Category: Politics

Joseph Stiglitz’s critique of global trade liberalization is behind FEER’s paywall. Thanks to Mark Thoma for this extended excerpt.

FEER: Joseph Stiglitz, professor of economics at Columbia University, argues that trade liberalization must be re-examined to take into account how it damages poor countries.

Economists are in near-univeral agreement that globalization is a Good Thing. But the globalization that economists theorize about isn’t the globalization that politicians negotiate.

Social Justice and Global Trade, FEER, March 2006, By Joseph Stiglitz.

The history of recent trade meetings—from Seattle to Doha to Cancun to Hong Kong—shows that something is wrong with the global trading system. Behind the discontent are some facts and theories.

The facts: Current economic arrangements disadvantage the poor. Tariff levels by the advanced industrial countries against the developing countries are four times higher than against the developed countries. The last round of trade negotiations, the Uruguay Round, actually left the poorest countries worse off. While the developing countries were forced to open up their markets and eliminate subsidies, the advanced developed countries continued to subsidize agriculture and kept trade barriers against those products which are central to the economies of the developing world.

Indeed, the tariff structures are designed to make it more difficult for developing countries to move up the value added chain… As tariffs have come down, America has increasingly resorted to the use of non-tariff barriers as the new forms of protectionism. Trade agreements do not eliminate protectionist sentiments or the willingness of governments to attempt to protect producer and worker interests.

The theories: Trade liberalization leads to economic growth, benefiting all. This is the prevalent mantra. Political leaders champion liberalization. Those who oppose it are cast as behind the times, trying to roll back history. Yet the fact that so many seem to have been hurt so much by globalization seems to belie their claims. …the details of the trade agreements—make a great deal of difference.

That Mexico has done so poorly under NAFTA has not helped the case for liberalization. If there ever was a free trade agreement that should have promoted growth, that was it, for it opened up for Mexico the largest market of the world. But growth in the decade since has been slower than in the decades before 1980, and the poorest in the country, the corn farmers, have been particularly hurt by subsidized American corn.

The fact of the matter is that the economics of trade liberalization are far more complicated than political leaders have portrayed them. There are some circumstances in which trade liberalization brings enormous benefits—when there are good risk markets, when there is full employment, when an economy is mature. But none of these conditions are satisfied in developing countries. With full employment, a worker who loses his job to new imports quickly finds another; and the movement from low-productivity protected sectors to high-productivity export sectors leads to growth and increased wages. But if there is high unemployment, a worker who loses his job may remain unemployed. A move from a low-productivity, protected sector to the unemployment pool does not increase growth, but it does increase poverty. Liberalization can expose countries to enormous risks…

Perhaps most importantly, successful development means going stagnant traditional sectors with low productivity to more modern sectors with faster increases in productivity. But without protection, developing countries cannot compete in the modern sector. They are condemned to remain in the low growth part of the global economy. South Korea understood this. Thirty-five years ago, those who advocated free trade essentially told South Korea to stick with rice farming. But South Korea knew that even if it were successful in improving productivity in rice farming, it would be a poor country. It had to industrialize.

What are we to make of the oft-quoted studies that show that countries that have liberalized more have grown faster? Put aside the numerous statistical problems that plague almost all such “cross country” studies. Most of the studies that claim that liberalization leads to growth do no such thing. … Studies that focus directly on liberalization—that is, what happens when countries take away trade barriers—present a less convincing picture that liberalization is good for growth.

But we know which countries around the world have grown the fastest: they are the countries of East Asia, and their growth was based on export-driven trade. They did not pursue policies of unfettered liberalization. Indeed, they actively intervened in markets to encourage exports, and only took away trade barriers as their exports grew…

The point is that no country approaches liberalization as an abstract concept… Every country wants to know: For a country with its unemployment rate, with its characteristics, with its financial markets, will liberalization lead to faster growth?

If the economics are nuanced, the politics are simple. Trade negotiations provide a field day for special interests. … Exporters want others’ markets opened up; those threatened by competition do not. Trade negotiators pay little attention to principles… They pay attention to campaign contributions and votes.

In the most recent trade talks, for example, enormous attention has been focused on developed countries’ protection of their agricultural sectors—protections that exist because of the power of vested agricultural interests there. Such protectionism has become emblematic of the hypocrisy of the West … Some 25,000 rich American cotton farmers, reliant on government subsidies for cotton, divide among themselves some $3 billion to $4 billion a year, leading to higher production and lower prices. The damage that these subsidies wreak on some 10 million cotton farmers eking out a subsistence living in sub-Saharan Africa is enormous. Yet the U.S. seems willing to put the interests of 25,000 American cotton farmers above that of the global trading system and the well-being of millions in the developing world. If those in the developing world respond with anger, it is understandable.

The anger is increased by the United States’s almost cynical attitude in “marketing” its offers. For instance, at the Hong Kong meeting, U.S. trade officials reportedly offered to eliminate import restrictions on cotton but refused to do anything about subsidies. The cotton subsidies actually allow the United States to export cotton. When a country can export a particular commodity, it does little good to allow imports of that commodity. The U.S., to great fanfare, has made an offer worth essentially zero to the developing countries and berated them for not taking it up on its “generous” offer. …

In short, trade liberalization should be “asymmetric”, but it needs to be asymmetric in a precisely opposite way to its present configuration. Today, liberalization discriminates against developing countries. It needs to discriminate in their favor. Europe has shown the way by opening up its economy to the poorest countries of the world in an initiative called Everything But Arms. Partly because of complicated regulations (“rules of origin”), however, the amount of increased trade that this policy has led to has been very disappointing thus far. Because agriculture is still highly subsidized and restricted, some call the policy “Everything But Farms.” There is a need for this initiative to be broadened. … In fact, the advanced industrial countries as a whole would be better off, and special interests in these countries would suffer.

There is, in fact, a broad agenda of trade liberalization (going well beyond agriculture) that would help the developing countries. But trade is too important to be left to trade ministers. If the global trade regime is to reflect common shared values, then negotiations over the terms of that trade regime cannot be left to ministers who, at least in most countries, are more beholden to corporate and special interests than almost any other ministry. In the last round, trade ministers negotiated over the terms of the intellectual property agreement. This is a subject of enormous concern to almost everyone in today’s society. … It reflected the interests of U.S. drug and entertainment industries, not the most important producers of knowledge, those in academia. And it certainly did not reflect the interests of users, either in the developed or less-developed countries. But the negotiations were conducted in secret, in Geneva. The U.S. Trade Representative (like most other trade ministers) was not an expert in intellectual property; he received his short course from the drug companies, and he quickly learned how to espouse their views. The agreement reflected this one-sided perspective.

Several reforms in the structure of trade talks are likely to lead to better outcomes. The first is that the basic way in which trade talks are approached should be changed. Now they are commercial negotiations. Each country seeks to get the best deal for its firms. This stands in marked contrast to how legislation in all other arenas of public policy is approached. Typically, we ask what our objectives are, and how we can best achieve them. … If we began trade talks from this position of debate and inquiry, we could arrive at a picture of what a true development round look like. …

As more and more countries have demanded a voice in trade negotiations, there is often nostalgia for the old system in which four partners (the U.S., EU, Canada and Japan) could hammer out a deal. There are complaints that the current system with so many members is simply unworkable. We have learned how to deal with this problem in other contexts, however, using the principles of representation. We must form a governing council with representatives of various “groups”—a group of the least developed countries, of the agricultural exporting countries, etc. Each representative makes sure that the concerns of his or her constituency are heard. …

Finally, trade talks need to have more focus. Broadening the agenda also puts developing countries at a particular disadvantage, because they do not have the resources to engage on a broad front of issues.

The most important changes are, however, not institutional changes, but changes in mindset. There should be an effort on the part of each of the countries to think about what kind of international rules and regulations would contribute to a global trading system that would be fair and efficient, and that would promote development.

Fifteen years ago, there was a great deal of optimism about the benefits which globalization and trade would bring to all countries. It has brought enormous benefits to some countries; but not to all. Some have even been made worse off. Development is hard enough. An unfair trade regime makes it even more difficult. Reforming the WTO would not guarantee that we would get a fair and efficient global trade regime, but it would enhance the chances that trade and globalization come closer to living up to their potential for enhancing the welfare of everyone.

Robert Frank in the NY Times., via Mark Thoma.

Suppose a politician promised to reveal the details of a simple proposal that would, if adopted, produce hundreds of billions of dollars in savings for American consumers, significant reductions in traffic congestion, major improvements in urban air quality, large reductions in greenhouse gas emissions, and substantially reduced dependence on Middle East oil. The politician also promised that the plan would require no net cash outlays from American families, no additional regulations and no expansion of the bureaucracy.

As economists often remind their students, if something sounds too good to be true, it probably is. So this politician’s announcement would almost surely be greeted skeptically. Yet a policy that would deliver precisely the outcomes described could be enacted by Congress tomorrow — namely, a $2-a-gallon tax on gasoline whose proceeds were refunded to American families in reduced payroll taxes.

James D Hamilton at Econobrowser notes the bipartisan Senate approval of yet another giveaway to ADM and their other pals.

The urge to be seen as doing something about our energy problems is giving rise to legislation that has the potential for more harm than good. The ethanol amendment approved by the Senate yesterday is a case in point.

…

Whatever the argument in favor of such a measure, it isn’t to provide a new energy source. David Pimental of Cornell concluded that when you take into account the energy required to plant, grow, harvest, and process the corn, 1.7 Btu of energy inputs get used up to produce 1 Btu equivalent in ethanol; Resource Insights and Energy Outlook have more discussion of this.

Which is not to endorse an energy theory of value, as if energy were the only wasted input that we should be concerned about. When you add up the value of the land, labor, and capital also used to produce that 1 Btu of ethanol, the economic loss is really quite considerable. Even the current use of ethanol for fuel would not remotely survive without huge public subsidies already in place.

There are other studies of other processes that yield a more optimistic energy ratio than 1.7:1, but as Hamilton points out, a small energy surplus (and that’s the best case here) is far from enough to justify this barrel of pork.

What is the justification? No real mystery there; the usual suspects are at this trough.

So what is the point of the amendment? Hard to come up with a good answer other than to throw a new benefit to farmers, not to mention Archer Daniels Midland. It looks to me less like an energy plan and more like the usual pork barrel, in this case, corn-fed pork.

The benefit to farmers, at today’s depressed prices, is nugatory. To ADM, priceless (since we pick up the tab…).

We’ve heard a lot of self-congratulatory talk in the media recently about the G8 announcement of some $40B in “debt relief” for third-world countries. You might have wondered about the motivations behind such a move; what’s in it for the creditors?

George Monbiot reads the fine print and writes in the Guardian,

The idea swallowed by most commentators – that the conditions our governments impose help to prevent corruption – is laughable. To qualify for World Bank funding, our model client Uganda was forced to privatise most of its state-owned companies, before it had any means of regulating their sale. A sell-off which should have raised $500m for the Ugandan exchequer instead raised $2m. The rest was nicked by government officials. Unchastened, the World Bank insisted that – to qualify for the debt relief programme the G8 has now extended – the Ugandan government sell off its water supplies, agricultural services and commercial bank, again with minimal regulation.

Paul Wolfowitz, new president of the World Bank, is satisfied. “I’m really delighted … because I think it’s a very important, successful outcome.”

Cui bono? Follow the money.