Friday, August 23, 2013


My six-year-old son should get a job

Is free trade always the answer?

" economists justify rapid, large-scale trade liberalization in developing countries. They claim that developing country producers need to be exposed to as much competition as possible right now, so that they have the incentive to raise their productivity in order to survive. Protection, by contrast, only creates complacency and sloth. The earlier the exposure, the argument goes, the better it is for economic development.

"Industries in developing countries will not survive if they are exposed to international competition too early. They need time to improve their capabilities by mastering advanced technologies and building effective organizations. This is the essence of the infant industry argument, first theorized by Alexander Hamilton, first treasury secretary of the US, and used by generations of policy-makers before and after him...

Free trade isn't working ...

"... the Bad Samaritans have done their utmost to push developing countries into free trade - or, at least, much free trade. During the past quarter of a century, most developing countries have liberalized trade to a huge degree. They were first pushed by the IMF and the World Bank in the aftermath of the Third World debt crisis of 1982. There was a further decisive impetus towards trade liberalization following the launch of the WTO in 1995. During the last decade or so , bilateral and regional free trade agreements (FTAs) have also proliferated. Unfortunately, during this period, developing countries have not done well at all, despite (or because of in my view) massive trade liberalization...

The story of Mexico - poster boy of the free trade camp - is particularly telling. If any developing country can succeed with free trade, it should be Mexico. It borders on the largest market in the world (the US) and has a free trade agreement with it since 1995 (the North American Free Trade Agreement or NAFTA). It has also a large diaspora living in the US, which can provide important informal business links. Unlike many other poorer developing countries, it has a decent pool of skilled workers, competent managers and relatively developed physical infrastructure (roads, ports and so on).

"Free trade economists argue that free trade benefited Mexico by accelerating growth. Indeed, following NAFTA, between 1994 and 2002, Mexico's 'per capita' GDP grew at 1.8% per year, a big improvement over the 0.1% rate recorded between 1985 and 1995. But the decade before NAFTA was also a decade of extensive trade liberalization for Mexico, following its conversion to neo-liberalism in the mid-1980s. So trade liberalization was also responsible for the 0.1% growth rate.

... "Wide-ranging trade liberalization in the 1980s and the 1990s wiped out whole swathes of Mexican industry that had been painstakingly built up during the period of import substitution industrialization (ISI). The result was, predictably, a slowdown in economic growth, lost jobs and falls in wages (as better-paying manufacturing jobs disappeared). Its agricultural sector was also hard hit by subsidized US products, especially maize, the staple diet of most Mexicans. On top of that, NAFTA's positive impact (in terms of increasing exports to the US market) has run out of steam in the last few years. During 2001-2005, Mexico's growth performance has been miserable, with an annual growth rate of 'per capita' income at 0.3% (or a partly 1.7% increase in total over five years). By contrast, during the 'bad old days' of ISI (1955-82), Mexico's 'per capita' income had grown much faster than during the NAFTA period -at an average of 3.1% per year.

"Mexico is a particularly striking example of the failure of premature wholesale trade liberalization, but there are other examples. In Ivory Coast, following tariff cuts of 40% in 1986, the chemical, textile, shoe and automobile industries virtually collapsed.

... "...When countries were already under considerable pressure from the IMF to reduce their budget deficits, falling revenue meant severe cuts in spending, often eating into vital areas like education, health and physical infrastructure, damaging long-term growth

"It is perfectly possible that 'some' degree of 'gradual' trade liberalization may have been beneficial, and even necessary, for certain developing countries in the 1980s - India and China come to mind. But what has happened during the last past quarter of a century has been a rapid, unplanned and blanket trade liberalization. Just to remind the reader, during the 'bad old days'of protectionist import substitution (ISI), developing countries used to grow, on average, at double the rate that they are doing today under free trade. Free trade simply isn't working for developing countries."

Poor theory, poor results

"... The more serious problem -at least for an economist like myself - is that theory is about efficiency in the short-run use of given resources, and not about increasing available resources through economic development in the long run; contrary to what their proponents would have us believe, free trade theory does not tell us free trade is good for 'economic development'.

"Free trade may often -although not always - be the best trade policy in the 'short run', as it is likely to maximize a country's current consumption. But it is definitely not the best way to develop an economy. In the long run, free trade is a policy that is likely to condemn developing countries to specialize in sectors that offer low productivity growth and thus low growth in living standards. This is why so few countries have succeeded with free trade, while most successful countries have used infant industry protection to one degree or another. Low income that results from lack of economic development severely restricts the freedom that the poor countries have in deciding their future. Paradoxically, therefore, 'free'trade policy reduces the 'freedom' of the developing countries that practise it.

International trading system and its discontents

"Never mind that free trade works neither in practice nor in the theory. Despite its abysmal record, the Bad Samaritan rich countries have strongly promoted trade liberalization in developing since the 1980s.

"On the surface, the WTO simply created a 'level playing field' among its member countries, requiring that everyone plays by the same rule - how can we argue against that? Critical to the process was the adoption of the principle of a 'single undertaking'which meant that all members had to sign up to all agreements. In the GATT regime, countries could pick and choose the agreements that they signed up to and many developing countries could stay out of agreements that they did not want - for example, the agreement restricting the use of subsidies. With the single undertaking, all members had to abide by the same rules. All of them had to reduce their tariffs. They were made to give up import quotas, export subsidies (allowed only for the poorest countries) and most domestic subsidies.

"In addition, there were areas where 'levelling the playing field' meant a one-sided benefit to rich countries. The most important example is the TRIPS (Trade-related Intellectual Property Rights) agreement which strengthened the protection of patents of other intellectual property rights. Unlike trade in goods and services, where everyone has something to sell, this is an area where the developed countries are almost always sellers and developing countries buyers. Therefore, increasing the protection for intellectual property rights means that the cost is mainly borne by the developing nations. The same problem applies to TRIMS (Trade-related Investment Measures) agreement, which restricts the WTO member countries' abilities to regulate foreign investors. Once again, most poor countries only receive, and do not make, foreign investment. So, while their ability to regulate foreign companies is reduced, they do not get 'compensated' by any reduction in the regulations that their national firms operating abroad are subject to, as they simply do not have such firms.

"Many of the exceptions to the rules were created in areas where the developed needed them. For example, while most domestic subsidies are banned, subsidies are allowed in relation to agriculture, basic (as opposed to commercial) R&D (research and development), and reduction of regional disparities. These are all subsidies that happen to be extensively used by the rich countries...All rich country governments, especially the US government, heavily subsidized basic R&D, which then increases their competitiveness in related industries. Moreover, this is not a subsidy that developing nations can use, even if they are allowed to - they simply do not do much basic R&D, so there is little for them to subsidize.

"So, in the name of 'leveling the playing field', the Bad Samaritan rich nations have created a new international trading system that is rigged in their favour. They are preventing the poorer countries from using the tools of trade and industries policies that they had themselves so effectively used in the past in order to promote their own economic development - not just tariffs and subsidies, but also regulation of foreign investment and 'violation' of foreign intellectual property rights..."

No comments: