunity. Also, recent U.S. history was a time of experimentation during the New Deal. It brought this attitude to the developing world. And maybe most important, business was not that popular in the United States at that time because of its role in the Great Depression. Business has been the main lobby behind the treasurys second empire policy, which is to control what the developing world can and cannot do.

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Before we get to the second empire, it makes sense to talk about the consequences of the early period of permissiveness. Why did it work for developing nations? A. By the way, it worked for virtually all developing nations. It was not just East Asia. Africa grew, Latin America grew, the Middle East grew. De-

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The Tyranny of Empire veloping countries enjoyed a golden age and a growth rate that was higher than the growth rate of the advanced countries in the same period. Q. In those years, did the income gap close, as opposed to opening, between the advanced countries and the developing countries? A. It narrowed, yes.

I did not realize that. That was a great exception to most of the history of the industrial revolution. The gap tended to widen, not narrow. A. It was a huge exception. And then you ask, how did the developing world do it? I think it involved using two types of knowledge. One was the intimate knowledge of its own economy. People typically forget about that. But the local intellectuals who came out of the struggle for decolonization in these countries understood their own economies. Ironically, they also understood the economies of the advanced countries because that is where they studied. So someone like Jomo Kenyatta, president of Kenya from 1964 to 1978 and considered its founding father, understood Kenyas history and class relations, and he also understood Britain, because he earned his Ph.D. at the London School of Economics. Thats just one example. I think if you went through all the liberation leaders, you will nd they were all very well read. Ho Chi Minh, Vietnams president from 1946 to 1969, knew Vietnam, of course, but he also had been in Paris. Second, you had a set of intellectuals in Latin America who proposed the idea that growth on the basis of exports could not work for a while, you needed import substitution. They just could not generate the exports to pay for all the necessities of life: air conditioners, trucks, railroad cars, and so on. They believed they had to start producing these locally. They had to experiment with a new system.

Now, import substitution industrialization has become anathema in the developing world. But you say quite emphatically in your book that import substitution worked.

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Interview with Alice Amsden A. It is a lthy word today because it goes against the reigning ideology, comparative advantage. In fact, if you look at the data, two pieces of information strike you immediately. First, import substitution is the mother of most future exports. If a country starts exporting steel, it is because it rst import-substituted steel. It has to get the knowledge and the experience and the scale before it can hit the world market. So if you look at developing country after developing country, their nontraditional exportsnot raw material or low-wage productscome out of import substitution. Second, import substitution really gave something to everybody. What do I mean? First of all, it gave workers jobs; second of all, it gave small capitalist companies a market for parts and components. You start producing or assembling a car, and a lot of the parts and components are too expensive to import, so you start producing them locally. You also train employees for the highest levels of skills: CEO, CFO, COO. You have an economy that may have been inefcient but that started to get the skill level up and nally the exports out the doorand not just the labor-intensive exports.

The argument against import substitution, or one of them, is that it breeds the inefciency you just described because it keeps competition out. A. Think of it this way. Let us say you are a businessman and you have no competition. What does that imply that you will do? Will you simply go to sleep and enjoy your money? Will you bet on the horses? Maybe. But maybe you will be as cutthroat as any other capitalist and you will drive your costs down as much as you can in order to increase your prots. Not having competition does not mean that many companies ceased trying to reduce cost, they did. Now, which companies? The countries that did not have any manufacturing experience when decolonization started were ones that had trouble. They had no real knowledge of how to produce goods and services efciently, so when they got protection and when they got money from the States, they did not know what to do with it, and they stuck it in their pockets.

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Manufacturing experience, you nd, was really a determination of future growth. A. I do. I do not mean to say that it is impossible to get manufacturing experience in other ways. But if you had experience, as you did in Korea, as you did in China, as you did in India, when you got the protection and when you got the money, you may well start being a really rst-rate capitalist because you had the chance to make big bucks, not just benet from a little piddling corruption.

an end? A. Well, the world changes. By the 1970s, what changed the world was not Denmark, it was not Canadain other words, it was not advanced countries. Instead, it was two sets of developing countries. The rst was Vietnam, and the second was the Organization for Petroleum Exporting Countries (OPEC)the Arab oil-producing countries, which raised the prices. These two sets of countries created ination. Q. Vietnam, by being a vigorous enemy. A. By being a vigorous enemy and causing demand in the United States to exceed supply for so many goods. And in the case of OPEC, it was angry about the war with Israel, but it also had a lot of knowledge about making money in the oil business. So, you get this ination, and two things happen. There is a lot of money sloshing around, the so-called petrodollars. The Treasury helps open the markets to loans by the big world banks, led by Citicorp. Americans hate this ination, so Paul Volcker, the Federal Reserve chairman in 1980 and 1981, goes to bat and cuts the money supply. Instantly, two things happen. First, the variable interest rates on the loans to developing countries go skyhigh. Second, the U.S. economy plummets so that the demand for third world exports declines. The developing world falls into a huge debt trap, with high interest rates and no demand for the products they must sell to pay off the debt.

If it was going so well, why did the rst empire come to

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Interview with Alice Amsden Finally, in exchange for a bailout, the U.S. Treasury marches into the developing worlds policy space and really takes over.

So that is the end of the rst empire. A. And that is the difference. In the rst empire, control was relatively permissive. In the second, it was relatively strong. Big business and globalization combined to maximize economies of scale. The pharmaceutical industry, for example, said, open the markets and not just in the rich countries but also the poorer ones. Wall Street said, open the nancial markets not just for capital ows but also for business takeovers. What you get as a consequence are huge declines in growth rates. In the Middle East, growth rates fell from 9 percent per annum to 2 percent. There were huge increases in income inequality. Now, ask yourself why. We are exerting our hand from without. We do not know who will gain and who will lose. In the developing world, some people will benet and others will not. There is no necessary consensus, and without that consensus, income distribution deteriorates.

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One of the lines in your book that I found interesting was that most economists believe equality and economic growth are positively related. A. They do. Q. Whenever I am on a panel, somebody says the exact opposite. A. I think the evidence is overwhelming that growth and equality are correlated.

What were the central principles of the second empire? Are you saying that they basically reect the vested interests of the powerful business communities? A. I think they do. It is supposed to be a level playing eld, but it

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The Tyranny of Empire is not. As Anatole France said ironically, a rich man and a poor man have an equal right to sleep under the bridge of the Seine. Brazil and the United States have to ght equally under the rules made by the international organizations, but they do not have the same means. How do you compete? Q. One thing I found fascinating in your book is that you describe the closed mind-set at the World Bank as a sort of Dark Ages. No dissension was tolerated. A. One excellent history of the World Bank reported how the chief economist then, Anne Krueger, attempted to clean out the economic section of the World Bank by discriminating between people who agreed with her and those who did not agree with her. This was reported to the personnel department and other departments, but nothing happened.

How did the second empire cause a slowdown in rates of growth in developing countries? A. I trace it to the crash in 1982, starting with Mexico, and then the inability of countries to restructure their business. These countries were locked into variable-rate loans with big Western nancial institutions. When they faltered, they were not able to restructure into new businesses. Instead, you had foreign buyouts. Or you had a structural adjustment loan. Now, doesnt that sound encouraging? But this loan did not usually mean you could close one plant and build another one. It meant that you started importing what you formerly produced, because domestic production, at least for the moment, was not competitive. So you closed down the operation because it was allegedly no longer competitive. Real restructuring never occurred.

What were the policies of the Washington Consensus imposed on the developing nations? A. Privatize. Import more. Keep the currency strong by keeping in-

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Interview with Alice Amsden ation down. Attract foreign investment. Most of all, open nancial and capital markets. Q. One of the interesting things you wrote is that foreign investment rarely is greeneld or entrepreneurial. It is a takeover of something that already exists or an expansion of something that existed. A. Right. What I was saying was that the best rms in these nations were nationally owned manufacturing companies, not multinationals. They got their technology because they were buying capital goods from overseas companies not owned by them.

What could have worked? What would have been more desirable? A. The world was certainly heading toward less protection, less import substitution. Everyone was pulling tariffs down, everybody. Of course, it was not quite reciprocal; the United States had high tariffs in agriculture. Lower tariffs were quite desirable, but only if you had them in conjunction with the other institutions and policies that worked well under the rst empire. Growth could have continued for a long, long time with the proper institutional policies. One of the worst policies was opening these countries nancial markets when they had no experience with them. During the rst empire, you never had a nancial crash. You never had a debt trap. They were really cautious. Even during the East Asian nancial crisis of 1997, there were three countries that did not have any nancial troubles: China, India, and Taiwan. The reason was that they did not deregulate their nancial markets and open them to foreigners. The push for access to the nancial markets by the U.S. nancial service industry was a tragedy for the economic growth and stability of developing countries.

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What was the nal result? A. One of the saddest consequences was that it undermined so

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The Tyranny of Empire many good investments made in the 1970s and 1980s. The defenders of open markets like to say that all the investments were corrupt or were in entertainment parks. But that is not true. A lot of the investments from the 1960s and 1970s were sensible, and they had been on the drawing board for years. But regulation of the nancial markets was really important, and when they deregulated, it was a disaster.

Is the second empire being undermined by the rise of China and India? A. What is an empire? It is about force and control. The United States is now losing its absolute power to China. There is just no doubt about it. But people fail to understand two points. First of all, when an empire fails, it does not become barbaric and start drinking Gauls blood. Most empires that fail stay really rich like the Italian city-states, like the Netherlands, like Britain, like France, like Japan. They do not go to the devil. So the United States could stay the richest country with the highest wealth and still lose power to China. It cannot control China. It cannot say to it, Were going to close our markets if you dont do x, y, and z because China can say, Oh yeah, well, were going to ban your foreign investments in our country. The interesting thing about China is, though it is huge on its own, it is even larger economically because it is tightly wedded and embedded with the rest of Asia. Of course, people say China hates Japan, and Japan hates Korea, and everybody else hates everybody else. Well, so do we. We hate France, and France hates Germany, and so on. But the web of East Asian trade and investment has expanded. About 6070 percent of foreign investment to China is from overseas Chinese. The United States is smaller in that sense because of Latin America. The trade from Latin America to the United States is all colonialist, north to south, south to north. There is no south to south. So the whole web is much looser, and East Asia has grown much faster than Latin America, so the real trouble for the United States may result from its regional economy and strategy.

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Interview with Alice Amsden

The United States could remain rich, but it becomes less dynamic. Slower growth can create problems. It certainly did in the Netherlands when there was a kind of stagnation of GDP per capita for a long time. A. That is true, but does slower growth necessarily discourage invention? Innovation, maybe, but what has fueled large spans of the American economy is some new contraption. Q. So the second empire, then, is over. But you do not see dire consequences for the United States? A. I do not see dire consequences for the United States if it can just get this idea of super control out of its mind.

Are you an optimist, then, with the decline of the second

empire? A. I am an enthusiastic optimist, because I think it has caused so much damage in the developing world. Q. Are you an optimist about the developing nations, then? A. I am an optimist if they can reduce the power of corporate America on the policies they follow. Let me give you an example. What about poor Africa? Well, you say, Oh, its so poor, and its this and its that and its tribal and everyones killing each other. But there are an enormous number of Africans now who have studied at MIT and other American universities at the forefront of knowledge. And they are aware of managerial issues, of engineering issues. There are good scientists, too. Now, we want these people to go back to Africa and start the development process. If you look at Africa, it is not so poor. They have all these minerals and metals and mining; its just that these resources are controlled by very bureaucratic, stiff-minded companies. And just as OPEC took over a lot of the oil companies, Africa has to have more control over these other natural-resource companies. Then its manufacturing experience will rise overnight, and it can start serious investment programs outside the aid sphere.

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But will that happen? Is there some reason to think that the declining second empire will open the door to that possibility? A. The issue is how the new administration relates to this kind of big business. If we look at the policy of the Clintons, they have moved the Democratic party rightward, with little to show for it. If we look at the policy of some of the Democrats who are coming up the pipeline, I think the chances are slightly better. But I do not think the decisions will always be made in this country anymore. Q. Right, maintaining control is no longer so much our prerogative. A. The world has really changed. The rst American empire created a pool of newly educated, highly skilled third world people. I am optimistic.

Do you see, then, a kind of axis of inuence from China and Asia through Latin America and ultimately to Africa? And even the Middle East? A. We see China and Africa collaborating. People say it is opportunistic. But, actually, China has been there a long time. The TanzaniaZambia railway is nanced by the Chinese. The developing world is growing its own big, modern companies, which are then investing overseas, bringing developing countries closer together. These are the real entrepreneurs who will dominate the next quarter of a century.

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