Salah El-Amrousi questions the causal relationship between economic freedom and economic development The 2003 Index of Economic Freedom (IEF), released by the Heritage Foundation and the Wall Street Journal, claims to have the final say in what constitutes economic development. According to the report, countries with the highest level of economic freedom attain the highest rates of long-term economic growth. To substantiate this hypothesis, the report classifies countries according to the levels of income and economic freedom and establishes a high correlation between the two. Egyptian neo-liberals have embraced this line of thinking, arguing that economic development can only be achieved through a capitalist system, in a climate where both domestic and international competition is unhindered. According to the IEF, 10 countries in the world are "free" and democratic, with an average per capita annual income of $27,000; 56 are "mostly free", with an average per capita income of $13,000; 74 countries are "mostly un-free", with an average per capita income of $3,000; and the hapless remainder are despotic and impoverished. Egypt's neo-liberals, citing this analysis and those like it, attribute the country's economic woes to insufficient economic freedom. Egypt, they argue, should accelerate the privatisation of public sector companies and state-owned ventures, particularly those operating in transport, communication and banking. It is worth noting that international investors have their sights set on the Suez Canal, the General Petroleum Company and Telecom Egypt. The neo-liberals want such state-owned enterprises privatised. They would also like to see all hindrances to the liberalisation of domestic and foreign trade removed, so that foreign goods may freely compete with local ones. Once such measures are taken, they say, the economy will flourish, and Egypt will begin to catch up with the industrialised world. However there is one catch. The data used in the IEF is confined to the year in which the report appeared. Viewed from a historical perspective, most of the conclusions of that report can be proved erroneous. The IEF says nothing about the policies under which development was achieved in the first place -- instead it offers a mere glimpse of what advanced countries want other nations to do. Countries that have already achieved a high level of progress and economic freedom are eager to see the rest of the world follow suit, for this would help them sell more abroad. But three decades of structural adjustment worldwide do not seem to suggest that this is the best way to go. Let's take a look at how development took place in what are now the world's leading industrial nations. Development in these countries was a result less of economic freedom than of state intervention and protectionism. The history of Great Britain and the US is often presented as one of unfettered trade -- but such representation is false. Interventionism in the UK began centuries before the industrial revolution, when the country was hoping to boost the textiles manufacturing rather than export unprocessed wool to the Netherlands. The beginning of the 18th century saw the UK busy discouraging industrial imports, subsidising exports and reducing custom duties on products needed in export-related industries. This policy continued for decades after the start of the industrial revolution, all the way up to the repeal of the Corn Law in 1846. By that time the UK was already the world's leading industrial nation. The repeal of the Corn Law is often described as a victory for free trade, but many historians argue that the move was motivated by imperial considerations and by Britain's desire to hamper industrialisation in Europe and free the trade in agricultural products and raw materials. In the years that followed, Britain tried to spread free trade throughout the world. The trade policies it imposed on the colonies had a devastating effect on their traditional economies as well as on the process of capitalist industrialisation in these colonies. As for the US, the history of protectionism is quite interesting. From the beginning of the 19th century to the middle of the 20th century, the US had the world's highest customs duties, while the high cost of trans-Atlantic freight provided it with an additional natural trade barrier. Protectionism was a major bone of contention during the American Civil War, one which was just as significant as the emancipation of slaves. The tariff rate in 1820 ranged from 35 to 45 per cent, rising to 40 to 50 per cent in 1875, just after the Civil War. By 1913, tariffs averaged 44 per cent, dropping to 37 per cent in the 1920s but rising again in the early 1930s to 48 per cent. Protectionism did not abate until the end of World War II when duties were reduced to an average of 14 per cent. By that time the US had become the world's most powerful industrial nation. Germany's protectionist past is well known. The creation of a unified German state began with the Zollverein customs union. The country's leading historian, Friedrich List, articulated the argument for protecting nascent industries, challenging Ricardo's theory of comparative advantages. Germany's development strategy was not confined to trade barriers. The country invented a system of versatile banks that -- unlike the commercial banking system in Anglo-Saxon capitalism -- sought to fund industrial ventures. The Deutsche Bank was particularly active in this regard. This is why the stock market never played a significant role in German capitalism, unlike what happened in the UK and the US. Equally relevant is the case of the state- sponsored and protected industry following the Meiji restoration in Japan during the last quarter of the 19th century. The state nurtured close ties with both the banks and the manufacturers, assuming ownership of a number of key industries. The state continued to play this role well into the 1950s, with the Ministry of Trade and Industry involved in the development of heavy industry and in coordinating various aspects of economy and trade. The neo-liberals attribute the success of the so-called "Asian tigers" to free trade. But the World Bank 1993 report on the East Asian Miracle admits that the governments in question played a crucial role in development. In Korea, the state followed policies combining export incentives with conventional barriers on imports while restricting trade, exchange rates and financial policy. The World Bank report makes the weak claim that these countries would have achieved the same results had they taken a free market route. It is ironic that the experience of the "Asian tigers" was used to promote structural adjustment programmes, for these countries resisted liberalisation programmes throughout the 1980s, when their economic growth was at its peak. In the 1990s, once these countries began liberalising their economies, they started facing trouble, culminating in the memorable crisis of summer 1997. One should bear in mind that state intervention has taken various forms in countries that have achieved a remarkable degree of economic development, including India, Brazil, Chile and Mexico. Some opted for imports substitution, others for export-oriented industries. Some focussed on stimulating domestic heavy and light industries -- as did South Korea, China and India -- while others such as Malaysia, Thailand and Indonesia preferred conformity to the new global division of labour. There are great variations in the way such countries perceived the role of foreign capital, state institutions and public ownership of business. For example, Indian state ownership started out in heavy industries and the nationalisation of banks came later. Taiwan had a nationalised public sector right from the start. In South Korea, the government nationalised the banks first and then proceeded to launch giant industrial corporations -- such as the Posco steel company, which became the third largest steel manufacturer in the world in the early 1990s. The outcome of such efforts was mixed. While there were success stories in Southeast Asia and China, for Latin America, the Middle East and sub-Saharan Africa these policies brought about economic stagnancy. The causes of success and failure need to be examined thoroughly. For now it is sufficient to say that the negligence of social aspects in economic development can have important consequences. One cannot disassociate the failure of import substitution strategies -- which often ended in increased trade deficits and foreign debt -- from the social bias favouring the upper and middle classes. This bias undermines the motor of industrialisation, a problem that has grown since the policies of structural adjustment were originally introduced.
