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Apr 1 / Jonathan

Reich on Stiglitz

Robert Reich reviews Fair Trade for All, by Joseph Stiglitz and Andrew Charlton, in which the authors maintain that the current program of global trade liberalization is not benefiting poorer countries, contrary to the hype associated with NAFTA and various WTO trade rounds. (Stiglitz is quoted more extensively in an earlier post.

Hence, the authors argue, the pace at which poorer nations open their markets to trade should coincide with the development of new institutions — roads, schools, banks and the like — that make such transitions easier and generate real opportunities. Since many poor nations can’t afford the investments required to build these institutions, rich nations have a responsibility to help.

Without these other institutions in place, the authors say, trade by itself can do more harm than good. They point out that inequality increased after trade was liberalized in Argentina, Chile, Colombia, Costa Rica and Uruguay. Ten years after the North American Free Trade Agreement went into effect, Mexico’s real wages are lower than they were before, and both inequality and poverty have grown. Many of the manufacturing jobs that came to Mexico in the wake of Nafta have since been lost to China, partly because China invested heavily in education and infrastructure while Mexico, lacking tariff revenues, couldn’t afford to do so. According to Stiglitz and Charlton, every developing country that has succeeded in achieving rapid growth has protected its market to some extent until it was ready to dismantle trade barriers. China’s growth, for example, escalated in the 1970’s, before it lowered its barriers.

Stiglitz and Charlton, Reich argues, fail to suggest how this might be fixed, and that in their analysis of inequality created by globalization, they don’t go far enough.

Surprisingly, though Stiglitz has spent some years in Washington, he doesn’t answer the obvious next question: How can this commendable agenda be sold to richer nations? Their political leaders are in a bind since so many of their own citizens are also losing jobs and experiencing declining incomes and, rightly or wrongly, blaming globalization for their plight. This is one of the major reasons the antiglobalization movement is as strong in the developed world as in the developing. It was, after all, Americans who marched and demonstrated against the World Trade Organization in Seattle in December 1999, at what was to have been the start of the new round of trade liberalization. And just months ago, with a Republican in the White House and a Republican-controlled Congress and with the solid support of American business leaders, the modest Central American Free Trade Agreement squeaked through the House of Representatives by only two votes.

While Stiglitz and Charlton nobly assert that trade agreements should be viewed as presumptively unfair if they bestow disproportionate benefits on richer nations, they fail to acknowledge that within richer nations free trade is already disproportionately benefiting the best educated and best connected. The wealthy are growing much wealthier while the middle class is being squeezed. In fact, the adjustment mechanisms the authors find lacking in most developing economies — good public schools, modern infrastructure and adequate social safety nets — are coming to be less and less available even in America. Free trade surely generates the gains Ricardo claimed for it. But until those gains are more widely shared — within richer countries as well as between richer and poorer — we can kiss any further round of trade liberalization goodbye.

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