Yes, the government can pick winners: Ha-Joon Chang

"The government can pick winners," said Professor Ha-Joon Chang of Cambridge University in England, in an interview with IBTimes.

In fact, in some cases, only the government can make the right decision.

Chang, author of 23 Things They Don't Tell You About Capitalism, is a leading 'heterodox economist,' meaning he doesn't subscribe to the mainstream thinking of free market capitalism.

He said the markets are a great thing, but they need to be supplemented with selective government intervention. Moreover, markets can occasionally cause great harm if the government stays too far away.

He cited several high-growth Asian countries as examples.

For South Korea, it was government intervention that started POSCO, an iron and steel company that has grown to be the third largest in the world. Moreover, it supplied steel to the automobile and shipbuilding industries and was therefore a crucial foundation for Korea's industrialization.

In hindsight, creating POSCO was a stroke of genius. However, back in the 1960s, the World Bank advised the Korean government against going into the steel business. Moreover, no one in the Korean private sector had the capital or risk appetite to pioneer this industry, even though doing so will greatly benefit the country.

It was government officials – ridiculed as bureaucratic, lazy, and incompetent by some free-market economists – who had to intervene.

What did these Korea officials do for the steel industry?

Subsidies and protections, said Chang.

He said what South Korea did for the steel industry was in accordance with the 'infant industry argument,' a theory that was first postulated by Alexander Hamilton, the US Treasury Secretary under George Washington.

In addition, the United States and other countries successfully practiced this theory early in their development.

Now, they've outgrown the need for it. However, these countries still need government intervention, said Chang, to restrain certain industries from jeopardizing the whole economy (like the financial sector in 2007-2010) and others from committing harmful actions like pollution.

As for the poorest countries, especially those in sub-Saharan Africa, Chang argues that protectionism and subsidies are absolutely necessary, contrary to the free-market approach advocated by the World Bank and IMF.

If the IMF and World Bank were right, a lot of these sub-Saharan African countries would have been out of poverty by now because they have implemented many free-market recommendations.

Instead, what happened was that they became stuck in low-productivity industries like agriculture.

What they need to do is to move to higher-productivity industries through government intervention, said Chang.

Which industries should they pick?

First, most countries – unless they're big like China or the US – must focus on exports because their domestic markets aren't big enough.

They can start with 'low-hanging fruits,' said Chang. Examples include electronics assembly and simple machinery. For these industries, there is proven global demand and it's not too difficult to get started in them.

In addition, Chang said it might not be a bad idea to 'leapfrog' into some hot, new sectors like alternative energy and new materials. The rationale is that there aren't too many dominant, established players in these fields.

He said one reason Asian countries were successful with electronics decades ago was that it was a relatively new field with few established players.

Chang also addressed the concern of corruption, laziness, and incompetence among government officials, a central argument of the pro-free market capitalism camp.

He said it's true that many countries, especially those that are poor, have corrupt and incompetent officials. However, it's undeniable that officials from other countries are highly competent.

Competent officials are usually paid adequately. One study said that wages equal to about 70 percent of the rate in a comparable private sector positions is enough, said Chang.

Moreover, the system must appeal to non-financial incentives of individuals; service to country and the desire to do well are examples. After all, even managers in the private sector appeal to non-financial incentives of its workers.

Finally, Chang said countries can grow out of corruption. In the 1950s, the United States Agency for International Development (USAID) famously said aid to South Korea was a "bottomless pit." Now, South Korea is a modern economy that no longer needs US aid, thanks in large part to the work of competent government officials.

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