Revisiting Albert O. Hirschman on Trade and Development

REVIEW ESSAY
Albert O. Hirschman: An Intellectual Biography
by Michele Alacevich
Columbia University Press, 2021, 352 pages

A recent article by Ralph Gomory revisits free trade and its consequences. When nations trade, Gomory points out, it is never “free”: more is exchanged than goods, and advantages accrue that are not simply comparative. A less developed nation at some point may gain a positional advantage over a seemingly stronger counterparty and eventually will become not merely a trade partner, but a competitor and a rival. Of course, Gomory and coauthor William Baumol made this point at book length over two decades ago, just before China’s accession into the World Trade Organization (WTO). They demonstrated that the wealth-maximizing equilibria of two nations were distinct, refuting the notion that there was a single open trade equilibrium that benefited such nations (and the world) equally.¹

Gomory’s argument that free trade is something more than an axiomatic economic condition recalls an earlier economist, Albert O. Hirschman (1915–2012), the subject of an intellectual biography published last year by Italian economist Michele Alacevich.² Alacevich calls Hirschman an “international political economist,” a term that attempts to do justice to Hirschman as a multifaceted thinker—initially as a developmental economist in the 1950s and ’60s who wrote the seminal text The Strategy of Economic Development (1958); later as a social thinker who wrote short but penetrating works on a variety of subjects ranging from politics (Exit, Voice and Loyalty in 1970) to intellectual history (The Passions and the Interests in1977) to language (The Rhetoric of Reaction in 1991).

This wide-ranging intellectual activity is not simply attributable, as some have claimed, to developmental economics being discredited in the late 1960s and ’70s. Hirschman is simply different from typical economists. He could certainly “do the math.” But when one reads him, he gives the impression that he is working up the numbers and setting up the Marshallian graphs and curves more to satisfy his academic colleagues and less to persuade his wider audience. Hirschman’s approach to economics was always grounded in historical and experiential reality.

Despite his German origins, there does not appear to be any direct, considerable influence on Hirschman by the German economic-historical school of Friedrich List. But perhaps Hirschman’s lived experience mattered more anyway. Prior to his academic career, he had to escape the Third Reich in the 1930s because of his Jewish ancestry. Through the 1930s and ’40s he served in a number of roles: from soldier in the Spanish Civil War, to operator in Varian Fry’s rescue efforts in Vichy France, back to soldier in the U.S. Army, and then to interpreter in one of the first war crimes trials in 1945. Perhaps reflecting this diverse life experience, Hirschman approaches economics not as some fixed system, but a subject filled with shifting and even contrarian ideas that he captured in pithy phrases: “the hiding hand,” “hidden rationalities,” “cart before the horse sequences,” and most famously, “unbalanced growth.”

Unbalanced Growth

Hirschman’s notion of unbalanced growth was a product of his unorthodox approach. Early in his career, Hirschman rejected the established theories of previous developmental economists such as Paul Rosenstein-Rodan, who had contended that massive, fully orchestrated industrial policy was needed to create the “big push” to develop a nation in a “balanced” way. If a country only developed its capacity to make shoes, the balanced growth argument went, then it would have an excess supply of shoes. While the workers in the shoe factory could afford them, the rest of the country could not. In other words, a nation needed to align its governmental policies and launch a large number of industries at roughly the same time so that the entire populace could benefit.³

Hirschman argues against this idea. In a balanced growth economy, an economic project could only “be successful if it comes into the world as a member of a complex of firms lending each other mutual, complementary support.”⁴ But Hirschman contends that this describes something that has never existed. Banks, infrastructure, private firms, and accordant laws and regulations are never all simultaneously created, even in developed countries. They emerge, gradually and singularly over time. How, therefore, could such creation happen in developing ones? Such an ambitious attempt in countries already low on human and financial capital would certainly fail.

Rather, Hirschman argues in The Strategy of Economic Development that a combination of both market and nonmarket forces is necessary to break through developmental inertia. The purpose of a developing state should not be to attempt to achieve the equilibrium of balanced growth, but to deliberately foster the frictions and tensions that propel economies forward, to “keep alive rather than to eliminate the disequilibria of which profits and losses are symptoms in a competitive economy . . . the task of development policy is to maintain tensions, disproportions, and [such] disequilibria.”⁵ Political pressures from certain groups, for instance, can force a correction in income inequality that has resulted from the earlier economic take-off. Unbalanced growth, in other words, is more about discovering and implementing indigenous and quotidian possibilities throughout the development process, not preparing and perfecting a master blueprint at the beginning of it.

In keeping with this approach, Hirschman views economic matters more as a cultural anthropologist than a classical economist, resulting in alternative economic explanations. In his book Development Projects Observed (1967), he examines a series of development projects from around the world. There are just a few supply curves scattered through the book, and he eschews standard economic theorizing.

Comparative advantage is not just reducible to labor and commodities, he asserts. A country’s natural resources, for example, are not only a possible comparative economic advantage but often a source of deep national pride and identity. Site-bound projects—at a river, for instance—may be pursued for reasons that are not simply reduced to profit-seeking. And something like excess demand is not a mere externality. It creates rivalries and competitions. For example, in the decolonization of the Cold War period, town-country cleavages were often created with serious consequences. In Uganda, as electricity spread out from major urban centers to provincial towns, civil servants and hired third-country nationals who lived in the towns got the electric power; the farmers in the countryside only saw the power lines overhead. Conditions were set for backlash and violence.⁶  But this tension was also needed to drive economic progress.

Unbalanced Trade

The unique qualities of Hirschman’s realistic, empirical approach are found his first book, National Power and the Structure of Foreign Trade (1945), largely ignored when it was first published, though subsequently influential as a proto-geoeconomics text. In it, Hirschman traces how Germany in the 1930s deliberately pursued trade mastery over smaller and weaker states to gain power-based advantages. Nazi Germany wanted to trade with lesser industrialized nations that it could more easily “entangle” into its economy. Whereas developed countries could, with their slew of exports, look elsewhere, developing countries with little more than commodities to export had fewer options. The swifter Germany could entangle these nations into close, or even exclusive, relationships with German manufacturers, the easier it could control them.⁷

This argument about exploitative trade relationships was not, in its basic form, controversial. Many economists, such as Alexander Gerschenkron, saw the Third Reich’s trade practice as something specifically Germanic, as an outgrowth of deep-seated patterns of Teutonic-Prussian aggression. In contrast, Hirschman contends that such motivations could not be so easily reduced to the nation’s predatory history. Rather, he asserts that trade itself is particularly prone to geopolitical manipulation and not simply economic calculation.⁸ Indeed, Hirschman further insists that, in the right circumstances and given the right instruments, any nation could act the way Germany did in the 1930s. Trade between countries is not simply about the provision of goods, but about competitive national advantage fraught with both economic and political consequences. Trade is not simply about the goods you trade (the “supply effect”); it is also about your ability to influence whom you trade the goods with (the “influence effect”), in the short and long term. Even if war “could be eliminated, foreign trade would lead to relationships of dependence and influence between nations.”⁹

Hirschman provides statistical data, historical evidence, and Marshallian formulae to demonstrate that none of this is an exclusively German phenomenon. Germany’s motives were impure and its aims ultimately self-destructive—its quest for autarky to support its campaign of conquest led to catastrophe. But that does not invalidate Hirschman’s basic premise: trade between states creates power dynamics that states themselves will exploit. Subsistence-based, unindustrialized countries might want to diversify their export economies, but they find themselves linked in historical path dependencies to more powerful industrial nations.  Ireland, for instance, after independence was still overwhelmingly importing and exporting its goods to Great Britain. Even after Ireland deliberately sought a diversified import policy, its exports to Great Britain fell only very slightly. As Hirschman demonstrates, once an export relationship has been established with a nation, it is extremely difficult for the nonindustrialized nation to disentangle itself from it.¹⁰

“Mutually beneficial” trade relations are, in reality, highly asymmetrical as to their benefits. The result is a seeming inclination by nations towards bilateral trade relations to maximize their own benefits, not necessarily towards multilateral and more open trade systems. In a subsequent essay, he foresees the dependencia thesis of Latin American economists who would come to reject “North American” developmental theories. And Hirschman goes even further. Asymmetries can provide advantages in both directions. The larger, more powerful nation could well suffer from a “disparity of attention” due to geopolitical or domestic concerns, and thus be “unable and unlikely to focus its attentions on its relation to a smaller trading partner with the single-mindedness . . . available to, and characteristic of the latter.”¹¹ The United States would exemplify this asymmetry, vis-à-vis China, in the twenty-first century.

Hirschman was not a protectionist; in the book, he advocates a robust supranational organization to prevent Nazi-like trade depredations. Nonetheless, his strategically inflected understanding makes him skeptical of maximalist arguments for so called free trade. He comments on the seemingly omnipresent British enthusiasm for it, specifically the argument that free trade presumptively reduces the dangers of famine and catastrophe even during pending or actual conflict, based on strict economic understandings of trade maximizing principles. This, to Hirschman, is blind to political realities and therefore absurd: “[s]uch an argument clearly presuppose[s] either freedom of the seas or a mighty British fleet”—precisely the things that a war could very much call into question.¹²

Hirschman’s views had little traction when they were published in 1945.¹³ They cut against then fashionable theories of trade, especially the Heckscher-Ohlin, neo-Ricardian model that postulates that trade is entirely premised on a nation’s abundance of goods (though the model came to have so many loopholes that it had to be continuously reworked).  Comparative advantage in its classic meaning still held sway. Anything that interfered with unfettered trade was to be avoided: such interference shifted costs to consumers and revenues to protected sectors that were likely inefficient and filled with grifting rent-seekers. In the twenty-first century, free trade as an axiomatic, unarguable proposition remains a deep-seated economic conviction. Many economists still contend that trade relationships are entirely about economic maximization, that even if “all other countries should practice trade protection . . . the economy that remained open would still gain more from cheaper imports than it would lose in denied export markets.”¹⁴

Trade during the Cold War

The publication of Hirschman’s National Power and the Structure of Foreign Trade coincided with the postwar victors’ establishment of what became known as the “liberal international order” that permitted the free flow of trade. Bilateralism and autarky were out, and Bretton Woods and the General Agreement on Trade and Tariffs (GATT) set the economic conditions within the new order.  Except the reality was far more complex. “Protectionism”—or better put, economic nationalism that involved a nation’s right to intervene in trade and related matters—continued. The truth was that purely unmitigated free trade was—as it has always been in history—less the norm than the qualified exception.¹⁵

Trade was still somewhat static: transportation costs remained high and international capital flow was highly restricted in the postwar era.¹⁶  Narratives asserting that Bretton Woods set up open, nondiscriminatory trade policy leave out very large details.

David Baldwin shows how trade discrimination was woven into the postwar order and was an integral part of U.S. trade policy throughout the Cold War. Massive exceptions were written into the charter of the proposed International Trade Organization (ITO) that was later incorporated into the GATT. Countries with major balance of payments difficulties could discriminate against U.S. goods (which the United States gladly acquiesced to in order to facilitate their recovery); regional customs unions could continue to discriminate freely against U.S. goods (and therefore promote especially European recovery and reintegration); and most significantly, discriminatory trade measures were permitted for “essential security interests”—which could be, in Baldwin’s words, interpreted “broadly enough to permit almost anything.”¹⁷

The United States sought to gain positional advantage via trade policy from the outset of the Cold War, not simply oversee the free flow of commerce. Revisionist Cold War historians contend that the establishment of the postwar economic order was not simply to create open markets, but to further American geostrategic interests and to promote American economic prosperity. Yet this should hardly be considered a particularly damning case of Machiavellian realpolitik, as the revisionists sometimes imply, and instead as standard practice, à la Hirschman. Truman’s revival of the Open Door was not merely to permit “free enterprise,” but enterprise that would ensure markets for America’s production surplus and thereby prevent economic recession. The Marshall Plan may have been advertised as beneficial for the whole world, but only selected markets were chosen—it applied to Europe only.¹⁸

It is often said, seemingly without irony, that an open trade system helped keep the near half-century Cold War peace between the superpowers. Such an assertion fails to mention the outright trade warfare that occurred throughout the Cold War between those same powers. Any potential “dual-use” civilian-military technologies were prohibited from being exported to the Soviet Union via the Coordinating Committee for Multilateral Export (CoCom). Established in 1949, it endured past the end of the Cold War. It effectively denied the Soviets much of the high technology and innovation breakthroughs that helped to propel the United States to dominance.¹⁹

“Protectionism” did not fade away but was debated and negotiated in the American polity even during the most intense periods of the Cold War.  Tariffs remained, subject to wide variation depending upon the particular good in question (e.g., tariffs on many agricultural products remained astronomical for decades).²⁰ Smoot-Hawley did not immediately vanish in the Bretton Woods system, either, but lived well into the early Cold War era via various amendments.²¹ Throughout the 1950s, Eisenhower’s ability to negotiate free trade agreements was significantly curtailed by legislative action or inaction. Protectionists within Congress successfully managed to keep the U.S. out of the Organization for Trade Cooperation (OTC), which was supposed to administer the GATT—and without the U.S. being a member, the OTC had little chance of being a viable entity. Indeed, OTC entry never had a chance in Congress, despite Eisenhower’s urgings.²²

Still, as the Cold War progressed, the “disparity of attention” played out as Hirschman speculated. America became immersed in and distracted by its own geopolitical affairs in places like Southeast Asia, attempting to have both guns and butter. Europe and Japan had recovered and, as global industrial competitors, began to threaten the U.S. position. America awoke in the early 1970s to find its economic position at risk, and it responded by scaling back on open trade.  In 1971, Nixon removed the dollar from the gold standard. He allowed the dollar to float and devalued it to boost exports. He even briefly included the idea of a 10 percent general tariff. Ultimately, the Bretton Woods system ended for good in 1973 and the devalued dollar briefly boosted American manufacturing and even momentarily resolved balance of payments issues—though during that same year the first of the decade’s “oil shocks” made all of it for naught.²³ In the mid-1980s, the Reagan administration negotiated the Plaza Accords in order to support American trade by devaluing the dollar. Despite the laissez-faire legend around Reagan, this was perhaps the most significant act of “protectionism” in the name of economic self-interest in the entirety of the Cold War.²⁴

And while trade debates played out in the corridors of power and in various routes of commerce, trade theories underwent considerable revision in the halls of academia. It took some time for economists to notice the world shifting around them, but Hirschman’s book was finally rediscovered in the 1970s. Scholars, particularly those focused on “international political economy,” began to take seriously the dynamic interactions between nations in the pursuit of wealth, power, and influence.²⁵ Standard neoclassical economists were slower to adapt. Paul Krugman noted in his Nobel address that suggestions that trade might be about anything other than standard comparative advantage were considered heretical well into the 1960s and 1970s. But the postwar data just did not fit the classical models, and even “pure” economists started to think differently. “New trade theory,” which dealt with increasing returns to scale, in direct contradiction to Ricardian notions, gradually emerged in the work of scholars such as Avinash Dixit (and Krugman himself).²⁶

In truth, the influence of such theorists was probably exaggerated.²⁷ Regardless of what the theorists said, the evidence showed that, during the Cold War, trade was a negotiated political space. Trade was a way to “govern at a distance,” to influence a nation’s actions through private sector proxy or through outright economic warfare. Economically, countries sought some form of trade advantage via the increasing returns brought by industrialization, whether via the import-substitution methods of Latin America or the export driven strategies of East Asia.²⁸ Whether there was overwhelming evidence that a Hirschmanian “influence effect” was more significant than “supply effect” may not have been conclusively demonstrated. Nonetheless, Hirschman’s dynamic world of trade seemed more accurate than the static world posited by the neoclassical theorists.

Trade and the Post–Cold War Order

Supposedly, the post–Cold War era saw the advent of true free trade. After all, the security problem that led to government-directed economic statecraft had been eliminated with the fall of the Soviet Union. But in fact, the so-called end of history in the early 1990s initially brought a surge of economic nationalist thinking. The Clinton administration is often considered the apogee of the globalized “New Economy.” But in 1992, Bill Clinton ran successfully on a campaign of economic nationalism and initially established the National Economic Council in order to compete (and emulate) Japan’s MITI and its industrial policy initiatives. His early administration was filled with the likes of Laura D’Andrea Tyson, who argued for more industrial policy, and W. Bowman Cutter, who worked on developing tough bilateral trade strategies with Japan. During the early Clinton years, even the normally free trade–oriented State Department bowed to protectionist preferences.²⁹

Contrary to what might seem like some inevitable free trade surge at the supposed end of history, the very opposite took place in the early 1990s. Richard Baldwin has noted that the GATT free trade regime looked to be in decline in the early 1990s, whereas trade regionalism swept “the globe like wildfire.” ³⁰ The nascent supply chain revolution hardly slowed down regionalism and bilateralism at all. When the U.S. entered into a bilateral free trade agreement with Mexico in 1990, for instance, it completely upended the economic status quo in the Americas. Soon other Latin American nations, realizing the favoritism that Mexico had received began to seek out free trade agreements themselves.³¹

Despite the GATT preference for multilateralism, countries set up numerous bilateral trade arrangements. One theory posited was a sort of variation of Hirschman’s influence effect. Differentiated products, generally those that are high-tech and produced in more developed nations, are more typically the products of more sophisticated firms. Those firms tend to have considerable political influence. They will lobby to favor bilateral agreements that structure trade arrangements as favorable to them as possible. High-tech firms may, for instance, openly seek protection via voluntary restraint agreements.³²

Ultimately, of course, in the campaign between “nationalists” and “globalists” in the Clinton administration, the latter prevailed. Yet in the past ten years or so, many of the globalists’ predictions have either fallen short or shown to be spectacularly wrong. In the long term, Hirschman’s ideas offered a better guide to understanding the shape of global trade.

The Rise of China

China had been trying to get into the GATT (later the WTO) for over fifteen years before it finally acceded to it in 2001. China’s accession should not be seen not as confirmation of its superpower status, but as another milestone on its way there. China’s earlier economic policies had seen the outright failure of orchestrated five-year plans in the ’1970s and ’80s.³³ Beginning in the 1980s, however, trade came to be used, in Hirschmanian terms, in a very “unbalanced way” in China: Rather than an overall nationwide orchestration, trade policies focused on stimulating the southern coastal provinces of Guangdong and Fujian. Those provinces accounted for nearly all Chinese exports by the mid-1990s. The provinces were even called the “Fifth Tiger,” and they eclipsed the traditionally richer Lower Yangtze region. Starting in the mid-1980s in Guangdong, experiments began with export-processing contracts that allowed foreign investors to gain ownership of components and materials brought in for assembly. The local experiment was a spectacular success and paved the way for further foreign investment.³⁴

When WTO accession occurred, China did make major changes to trade policy. It vastly reduced its tariffs. It stopped restricting trade to a limited number of so-called foreign-trade corporations. But China also masterfully utilized WTO-permitted policies to its advantage. A good example is the WTO’s provision of value added tax rebates on exports—China made VAT rebates near-universal within the Chinese economy, with significant results.³⁵

China’s trade strategy since WTO accession has not simply been to fit harmoniously within the WTO trade framework, but rather to seek bilateral, geoeconomic, and geopolitical advantages, including total regional hegemony. Prior to WTO accession, it had no bilateral FTAs. After accession, it steadily entered into FTAs with neighboring countries, primarily via ASEAN membership. As if to prove the point that China sees the WTO as a means and not an end, fully 45 percent of China’s trade is now exclusively bilateral, up from 19.5 percent in 2010.³⁶

China has participated in organizations such as the WTO not simply for the economic benefits of comparative advantage and free trade, but to create Hirschmanian power and influence effects—in Rush Doshi’s words, to “order-build.” China’s deliberate twenty-first-century economic strategy appears to seek influence over global and regional organizations, from the WTO that it acceded to in 2001; to the Asian Conference on Interaction and Confidence Building Measures (CICA) that it joined in 2014; to the Asian Infrastructure Investment Bank (AIIB) that it founded in 2016.³⁷ A recent report to Congress by the U.S. China Economic and Security Review Commission states that, in the past two years, China has “significantly expanded use of economic coercion to punish critics and compel behavior.” Nevertheless, the same report noted a 2021 business outlook survey conducted by the European Chamber of Commerce that reported that European firms were nonetheless committed to China “now more than ever.”³⁸

China’s international economic strategy now includes development along with trade, though how this strategy correlates is not entirely clear. In the last ten years, China has become, by a considerable margin, the world’s leading overseas development financier. From 2000 to 2012, U.S. and Chinese development financing was roughly equivalent. Since 2013 and the announcement of the Belt and Road Initiative (BRI), China has outspent the United States in overseas development by a nearly three-to-one ratio. Financing is done primarily through semi-concessional and non-concessional loans and export credits, in sharp contrast to the U.S. policy of financing via grants and concessional loans. Africa has the highest project count and overall investment.³⁹

And yet, as of this writing, China has yet to sign any FTAs with African nations. Why not? Rather than pure market imperatives, is there perhaps a deliberate “African” strategy of deepening ties via investment and infrastructure—of seeing what “works”—and then exploiting success by “locking in” those nations via bilateral FTAs? This would create long-lasting, path dependent relationships, as Hirschman recounts in his book. (Bear in mind, such a bilateral/FTA strategy would in no way violate WTO rules.)

Interests

China’s grand economic strategy remains elusive to the United States. Nonetheless, many are realizing that it should be resisted, or at least challenged, beyond merely invoking free trade and related principles. Rush Doshi writes of the virtues of likeminded countries binding together in cartels in order to set up systems of trade and standards-creation that can bypass global organizations such as the WTO and the International Telecommunications Union, which are seen to have excessive Chinese influence.⁴⁰ The U.S.-China Economic and Security Review Commission recommends an economic “defense coalition” of like-minded countries to “provide mutual support in the event of economic coercion” that would provide assistance to coerced weaker nations, to include the ability to impose retaliatory measures against the coercer states.⁴¹

It appears that, in the United States at least, more are waking to the fact that we live in Hirschman’s world of economic realism, a world not of economic essences but of historically contingent existences. Yet the allure of the free trade “empyrean” remains powerful. Charles Taylor, among the many distinguished philosophers and intellectual historians who admired and was influenced by Hirschman, noted that economics as a discipline is still reliant on the Enlightenment’s notion of individually based economic “interest” that can be accordingly atomized, simplified, and quantified.⁴² In one of his later books, The Passions and the Interests, Hirschman shows how “interest” as a notion is not so easily confined.  Over the centuries, such “interest” congeals around not only individuals, but around other groups—nations, societies, interest groups, firms, and classes.⁴³ Interests are hard to reduce and simplify. They require historical contextualization and deep, specific cultural knowledge.

The same can be said of trade—trade between nations is not reduced to simple labor-based comparative advantage and other “classical” concepts. If we learn to understand trade more like Hirschman did, we will better understand the world we live in, our possible rivals, and ourselves.

This article is an American Affairs online exclusive, published August 20, 2022.

Notes