Revisiting the Lexus and the Olive Tree

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Once upon a time, the leading car maker of a developing country exported its first passenger car to the US. Up until then, the little company had only made shoddy products – poor copies of quality items made by richer countries. The car was nothing like sophisticated. It was just a cheap subcompact and one could have called it “four wheels and an ashtray”. But it was a big moment for the country and its exporters felt proud. Unfortunately, the product failed. The car had to be withdrawn from the US market. This disaster led to a major debate among the country’s citizens.
Many argued that the company should have stuck to its original business of making simple textile machinery; after all, the country’s biggest export item was silk. If the company could not make good cars after 25 years of trying, there was no future in it. The government had given the car maker every opportunity to succeed. It had ensured high profits for it at home through high tariffs and draconian controls on foreign investment in the car industry. Fewer than ten years ago, it even gave public money to save the company from imminent bankruptcy. So, the critics argued, foreign cars should now be let in freely and foreign car makers, who had been kicked out 20 years before, should be allowed to set up shop again. Others disagreed. They argued that no country had got anywhere without developing ‘serious’ industries like automobile production. They just needed more time to make cars that appealed to everyone.
The year was 1958 and the country was, in fact, Japan. The company was Toyota, and the car was called the Toyopet. Toyota started out as a manufacturer of textile machinery (Toyoda Automatic Loom) and moved into car production in 1933. The Japanese government kicked out General Motors and Ford in 1939 and bailed out Toyota with money from the central bank (Bank of Japan) in 1949. Today, Japanese cars are considered as ‘natural’ as Scottish salmon or French wine. At the time, the ones that had disagreed had argued that no country had gotten anywhere without developing ‘serious’ industries but fewer than 50 years ago, most people, including many Japanese, thought the Japanese car industry simply should not exist.
Half a century after the Toyopet debacle, Toyota’s luxury brand Lexus has become something of an icon for globalization, thanks to the American journalist Thomas Friedman’s book, “The Lexus and the Olive Tree” which was published in 2000. The book owes its title to an epiphany that Friedman had on a train during his trip to Japan in 1992. He had paid a visit to a Lexus factory which mightily impressed him. On his way back he came across yet another newspaper article about the troubles in the Middle East where he had been a long-time correspondent. Then it hit him.
As written well in his book, he realized that “half the world seemed to be intent on building a better Lexus, dedicated to modernizing, streamlining, and privatizing their economies in order to thrive in the system of globalization. And half of the world, sometimes half of the same country, even half of the same person, was still caught up in the fight over “who owns which olive tree”. According to Friedman, unless they fit themselves into a particular set of economic policies that he calls the Golden Straitjacket, countries in the olive-tree world will not be able to join the Lexus world. In describing the Golden Straitjacket, he pretty much sums up today’s neo-liberal economic orthodoxy: in order to fit into it, a country needs to privatize state-owned enterprises, maintain low inflation, reduce the size of government bureaucracy, balance the budget (if not running a surplus), liberalize trade, deregulate foreign investment, deregulate capital markets, make the currency convertible, reduce corruption and privatize pensions.
According to him, this is the only path to success in the new global economy. His Straitjacket is the only gear suitable for the harsh but exhilarating game of globalization. Friedman is categorical. He argued that: “unfortunately, this Golden Straitjacket is pretty much “one-size fits all”. It is not always pretty or gentle or comfortable. But it’s here and it’s the only model on the rack this historical season”. However, the fact is that, had the Japanese government followed the free-trade economists back in the early 1960s, there would have been no Lexus. Toyota today would, at best, be a junior partner to some western car manufacturer, or worse, have been wiped out.
The same would have been true for the entire Japanese economy. Had the country donned Friedman’s Golden Straitjacket early on, Japan would have remained the third-rate industrial power that it was in the 1960s, with its income level on a par with Chile, Argentina and South Africa. As Time Magazine reported on its 4 April 1969 edition, it was then a country whose Prime Minister, Hayao Ikeda, was insultingly dismissed as “a transistor-radio salesman” by the French president, Charles De Gaulle, when he visited France in 1964. In other words, had they followed Friedman’s advice, the Japanese would not be exporting the Lexus now but still be fighting over who owns which olive tree.
The above Toyota story suggests that there is something spectacularly jarring in the fable of globalization promoted by Thomas Friedman and his colleagues. According to this history, globalization has progressed over the last three centuries in the following way: countries adopted free-market and free-trade policies; liberalized their trade and deregulated their domestic economies; set low barriers to the international flows of goods, capital and labor; and macroeconomic stability, both nationally and internationally, was guaranteed by the principles of sound money (low inflation) and balanced budgets.
Unfortunately, things started to go wrong after the First World War. In response to the ensuing instability of the world economy, countries unwisely began to erect trade barriers again. The resulting contraction and instability in the world economy, and then finally, the Second World War, destroyed the last remnants of the first liberal world order. After the Second World War, the world economy was re-organized on a more liberal line, this time under American hegemony. In particular, some significant progress was made in trade liberalization among rich countries through the early General Agreement on Trade and Tariffs (GATT) talks. However, protectionism and state intervention still persisted in most developing and communist countries.
Fortunately, illiberal policies have been largely abandoned across the world since the 1980s following the rise of neo-liberalism. National policy changes were made all the more necessary by the unprecedented acceleration in the development of transport and communications technologies. With these developments, the possibilities of entering mutually beneficial economic arrangements with partners in faraway countries, through international trade and investment, increased dramatically. This has made openness an even more crucial determinant of a country’s prosperity than before.
Reflecting the deepening global economic integration, the global governance system has recently been strengthened. Most importantly, in 1995 the GATT was upgraded to the World Trade Organization (WTO), a powerful agency pushing for liberalization not just in trade but also in other areas, like foreign investment regulation and intellectual property rights. WTO now forms the core of the global economic governance system together with the International Monetary Fund (IMF) and the World Bank in charge of access to short-term finance and long-term investments.
The result of all these developments, according to the official history, is a globalized world economy comparable in its liberality and potential for prosperity only to the earlier ‘golden age’ of liberalism. Renato Ruggiero, the first Director-General of WTO, solemnly declared that: “as a consequence of this new world order, we now have the potential for eradicating global poverty in the early part of the next 21st century – a Utopian notion even a few decades ago, but a real possibility today.” 
This version of the history of globalization is widely accepted. It is supposed to be the route map for policymakers in steering their countries towards prosperity. Unfortunately, according to Ha-Joon Chang, who wrote a book entitled “Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism” in 2001, it paints a fundamentally misleading picture, distorting “our understanding of where we have come from, where we are now and where we may be heading for.” 
The truth and the real history of globalization is that the free movement of goods, people, and money that developed under British hegemony between 1870 and 1913, the first episode of globalization which was led by Britain, was made possible in large part by military might rather than market forces. As Ha-Joon Chang stated in his book entitled “ Kicking Away the Ladder: Development Strategy in Historical Perspective” published in 2002, apart from Britain itself, the practitioners of free trade during this period were mostly weaker countries that had been forced into it, rather than voluntarily adopted it, as a result of colonial rule or ‘unequal treaties’ like the Nanking Treaty between China and Britain which resulted in the 99 years British lease of Hong Kong which, among other things, deprived them of the right to set tariffs and imposed externally determined low flat-rate tariffs on them.
Despite their key role in promoting ‘free’ trade in the late 19th and early 20th centuries, colonialism and unequal treaties hardly get any mention in the hordes of pro-globalization books. Even when they are explicitly discussed, their role is seen as positive on the whole. For example, in his acclaimed book, Empire, the British historian Niall Ferguson honestly notes many of the misdeeds of the British empire, including the Opium War, but contends that the British empire was a good thing overall and it was arguably the cheapest way to guarantee free trade, which benefits everyone. Another example is the Indian-born British-American economist Deepak Lal who never mentions the role of colonialism and unequal treaties in spreading free trade in his controversial study “In Praise of Empires”.
However, the countries under colonial rule and unequal treaties did very poorly. While they were imposing free trade on weaker nations through colonialism and unequal treaties, rich countries maintained rather high tariffs, especially industrial tariffs, for themselves. Ha-Joon Chang noted that from the 1880s onwards, most European countries raised protective barriers again, partly to protect their farmers and to promote their newly emerging heavy industries. Finally even Britain, as the chief architect of the first wave of globalization, abandoned free trade and re-introduced tariffs in 1932. It was due to the decline in British economic supremacy, which in turn was the result of the success of protectionism on the part of competitor countries, especially the USA, in developing their own new industries.
Thus, the history of the first globalization in the late 19th and early 20th centuries has been rewritten today in order to fit the current neo-liberal orthodoxy. The history of protectionism in today’s rich countries is vastly underplayed, while the hegemonic origin of the high degree of global integration on the part of today’s developing countries is hardly ever mentioned.