Our Word is Our Weapon

I’ve finally taken the plunge and changed my blogging software from Movable Type, which was fun for a while but atrophied badly, to Wordpress, which is great. So I’ll probably muck things up quite a bit over the next while, but bear with me …

A while ago I said here that “if I thought that there really would be serious compensation for the losers from international trade liberalisation, I’d be a lot less cautious about it … But the signs are not encouraging”. Now there seem to be moves afoot to create a largish fund (seeded with $400m with the aim of levering in billions more - it’s all a bit vague at the moment). This raises a few issues.

Firstly, this initiative represents an implicit acknowledgement that (a) the ‘adjustment costs’ of trade liberalisation are severe for some countries and have not been adequately mitigated in the past, and (b) simply dropping trade barriers will not automatically increase the trade shares of developing countries if they lack the infrastructural (eg transport) and administrative (eg improved customs arrangements) capabilities to take advantage of it. Advocates of ‘trade not aid’ might therefore want to consider whether their opposition to aid is not another case of free trade fundamentalists shooting themselvs in the foot.

Secondly, the plans are not well developed yet, but it’s still worth asking whether the amounts being considered are really enough, compared for example to UNCTAD’s call for a $15bn ‘aid for trade’ fund over three years.

Lastly, it would be short-sighted this fund were used to bribe developing countries into further liberalisation. Pressure for more ‘aid for trade’ has grown because developing countries have not yet benefitted from freer trade as much as anyone would like. Plenty of aid is needed to meet the adjustment costs of previous liberalisation and fund the export opportunities that already exist, and diverting it into buying more reform is potentially storing up more problems for the future.

Dani Rodrik, probably the most-cited academic on this blog and an excellent analyst of globalisation and development (see this and this, for example), will be speaking at the LSE here in London this Friday the 18th. The lecture will apparently “ask what kind of global rules best permit and foster economic development, and compare those with the ones that are enshrined in current economic arrangements”. If you’re in town at the time, check it out - I can’t think of a better way to start the weekend, but then I always have been a saddo.

Paul Staines of the Globalization Institute complains here that Christian Aid never “produce anything on say micro-finance and the creation of micro-entrepreneurs”. Is this a fair or even accurate criticism? No.

Long before the Globalization Institute or Global Growth Org burst onto the scene, Christian Aid were supporting partner organisations in Africa in setting up micro-finance schemes and publicising the results (here and here). Not only that, they almost literally wrote the book on the subject way back in 1998, with their “Microcredit - planning and appraisal guidelines” which were “intended to assist organisations working with Christian Aid to plan microcredit or microfinance schemes”.

But while Christian Aid know that microcredit can “make a significant contribution to the effort to tackle poverty”, they’re not so naive to think it’s a panacea. This useful analysis of the promise and limits of microcredit ends with the following caveats:

* Microcredit needs to be accompanied by other programmes or services which address the full range of the needs of the poor.

* The poor should not be expected to pay for their own development alone. The richer have a continuing duty to assist the poorer.

* The effort to promote and to raise funds for microcredit should not result in the diversion of resources from providing for the poor’s other needs.

* Any growth in commercial funding for microcredit should not be seen as an opportunity for a decrease in aid or social provision.

* The benefits of ownership of microcredit institutions by the poor themselves and of wider organisation should be recognised.

* If the North is to support microcredit in the South, there must also be changes in Northern policy to produce a fair and favourable macroeconomic context in which microenterprise can flourish.

Sensible stuff, I think, and typical of Christian Aid’s healthy scepticism (borne out of experience) towards whizzy policy ideas.

Over at Stumbling & Mumbling, Chris reports an eye-catching bit of new research that claims to demonstrate that “life satisfaction decreases with higher government spending”. And it does, if you believe that the countries with the lowest government spending (as share of GDP) in the world are (lowest first) Japan, Spain, South Korea, Norway (yes, Norway) and Finland, and that France has a smaller government than the USA (see Table A1 on page 35 for the full breakdown). If you think that’s a load of nonsense, then this paper is a load of nonsense. I’m not blaming Chris or these other bloggers for taking respected researchers on their word (we all do that, all the time), but I would like to know whether they think the bizarre data on government size weakens the results at all.

Sorting the data also reveals that the countries with the ’smallest’ government seem overwhelmingly to be rich and those with the ‘biggest’ seem overwhelmingly to be poor. So maybe what this paper is telling us is “people in rich countries tend to be happier”. And in fact that’s precisely what this table from one of the researchers behind the World Values Survey (from which the life satisfaction data was drawn) shows. Unfortunately, that’s a far less blogworthy result than “Big government makes people unhappy”.

Commentes have pointed out that I was a bit misguided myself in my original post, so I’ve updated with some paragraphs at the end

“You can’t always get what you want
You can’t always get what you want
You can’t always get what you want
But if you try sometimes you might find
You get what you need”

Alex Singleton’s latest post on free trade at the Globalization Institute is both misinformed and misguided.

Let’s get misinformed out of the way first. Clearly inspired by his pals at The Business, Alex informs us that “Developing countries that open themselves to globalisation grow faster”. This is actually a rather ambiguous claim, probably deliberately so - does ‘open themselves’ mean trade liberalisation (a policy choice), or does it refer to growth in trade (not only or even mostly a policy choice)?

Anyway, his evidence for the claim is apparently “A study by Jeffrey Sachs and Andrew Warner of 117 countries in the between 1970 and 1989 [which] showed that open developing countries had an annual growth rate of 4.5 percent, compared with 0.7 per cent in closed developing countries”.

Problem is, as I said here recently, it’s been known for some time that the Sachs-Warner study is seriously flawed in that it doesn’t so much measure whether countries had open trade policies or not as whether countries were in Sub-Saharan Africa or not. So all it really tells us is that countries in Sub-Saharan Africa tended to grow more slowly, which we already knew. I think Alex needs to get his crack team of researchers working on some better evidence in support of his case.

Now for misguided. As we all know, the Doha ‘Development Round’ of trade talks is seriously stalled. The main reason seems to be the demands of the EU in particular that developing countries open their markets in exchange for the EU cutting their obscene export subsidies and prohibitive barriers to agricultural trade. The Financial Times reported on Wednesday that “Mr Mandelson, who is under strong pressure from France and its allies not to give more ground in agriculture, insisted yesterday that it was up to countries such as Brazil and India to show their hands on industrial goods and services as an “incentive” for Brussels to go further”.

What this means is that it is the demands of the rich countries that developing countries must cut their trade barriers even more that is holding up liberalisation in the sectors that probably matter most in terms of poverty reduction.

It’s ironic, really - if the EU and the other rich countries had listened to the ‘trade Justice’ movement and dropped these demands, then we would now be much closer to the real reform of the disgraceful farm policies that we all say we want. Instead, they took precisely the line that the Globalization Institute supports - trying to bully poor countries into opening their markets - and that’s why the trade talks are going nowhere. In short, the free trade fundamentalists are shooting themselves in the foot.

Alex points out - correctly - that the two main political parties in the UK support pressuring poor countries into liberalising (the Labour government have talked about dropping such demands, but in practice haven’t have yet to do so), and thus support the approach that has grounded the trade talks. I don’t think this will last, though - for example, over 200 MPs have signed the Trade Justice Movement’s Early Day Motion calling for a change in tack, support that will probably only grow given the recent breakdown.

People are slowly coming round to the realisation that trying to impose liberalisation on everyone else as a condition of our reform only slows that reform down. I hope this message eventually gets through to the Globalization Institute too - I’m sure the trade justice movement would love to have their support.

Following comments from readers Jonathan and Paul, I’m happy to correct my post and clarify that the Globalization does support unilateral liberalisation without pressure being put on poor countries to reciprocate through the WTO. A couple of questions then arise:

(2) If the answer to question (1) is no and the GI really does support developing countries having the liberty to decide their own policies, then would someone like to explain what the pragmatic differences are between this position and that of the trade justice movement? In another recent GI post, Paul complained that Christian Aid seeks to “impose an outdated, failed economic model on the developing world”. The problem with this argument is that even if they did want to impose their wishes on developing countries, in pragmatic terms neither Christian Aid nor anyone else has any power to force any country to raise trade barriers. They know that countries can be pressured or even forced to lower their trade barriers by others, and that kind of pressure, bribery and coercion is what they campaign against. So does ‘trade justice’ ultimately mean the same thing for both the Globalization Institute and the TJM - ‘unilateral liberalisation in the rich world and policy space for developing countries’? Or have I just misunderstood again?

A couple of months ago I criticised Tim Worstall’s attack on the World Food Programme’s response to widespread under-nourishment and starvation Niger, in which he accused them of “making the problem worse” by (a) providing aid in the form of food supplies, and (b) providing this aid too late so that it would arrive at the same time as the October harvest, which would push down prices and make local farmers even worse off, some of them fatally so.

As I said at the time, Tim was misinformed, in that he didn’t seem to realise that the WFP had already started food distributions in August. But I said that “if that process does go too far and we do get mass starvation of farmers as a result of too much free food aid, the WFP deserve all the criticism Tim can throw at them”.

So, did anything like this happen? As far as it’s possible to tell, no. There have been no reports of farmers made destitute by plummeting prices - in fact, as this update of the 10th of November from the United Nations Office for the Coordination of Humanitarian Affairs says, “while cereal prices have come down, they remain higher than at the same time last year and higher than the five-year average” (my italics).

So Tim’s “Textbook case of how bureaucracy kills” appears to be nothing of the sort. But this should not be that surprising. As I reported back in September, the WFP were acutely aware of the need to avoid distorting markets with food aid, and as the crisis developed they worked closely with the Nigerien government to keep a close eye on price developments throughout the country. Tim seemed to conceive of the World Food Programme as an “international bureaucrat running the system” from far away with no regard to the situation on the ground. The reality was completely different - WFP bureaucrats were in Niger, intimately connected to the situation on the ground, working with government, local groups and NGOs, and saving lives by the thousand.

I think there’s an obvious but important lesson here. The criticism of centrally planned economic systems - that the bureaucrat in the centre cannot access and process enough information to allocate resources correctly - is a valid one, but much less so when applied to mixed economies. The same market that shares and synchronises information for the benefit of consumers and producers also informs the decisions of planners and bureaucrats in mixed economies.

Another conclusion to be drawn, I think, is that in some cases emergency food aid can be A Very Good Thing. While it is always preferable to boost people’s capabilities and purchasing power in order to prevent starvation in the first place, if and when that starvation kicks in a quick distribution of food can save lives without distorting the market too much. The key word there is ‘quick’ - food aid that has to be transported thousands of miles because of cosy deals with farmers in donor countries definitely does not count.

The last point is this: surely nobody, even those who read or write for TechCentralStation, can deny that the UN’s World Food Programme saved lives in Niger by distribution food to tens of thousands of dangerously malnourished people? I don’t expect Tim or TCS to ever actively celebrate the existence of UN, but wouldn’t it be nice if they actually acknowledged the life-saving work of the WFP and other ‘bureaucrats’ in Niger or even, at the very least, acquired a basic understanding of the situation before working themselves up into patently mis-informed rages about “the weasels who rule us”?

In a recent post I said “the reciprocal nature of WTO negotiations means the ‘Quad’ are able to demand ‘concessions’ from everyone else in return for reducing their manifestly unjust trade barriers and export subsidies”.

Kamal Nath, trade minister of India, makes the same point but puts it much, much better in this interview in the Independent:

“I welcome Peter Mandelson’s proposal to say he will reduce by so much but then he says ‘I want my pound of flesh’,” Mr Nath said. He compared Mr Mandelson to a politician seeking a knighthood simply for obeying a traffic light. “He is looking to be rewarded and rewarded for behaving as one should.

Today’s edition of The Business features a lengthy rant against the Trade Justice Movement. The piece is unsigned, but judging by the intemperate language and shaky grasp of the facts, I suspect it’s our old friend Allister Heath at work again (see here for discussion of his previous article slating Make Poverty History).

Whoever the author is, it’s ironic that they describe the Trade Justice campaign as “propped up by so many basic economic fallacies and selective statistics that its misleading nature can only be wilful”, because you could say the same about their article. Actually, that’s a bit unfair on TJM- whereas its members tend to back up their arguments with a variety of statistics and other evidence, Heath or whoever wrote the article in The Business is mainly content to fling mud (describing the TJM as ‘Marxists’ and their platform as “in effect, a petition to kill Africans”), and relies on very little hard fact.

The single economic study referred to is a ten-year old paper by Sachs and Warner entitled “Economic Reform and the Process of Global Integration”, which The Business claims “showed growth averaging 4.5% in deregulating countries and 0.7% in protectionist ones”. It is unfortunate that the author of the article couldn’t find any better evidence, because the Sachs-Warner paper simply doesn’t cut the mustard. A later paper by Rodriguez and Rodrik demonstrated that the rather novel measure of economic ‘openness’ used by Sachs and Warner didn’t really measure trade policy at all and was more likely to be simply picking up whether or not a country was located in Sub-Saharan Africa, rendering the conclusions drawn about whether or not it is good to be ‘open’ of little or no value. Rodriguez and Rodrik conclude, politely, that the Sachs-Warner index “yields an upwardly-biased estimate of the effects of trade restrictions proper”.

And that’s what the sum total of the hard evidence offered by The Business amounts to. The rest should be familiar - for example, there’s the old chesnut of claiming that Hong Kong proves that free trade is the road to riches, when in fact Hong Kong is interesting because it is such an outstanding exception to the general experience, which is that today’s well-off countries lowered their trade barriers well after embarking onto sustained high growth. At least we are not treated to another nomination of China as a free trade success story.

What strikes me is that nowhere is there any acknowledgement that the experience of trade liberalisation might be any different in poor countries to the experience in rich countries. But there are perfectly valid reasons why it might be, for example:
(a) Income from trade taxes often accounts for up to 30% of government revenues in very poor countries, revenues which almost never recover following liberalisation and which thus have to be replaced using taxes on labour or consumption, which are more likely to fall on poorer households;
(b) Poor countries tend to specialise more in a few key products - suddenly exposing these industries to competition could have a much greater proportional impact on employment than we see in the far more diversified rich countries;
(c) It’s no fun losing your job in the UK or another rich country, but it is very rarely life-threatening because we have relatively lucrative safety nets, quality education and re-training facilities, and usually relatively tight labour markets. In many poor countries, none of these apply, so losing your job can be catastrophic;
(d) Finally, selective protection can allow firms to build up their competitiveness rather than simply being immediately flattened by globally dominant companies. Getting over this first hurdle can allow them to develop an advantage in higher value-added niches not accessible from the word go.

None of these are laws to be written in stone and followed in every case. But they illustrate how selective and reasonably applied trade protection can be pro-poor and pro-growth, as indeed it has been in the past for many of today’s rich countries. The Trade Justice Movement simply demands that governments in developing countries be allowed the freedom to make these decisions for themselves based on their own circumstances, rather than being ‘crowbarred’* open either directly by the rich countries or indirectly through the WTO or through their proxies in the IMF and World Bank.

It’s interesting that the article in The Business ends with a similar call: rich countries “should simply make a unilateral declaration to scrap their tariffs without condition on the goods and services of developing nations” and then try to win the battle of ideas for free trade. I’d love to see that happen too, but if this article represents a first salvo in that battle, I don’t fancy their chances.

*I’m referring here to the viewpoint articulated by then-US Trade Representative Carla Hills, who in her Senate confirmation hearings spoke of prying open other countries’ markets with a crowbar if necessary “so that our private sector can take advantage of them”

It’s good to see that the Center for Global Development has a new blog up covering general development issues, in addition to their two pre-existing blogs on Vaccines for Development and Monitoring the Millennium Challenge Account. To get the discussion going they asked for views on the fate of the Doha round of trade talks, and I gave this comment, which sums up my thinking on the subject at the moment. If you want to weigh in, feel free to do so either here or at the CGD blog.

“I’ve recently been wondering whether [the Doha Round] will really make that much difference in terms of development and poverty reduction. The latest World Bank estimates of gains from a likely Doha round are not actually that huge, and seem to accrue mostly to high-income countries and a handful of non-LDC developing countries. Preference erosion for African countries is a real worry - Lesotho has already lost a lot of market share in textiles with the expiry of the Multifibre Agreement. The reciprocal nature of WTO negotiations means the ‘Quad’ are able to demand ‘concessions’ from everyone else in return for reducing their manifestly unjust trade barriers and export subsidies. And so I wonder whether the poorest will really benefit that much from Doha.

But even if that’s the case, there are other reasons to hope that the Doha round does conclude with significant liberalisation by the rich countries. Firstly there’s the cost to their citizens as consumers and tax-payers of the current arrangements. And there’s the prospect of a collapsed Doha round leading to yet more bilateral and regional trade deals in which the imbalances of power are even greater.

Last point: I always find it strange that analysis and discussion of trade focuses on the role of countries and governments, when it is firms who trade. I recently read some research suggesting that most of the gains from the African Growth and Opportunity Act went not to exporting African firms but to US firms due to their rather oligopsonistic market power. Recognising that this kind of analysis is often very difficult, shouldn’t there be a greater focus on the distribution of the gains from trade not just between countries but between the different actors and classes within them?”

Johan Norberg, citing this World Bank study, writes:

total world income gain from free merchandise trade would be $287 billion - four times the total amount of foreign aid given every year

Johan is quoting the World Bank study accurately (leaving aside for a moment whether the findings are correct), but the comparison is misleading.

A detailed breakdown of the distribution of that $287 billion is given in Table 3 of the PDF. There we see that Sub-Saharan Africa would apparently benefit from global free trade to the tune of $4.8 billion - but this is many times less than the aid it receives. By far the biggest share of the gains would, according to the World Bank analysts, go to high-income countries. As always, distribution matters.