Larry Elliot Monday September 8, 2003 The Guardian
Gags about economics are few and far between. One of them concerns a scientist and an economist marooned on a desert island. The good news is that the pair find a crate of tinned peaches washed up on the beach. The bad news is that they don't have a can opener.
Faced with this predicament, the scientist scours the island in vain for a rock with which to prise open the tins. The economist, meanwhile, sits serenely on the beach enjoying the view. When the scientist expresses concern at his insouciant behaviour in the face of potential starvation, the economist replies that he sees no problem because they will eat when they are hungry.
"How can we do that without a tin opener?", asks the scientist. "Assume we have a tin opener", replies the economist, "and then it's easy."
This joke should perhaps be borne in mind over the coming week as the World Trade Organisation meets in Mexico, because the background music to the talks will be that the way for poor countries to escape poverty is simple. All they have to do is assume free trade. Protectionism equals stagnation and misery. Free trade equals growth and prosperity. For its devotees - and that means all mainstream politicians - the freer trade can become, the better. And the sooner the better.
The classic modern text on free trade is from Paul Samuelson, who won a Nobel prize for work showing that free trade benefits all nations. Samuelson provided an accomplished proof, although it has to be said that the thesis was based on a number of - let's put it politely - questionable assumptions. If you assume no government, no trade deficit, that wages are equal in all industries and that capital stays at home rather than seeking out low wages abroad, it all works just fine.
Preconditions
The fact that these preconditions are not likely to appear in reality has never really worried economists, a branch of science or pseudo-science where the practitioners never seem to be discouraged by the failure of their experiments. It does, however, help explain why there will be little mention of Samuelson's seminal work in Cancun this week. Instead, there will be the usual mercantilist power struggle between negotiators out to secure concessions from their rivals while giving away as little as possible themselves.
So forget the theory for a minute and concentrate on the evidence. What this shows is that no country in the west got rich by laying itself open to unfettered international competition that could wipe out its nascent industries. Britain didn't, the United States didn't, Germany didn't, Japan didn't, Taiwan didn't. All these countries grew first and liberalised their markets later. Growth leads to trade, rather than vice versa.
This view of the world fitted well with the era of social democracy in the middle of the last century, which was infused with the belief that capitalism needed to be managed properly in order to garner the rewards that were available from markets. Sadly, however, this arrangement was not good enough for the economists sitting on their desert island with their imaginary tin openers.
Free trade is one of the three pillars on which modern political economy is built, the other two being price stability through the agency of independent central banks and capital liberalisation. Faster growth is possible, so the theory goes, but only if democratically elected politicians have their grubby fingers removed from the levers of power and a country's destiny is left to the market.
For the free market right, this presented few ideological problems. The social democratic left has, however, been equally acquiescent, failing even to ask for the empirical evidence to support the new regime. This is a profound error. The difficulties supporters of the new world order are having in proving their case were perfectly highlighted in an article in last week's Financial Times, in which Ken Rogoff, the IMF's chief economist, reported the findings of an in-depth study into capital integration. "The conclusions are rather sobering, suggesting that many developing countries have been unable to get the full benefits although they have borne the full weight of the risks," he wrote.
The fund found that it was hard to establish that financial integration by itself led to higher levels of growth, but that there was evidence that "financially integrated developing economies have in some respects been subject to greater instability than other developing countries ... it is precisely those countries that made the effort to become financially integrated that, in general, faced more instability".
Arm-twisting
Predictably, Rogoff's conclusion was not that capital integration was misguided - he's an economist, after all - but that it should not be rushed. Developing countries would be advised to adopt a similar approach to trade liberalisation rather than allow themselves to be dragooned into lopsided agreements.
Cambodia is a case in point. Together with Nepal, Cambodia will be joining the World Trade Organisation this week, but the price of entry is high, with the country being forced to commit itself to cuts in tariffs well beyond what the US or the European Union are prepared to sign up for.
Most of this arm-twisting goes on behind the scenes but Franz Fischler, Europe's farm commissioner, rather let the cat out of the bag last week with his rant against developing countries for having the temerity to demand cuts in support to farmers provided by the common agricultural policy.
For years, politicians in the west have been shedding bucketloads of crocodile tears about the need for the developing world to develop the capacity to fight their corner in trade talks. Yet when Brazil, India and China mobilised a group of developing countries to oppose attempts by the EU and the US to bounce them into the usual one-sided deal, Fischler had a hissy fit.
At one level, the temptation is to wish devoutly for a collapse in the trade talks this week to precipitate the break-up of the global trading system and the demise of the WTO. The danger is, however, that it would be a further, and perhaps fatal, blow to multilateralism and would encourage a form of brutal bilateralism in which power politics ruled unchecked.
A more sensible set of suggestions is provided in a Fabian Society pamphlet released today, which - drawing on the tradition of 20th century social democracy - calls for a new system of global governance based on four pillars: equitable trade, economic regulation, global redistribution and democratic governance.
This excellent study repays reading in full, but in terms of trade it notes how Europe and the New World used tariff barriers, industrial subsidies, nationalised infrastructure investment and public services free at the point of use to develop national economic strength.
"At the same time experience from many developing countries shows that over-rapid, poorly planned, and badly sequenced import liberalisation can be economically disastrous. It can contribute to the collapse of fledgling local industries and of potentially competitive sectors."
It concludes that protectionism is clearly not a panacea for poverty - and import barriers can hurt as well as protect the poor. But is clear that a dogmatic application of free trade principles can undermine poverty reduction efforts."
Developing countries, in other words, should not put trade liberalisation at the top of their list of priorities. They should consider that the history of the US in the 19th century shows that countries can be highly dynamic behind big tariffs provided there is vigorous domestic competition. They should ask themselves whether it would be better to have an industrial strategy before a trade strategy. And they remember Virgil's warning about Greeks bearing gifts.
· Progressive Globalisation; Fabian Society; £6.95
larry.elliott at guardian.co.uk
==================================== To this day, no one has come up with a set of rules for originality. There aren't any. [Les Paul]