Our Word is Our Weapon

Recently I was musing on the fact that there were probably lots of people in rich countries who would like to lend small amounts of money to businesses in poor countries, and lots of businesses in poor countries who would like them to too. If only there was some way of connecting one to the other!

Fortunately somebody was way ahead of me. They’re called Kiva, and they let people loan money in increments of $25 to businesses in Africa that need a few hundred dollars to, say, buy a truck or some new equipment. You get your money back, but without interest, so you could call it charitable lending. There’s always the chance that the business won’t work out and you don’t get anything back, in which case it’s just charity, but Kiva’s viability rests on that not happening very much. I’ve just lent 50 bucks to Lweny Gichandi Fish, so we’ll see how that goes.

Phil Hunt and Market Wire have more on Kiva. In a nice example of the blogosphere impacting positively on the real world, Phil’s post seems to have indirectly inspired this diary entry on DailyKos, which in turn inspired Kos readers to bombard Kiva with business.

As the Doha talks continue to go nowhere, it is perhaps time to ask whether anybody should be either that surprised or that disappointed.

First let’s look at the benefits we can expect from the most likely Doha scenario. According to the latest estimates from Kym Anderson and other World Bank researchers, the benefits of their most likely ‘hypothetical’ Doha scenario amount to an extra $96 billion or so on top of world GDP in 2015, an increase of a whopping 0.23% above the baseline figure. Anderson et al also suggest that the lion’s share of the gains would go to rich countries, leaving low and middle-income countries with an extra $16bn, or 0.16% above the baseline. To put that in concrete terms, they estimate that this trade round would reduce the percentage of people living on less than $1 a day in Sub-Saharan Africa from 38.4% to, er, between 38.1% and 38.3%.

It’s hard to know how seriously to take these results. They use the same kind of CGE calculations I’ve criticised before, and as Frank Ackerman says here, they are based almost entirely on the impacts on consumers of trade policy changes, mostly leaving the producer side out of it. Perhaps a more realistic assessment would begin by looking at how much developing countries have benefitted from trade liberalisation in the past. The answer seems to be “not very much”, with this recent paper from Emma Samman of the UNDP only the latest to support this view.

So if the gains for most developing countries are not particularly alluring, we shouldn’t be that surprised if they’re resisting pressure to open up their markets unless the rich countries make some very significant concessions in terms of agriculture, which so far they’re pretty reluctant to do.

Does this reveal an inherent problem with the reciprocal nature of WTO negotiations? The usual theory is that wringing concessions from our trading partners sweetens the pill of our liberalisation, but there are two possible counter-arguments:

• The effects of liberalisation are more likely to be harmful for poor countries (as previously discussed on this blog here; see also this recent paper from DeJong and Ripoll) so why should they take part in reciprocal liberalisation? True, the cuts being suggested are not exactly reciprocal, but developing countries are already very open in historical terms (as Yilmaz Akyüz argues here).
• Secondly, perhaps reciprocity actually slows down liberalisation which would otherwise happen unilaterally.

So maybe both the Trade Justice and Free Trade brigades should be hoping for a high-profile collapse of the Doha round that puts significant pressure on the rich countries to liberalise unilaterally or at least part-reciprocally (eg the EU and US each agreeing to lower their barriers if the other does so without requiring increased market access from low-income countries).

Observing the progress of the Doha ‘Development Round’ of trade negotiations at the World Trade Organisation has become as frustrating as it is boring. Progress, where there has been any, has been achingly slow, particularly in the most important sector, agriculture, largely due to the intransigence of the big players (the US, the EU and Japan). As Peter Gallagher points out, the latest proposals from the US and EU are much less impressive than they may seem at first glance, and still Japan has rejected them as “unacceptable”.

What’s behind this intransigence? The political clout of protected farmers in these rich countries obviously plays a very big part. But this paper from Nuno Limão and Marcelo Olarreaga suggests another, perhaps more surprising factor: the preferential market access that some rich countries grant to some of the poorest (many in Africa).

These trade preferences are generally in the form of an exemption from the ‘Most-Favoured Nation’ (MFN) tariff which the importing country imposes on imports from WTO members, so they offer less and less advantage to the recipient (exporting) country as MFN tariffs fall. So if the rich countries suddenly decide to slash their trade barriers (I know it’s unlikely, but bear with me here), the poor countries who currently benefit from trade preferences could lose out.

This prospect has attracted considerable attention recently, and it’s not too far-fetched to imagine these concerns eroding support for liberalisation in rich countries, or being exploited by those who oppose such liberalisation anyway. And countries that might suffer major losses from preference erosion, even if they are small in number and size, can theoretically veto any agreement in the ostensibly consensual WTO. It’s worth noting here that trade preferences do appear to have helped recipient countries, though not as much as they could have in the absence of various non-tariff barriers (sanitary standards and the like).

Limao and Olarreaga (L&O) suggest another way in which preferential trade arrangements might be holding up multilateral liberalisation: the countries providing the preferences may want to maintain them as they can be used as a side payment for cooperation on other issues - for example the US uses trade preferences “to extract concessions in terms of enforcing labor, environmental standards” from exporting countries.

It looks like a classic case of a policy failing because its benefits, though they may be significant, are more widely spread than the costs, which are large enough for even a small number of actors to fiercely resist. Is there a way to ensure remove this obstacle to multilateral liberalisation without eroding the benefits enjoyed by the recipient countries?. L&O have a proposal: allow for a preferential import subsidy that maintains the preference margin unchanged relative to the initial MFN tariff. They argue that if the subsidy is paid to the purchaser at customs the costs and benefits to importer and exporter are basically no different from the situation under a tariff-based trade preference. As this subsidy is unrelated to the level of the MFN tariff the preference no longer poses an obstacle to lowering or eliminating that tariff, so that means no excuse for not concluding a decent Doha round.

All of which sounds great, but to my mind it begs another question: are the current trade preferences (and the proposed equivalent import subsidies) enough? Perhaps not, given that African exports are often uncompetitive in large part not because of inefficiency but because of transport costs and poor infrastructure (see this paper by Limão and Anthony Venables). Import subsidies, unlike trade preferences not inherently limited in size by MFN tariffs, could in principle be adjusted higher for some regions to account for differing transport costs, putting Africa in particular back on more of a level playing field with the rest of the world.

As this chart from the World Bank shows, perhaps the most interesting thing about the record of poverty reduction in China is how relatively slow it has been in recent years, despite consistently high economic growth.

The main reason seems to be that the very poor are not benefitting from growth, which is instead lifting the incomes of the better off and pushing up inequality. As the World Bank’s Martin Ravallion says, if inequality had stayed static rural areas there would be only around a quarter the current number of Chinese living in poverty.

So it’s no surprise that the Communist Party is vowing “to spread the benefits of economic growth more fairly among all levels of Chinese society” with its new five year plan. One thorny question is what to do about migration between rural and urban areas, which is currently quite restricted. Open it up and you might get more peasants leaving their farms for better prospects in and around the cities, but you might also get a much larger and more unmanageable mass of urban poor, which I imagine the dictatorship would want to avoid.

That World Bank article also serves the useful purpose of hammering home once again the fact that China’s poverty reduction is not a free trade success story, contrary to what many seem to believe. Ravallion puts it bluntly: there is “No clear evidence that greater external trade openness brought rapid gains to the poor”. Indeed, about half of the poverty reduction occurred in the early 1980s, when China was very protectionist.

In another attack on “celebrity economist” Jeffrey Sachs, non-celebrity economist William Easterly accuses him of dangerous utopianism. In proclaiming that a significant increase in foreign aid can help eradicate extreme poverty around the world over the next twenty years, Easterly says Sachs is guilty of “expecting great things from schemes designed at the top, but doing nothing to solve the bigger problems at the bottom”. Once again comparing Sachs to a Soviet-style central planner insulated from the harsh realities of the world in his New York ivory tower, Easterly warns that “Planners at the global top simply don’t know what, when and where to give to poor people at the global bottom”.

I wonder, then, what Easterly makes of the Millennium Village project? Launched last year by Sach’s Earth Institute, the MV project aims “to show that an integrated approach to development, which tackled multiple needs and responded to local conditions, could lay the foundations for long-lasting change, even in the most difficult circumstances”, namely in individual African villages and towns with very high levels of poverty and deprivation.

Many of the ideas tried out by the MV project are laid out in “Investing in Development”, the report Sachs and many others wrote for the UN and which Easterly derides as symptomatic of the loony utopianism behind the big push for more aid. But what’s interesting to me about the MV project, as this BBC picture story on the first Millennium Village in Kenya says, is how little it resembles the top-down approach Easterly accuses Sachs of promoting. The Earth Institute team don’t try to dictate what is produced, but they do give advice on how. The villagers generally knew what needed to be done - a fundamental example is that they needed to produce more and better crops and to get their surplus to market - but they lacked the resources (such as fertiliser and a truck to transport produce) and the particular technologies and know-how (such as nitrogen-fixing trees and a particular tool for for extracting groundwater) that would make the big difference. The extra resources involved are actually fairly modest (and are funded in part by the national government as well as by foreign aid), and it looks like the transfer of knowledge is just as important as the transfer of money, if not more so.

Although it’s early days yet, the picture painted by the BBC report and by other press coverage of the Kenyan village is that of a multitude of small changes adding up to a significant improvement in welfare and opportunities. The real test will obviously be whether this improvement is sustained over the years when the focus shifts elsewhere, and whether the lessons learned can be spread to surrounding towns without MV designation and all that goes with it, but the start is very encouraging.

Which brings us back to William Easterly. In his article, he says that “instead of setting utopian goals such as ending world poverty, global leaders should simply concentrate on finding particular interventions that work. Anecdotal and some systematic evidence suggests piecemeal approaches to aid can be succesful”. He goes on to list interventions that research has found to be succesful, such as education subsidies, nutritional supplements, anti-malaria bed-nets and fertiliser. But this list should sound very familiar to anyone who has read much of the “Investing in Development” report, or indeed perused this summary list of “Quick wins” which the Millennium Village project is designed to implement. Sachs and his colleagues seem to be doing what Easterly wants - applying tried and tested ideas at ground level in partnership with poor people. So why is Easterly so keen on criticising them?