Saturday, November 05, 2005

The Humanitarian Case for Free Trade

A recent article in The Quaker Economist argues that the evidence shows that globalization has had a positive effect on the standard of living for the world's poor.

Contrary to what you may read in anti-globalization leaflets and press releases, between 1980 and 2000, 75% of the world's population achieved an enormous increase in both average incomes and living standards due to the effects of globalization. Summarized from Wolf's book in the chapter "Why The Critics Are Wrong" (p. 143), "never before have so many people, or so large a proportion of the world's population, enjoyed such large rises in their standard of living — India produced an approximately 100% increase in real GDP per head and China nearly a 400% increase in real GDP per head." This is an enormous improvement, experienced by some two billion people.

Meanwhile, GDP per head in high-income countries (with only 15% of the world's population) rose by 2.1% between 1975 and 2000, and by only 1.7% per year between 1990 and 2001.

A much shorter piece appeared in the Nov/Dec 2004 issue of Foreign Affairs which helps, along with the data cited above, to explain some of the intense reactions against globalization by the middle class around the world (including many Quakers). The article is "Globalization's Missing Middle" by Geoffrey Garrett. He, too, describes the net positive effect of globalization on the poor of the world and admits that the rich also benefit, but his primary focus is the fact that "middle income countries have not done nearly as well under globalized markets as either richer or poorer countries..."

While the western hemisphere contemplates establishing FTAA, we need to look at the data to understand the effects of NAFTA and CAFTA on the regional economy as a whole, and not get distracted by anecdotes of plant closings and unfair labor practices.

Timothy Taylor at Macalester College makes two arguments for free trade that I find persuasive. To frame the debate, let's realize that the globalization debate amounts to deciding where to situate our policy along the spectrum from free trade to maximum protectionism (high tariffs and nuisance regulation to discourage foreign investment and importation).

First Taylor suggests a thought experiment. Imagine one company develops a technology that increases productivity so much that it will make all its competitors obsolete unless they adopt the same technology. Should the government institute taxes and regulations that make the new technology impractical to protect the competitors? I think most of us would say no. Now imagine that the new technology in question is moving production offshore. In economic terms, there are no differences between these situations. As Rudi Volti notes, technology is most fruitfully thought of as a complex of tools and social organization for economic activity. Except for those who hold on to the ideas that command economies or mercantilism are still better models, there's little arguement that protectionist policies decrease economic growth, and the data support this.

Taylor's other argument runs like this. If we imagine there is a specific industry, automobile manufacturing for instance, which the nation considers to be of strategic or cultural value to protect, we may institute trade barriers to keep the higher prices of domestic cars competitive with those of imported cars. What this amounts to though is a subsidy of this industry--a government policy that augments the income of the industry above what the market would otherwise provide. However, if there is strategic value to keeping the auto industry vibrant, that's a benefit that presumably all citizens share, but only those who buy domestic autos pay for. That's not as fair as providing a direct subsidy to the industry, since then the presumed beneficiaries of the presence of the industry in the country--the taxpayers--share the cost equally. I'm definitely not arguing for subsidies of that nature. My point is that protectionism is a very indirect and inefficient way to support an industry that the market won't support on its own.

A few words about the very important concerns about labor and environmental practices by large firms in the developing world. The main fear here is the 'race to the bottom' theory: that capital will flow from developed nations to the developing ones with the loosest environmental standards and labor laws. Radley Balko cites data that show that this is not happening, however. On the contrary, the degree of liberalization of a country's economic policies correlates with better conditions, not worse. The cause of poor working/environmental conditions in developing countries is the poverty and misgovernment already there--such conditions would exist even without foreign capital. If anything, the foreign investors' public relations needs provide much of what leverage there is in some countries to improve these conditions.

In short, the emperical evidence just does not support these theoretical concerns about free trade.

Now, it's certainly true that free trade amplifies the fluidity of the economies involved, and when a new free trade agreement is put into effect there's a fair amount of economic disruption--this causes adjustment pains, and spawns aweful anecdotes of plant closings and sweatshops. Government can and should do much to cushion the transition for displaced workers and industries. And there is a place for activists to ensure good corporate citizenship in the US and abroad. But improving the hours or benefits or child hiring one factory at a time is nibbling around the problem of developing-nation poverty that only endogenous economic growth can truly solve.

To paraphrase Churchill, a liberalized market-oriented economy with free trade is the worst economic system around, except for all the others.


At 4:50 PM, Blogger Bill Baar said...

Read David Brooks from last year on the huge advances the world has made reducing poverty and excellant chance we have for meeting the UN's goals for reducing poverty by 2015,
It now seems quite possible that we will meet the United Nations' Millennium Development Goals, which were set a few years ago: the number of people living in extreme poverty will be cut in half by the year 2015. As Martin Wolf of The Financial Times wrote in his recent book, "Why Globalization Works": "Never before have so many people - or so large a proportion of the world's population - enjoyed such large rises in their standard of living."

I heard the Historian Timothy Garton Ash on Chicago's public radio a while back talk about his new book, Free World: America, Europe, and the Surprising Future of the West

Ash said the best thing Bush and Blair coud do for the worlds poor was continue expanding free trade, and drop our agriculture subsidies.

It's also interesting to hear Ash compare how Muslims fare in Europe vs the US in light of what's happening now in France. You can find links to it here.


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