GLOBAL STUDIES AND INTERNATIONAL RELATIONS THESIS THE DEVELOPMENTAL STATE, HIGH-VALUE ADDED ACTIVITIES AND GRADUAL LIBERALIZATION AS FOUNDATIONS FOR ECONOMIC DEVELOPMENT: “RECALLING AND ANALYZING THE ANGLO-AMERICAN DEVELOPMENTAL DYNAMIC TO GUIDE THE ROLE OF THE STATE AND MARKETS IN ACHIEVING SUSTAINED ECONOMIC GROWTH IN DEVELOPING COUNTRIES” MANUEL ANDRES SANCHEZ COLLEGE OF PROFESSIONAL STUDIES NORTHEASTERN UNIVERSITY WINTER 2020 ADVISOR: PROFESSOR EDWARD MURPHY, PHD 226 pages 2 Abstract Today, globalized mainstream development theories gravitate around the concepts that Adam Smith and David Ricardo introduced more than two hundred years ago. Nonetheless, the theories of both economists were not always as relevant and appreciated as they are today, especially in the developed world. Before the complex polarizing dichotomy between right and left ideologies, there seemed to be a strong consensus about the right path towards economic development based on concepts that largely contradict free-market ideals. Historical evidence shows that today’s developed nations disregarded much of Smith’s and Ricardo’s theories and followed the concepts of forgotten developmental economists such as Antonio Serra, Robert Walpole, Alexander Hamilton, Friedrich List, Joseph Schumpeter, John Maynard Keynes, among others. These economists advocated for three basic convictions in order to achieve high-income levels. First, promotion of industrialization, diversification of high value-added goods and the abandonment of a natural resources-based economy. Second, to achieve this successfully, they were convinced it was not through laissez-faire economics, but through a strong and active presence of the State. Last but not least, although the importance of international trade was acknowledged, it was essential to protect local industries from international competition during their early and learning stages and that long-term success was tied to gradual liberalization. Disregarding and even criticizing these concepts, the strong economic liberalization and globalization policies of the last four decades have not been successful in turning poor or middle-income countries into high-income advanced ones, condemning the latter group to keep depending on natural resources and on the imports of technology from developed nations. Ironically, those nations that did not follow aggressive liberalization and emulated what nations such as Britain and the U.S did during their early development stages (three convictions), are the ones that did or have been doing better such as Japan, the Asian Tigers, Ireland, Finland, and of course, China. Keywords: Free market, Free Trade, Industrialization, Gradualism, Government, Protectionism, Diversification 3 Table of Contents INTRODUCTION ....................................................................................................................................... 5 CHAPTER 1- THE BRITISH SHADOW AND FREE MARKETS: THE AMERICAN RELUCTANCY ......................................................................................................................................... 18 THE ECONOMICS OF BRITISH COLONIALISM IN AMERICA: MERCANTILISM AND INDUSTRIAL RESTRICTIONS ......................................................................................................................................... 18 BRITISH SUPREMACY AND ITS QUEST FOR GLOBAL LIBERALIZATION: SAME DYNAMIC, DIFFERENT TIMES ....................................................................................................................................................... 23 ALEXANDER HAMILTON, THE “BRITISH- AMERICAN DYNAMIC” AND THE BIRTH OF THE AMERICAN INDUSTRY: “DO AS THE BRITS DID, NOT AS THEY SAY” .......................................................................... 27 CHAPTER 2: PROTECTIONISM, INFANT INDUSTRIES AND GRADUAL TRADE LIBERALIZATION: THE AMERICAN NATIONAL CREED AND THE INCONSISTENCIES OF LAISSEZ-FAIRE ECONOMICS ...................................................................................................... 34 U.S TRADE POLICIES IN THE 19TH CENTURY: “THE MOTHER COUNTRY AND BASTION OF MODERN PROTECTIONISM” ..................................................................................................................................... 34 TRADE POLICY DISCREPANCIES AND THE AMERICAN CIVIL WAR: “NO SLAVERY REALLY MEANT PROTECTION AND INDUSTRY” ................................................................................................................. 37 AMERICAN TRADE POLICY DURING THE LATE-19TH CENTURY AND 20TH CENTURY ................................ 40 THE MYTH OF FREE TRADE AND FREE MARKETS: INCONSISTENCIES WITH SMITH’S, RICARDO’S AND COBDEN’S THEORIES ............................................................................................................................... 44 THE CONSENSUS ABOUT FREE TRADE: A MATTER OF TIMING AND GRADUALISM ................................ 52 CHAPTER 3: INDUSTRIALIZATION AND HIGH-VALUE ADDED GOODS AND SERVICES: THE “RIGHT” ECONOMIC ACTIVITIES .......................................................................................... 56 COMMODITIES AND SUSTAINED ECONOMIC GROWTH: BRITISH VS SPANISH EXPERIENCE ................... 56 INDUSTRY OVER AGRICULTURE: INCREASING RETURNS VS DIMINISHING RETURNS ............................ 63 EXPANSION OF THE MIDDLE-CLASS: THE PROSPERITY VIRTUOUS CYCLE ............................................ 70 CHAPTER 4- THE AMERICAN DEVELOPMENTAL STATE: A KEY BUT IGNORED PLAYER IN AMERICAN HISTORY..................................................................................................... 78 ESCAPING FROM NATURAL RESOURCES AND SUCCESSFUL CAPITALISM: IT DOESN’T HAPPEN JUST BECAUSE .................................................................................................................................................. 78 DIVERSIFICATION OF THE AMERICAN ECONOMY: GOVERNMENT’S CONSCIOUS AND CONTINUOUS SUPPORT FOR TECHNOLOGY, SCIENCE AND INNOVATION ...................................................................... 85 FOREIGN DIRECT INVESTMENT, INTELLECTUAL PROPERTY RIGHTS AND BANKING ............................. 94 INFRASTRUCTURE AND SOCIAL SAFETY NETS ........................................................................................ 98 CHAPTER 5- OTHER DEVELOPMENT CASES: SUCCESSFUL EMULATORS OF THE ANGLO-AMERICAN EXPERIENCE .................................................................................................. 107 FRANCE .................................................................................................................................................. 107 GERMANY .............................................................................................................................................. 109 OTHER CASES: SWEDEN, CANADA, SWITZERLAND AND AUSTRALIA ................................................... 111 JAPAN: THE FLYING-GEESE LEADER .................................................................................................... 115 SOUTH KOREA ....................................................................................................................................... 120 SINGAPORE ............................................................................................................................................ 123 OTHER LATE- INDUSTRIALIZERS: .......................................................................................................... 125 Finland .............................................................................................................................................. 125 Ireland ............................................................................................................................................... 127 4 Other European Cases ...................................................................................................................... 128 CHINA .................................................................................................................................................... 129 THE MARSHALL PLAN: REINDUSTRIALIZATION FOR ECONOMIC RECOVERY ....................................... 133 KEYNESIANISM: THE STATE REGULATION FOR PROSPERITY AND STABILITY ..................................... 136 CHAPTER 6- THE WASHINGTON CONSENSUS AND THE NEOLIBERAL ERA: THE AMERICAN SHADOW? ........................................................................................................................ 140 THE WASHINGTON CONSENSUS AND THE RISE OF NEOLIBERALISM .................................................... 140 REVERBERATIONS OF THE NEOLIBERAL ERA THROUGHOUT THE DEVELOPING WORLD ...................... 147 IMPACT IN AFRICAN NATIONS ............................................................................................................... 149 IMPACT IN LATIN AMERICA ................................................................................................................... 151 FORMER SOVIET STATES ....................................................................................................................... 154 FINANCIAL CRISES................................................................................................................................. 155 POVERTY REDUCTION ........................................................................................................................... 157 REVERBERATIONS OF THE NEOLIBERAL ERA IN THE U.S ....................................................................