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Monday, December 12, 2005

More globaphobic nonsense

More Larry Elliott...

Two countries, one booming, one struggling: which one followed the free-trade route?: A look at Vietnam and Mexico exposes the myth of market liberalisation
Larry Elliott, The Guardian, Monday 12th December 2005

Expect much gnashing of teeth in Hong Kong this week. The chances of securing a comprehensive trade deal are non-existent, with the talks now really about damage limitation and the apportionment of blame.

The development charities will say that the selfish behaviour of the developed world has condemned poor nations to further penury. Washington and Brussels will say the negotiations have been stymied by the obduracy of India and Brazil. Economists will have a field day explaining how the world is turning its back on millions of dollars' worth of extra growth, and that the poor countries will be the ones who will really suffer if the global economy lapses back into a new dark age of protectionism.

That's certainly the accepted view. An alternative argument is that the trade talks are pretty much irrelevant to development and that in as much as they do matter, developing countries may be buying a pup.

The Harvard economist Dani Rodrik is one trade sceptic. Take Mexico and Vietnam, he says. One has a long border with the richest country in the world and has had a free-trade agreement with its neighbour across the Rio Grande. It receives oodles of inward investment and sends its workers across the border in droves. It is fully plugged in to the global economy. The other was the subject of a US trade embargo until 1994 and suffered from trade restrictions for years after that. Unlike Mexico, Vietnam is not even a member of the WTO.

So which of the two has the better recent economic record? The question should be a no-brainer if all the free-trade theories are right - Mexico should be streets ahead of Vietnam. In fact, the opposite is true. Since Mexico signed the Nafta (North American Free Trade Agreement) deal with the US and Canada in 1992, its annual per capita growth rate has barely been above 1%. Vietnam has grown by around 5% a year for the past two decades. Poverty in Vietnam has come down dramatically: real wages in Mexico have fallen.

Rodrik doesn't buy the argument that the key to rapid development for poor countries is their willingness to liberalise trade. Nor, for that matter, does he think boosting aid makes much difference either. Looking around the world, he looks in vain for the success stories of three decades of neo-liberal orthodoxy: nations that have really made it after taking the advice - willingly or not - of the IMF and the World Bank.

Rather, the countries that have achieved rapid economic take-off in the past 50 years have done so as a result of policies tailored to their own domestic needs. Vietnam shows that what you do at home is far more important than access to foreign markets. There is little evidence that trade barriers are an impediment to growth for those countries following the right domestic policies.

Those policies have often been the diametric opposite of the orthodoxy. South Korea and Taiwan focused their economies on exports, but combined that outward orientation with high levels of tariffs and other forms of protection, state ownership, domestic-content requirements for industry, directed credit and limits to capital flows.

Rodrik says: "Since the late 1970s, China also followed a highly unorthodox two-track strategy, violating practically every rule in the guidebook. Conversely, countries that adhered more strictly to the orthodox structural reform agenda - most notably Latin America - have fared less well. Since the mid-1980s, virtually all Latin American countries opened up their economies, privatised their public enterprises, allowed unrestricted access for foreign capital and deregulated their economies. Yet they have grown at a fraction of the pace of the heterodox reformers, while also being buffeted more strongly by macroeconomic instability."

This is an argument taken up by Ha Joon Chang in a recent paper for the South Centre, the developing countries' intergovernmental forum. Chang argues that "there is a respectable historical case for tariff protection for industries that are not yet profitable, especially in developing countries. By contrast, free trade works well only in the fantasy theoretical world of perfect competition."

Going right back to the mid-18th century, Chang says Pitt the Elder's view was that the American colonists were not to be allowed to manufacture so much as a horseshoe nail. Adam Smith agreed. It would be better all round if the Americans concentrated on agricultural goods and left manufacturing to Britain.

Alexander Hamilton, the first US Treasury secretary, dissented from this view. In a package presented to Congress in 1791, he proposed measures to protect America's infant industries. America went with Hamilton rather than Smith. For the next century and a half, the US economy grew behind high tariff walls, with an industrial tariff that tended to be above 40% and rarely slipped below 25%. This level of support is far higher than the US is prepared to tolerate in the trade negotiations now under way.

The lesson is clear, Chang says. South Korea would still be exporting wigs made from human hair if it had liberalised its trade in line with current thinking. Those countries that did liberalise prematurely under international pressure - Senegal, for example - saw their manufacturing firms wiped out by foreign competition.

Infant industry

He draws the comparison with bringing up children. "In the same way that we protect our children until they grow up and are able to compete with adults in the labour market, developing country governments need to protect their newly emerging industries until they go through a period of learning and become able to compete with the producers from more advanced countries."

As with children, infant industry protection can go wrong. But, says Chang, "just as failures in the world of parental protection are hardly an argument against parenting itself, so cases of failures of infant industry protection do not constitute an argument against infant industry protection per se - especially when history shows that with startlingly few exceptions, successful countries in the past and in the present have used infant industry protection".

The chances of success are increased if the choice of target infant industries is realistic, protection is combined with an export strategy, the state imposes discipline on the firms receiving protection and the government is competent.

Another counter-argument is that while a modicum of protection may be necessary, most developing countries now have tariff rates much higher than those used by today's developed countries in the past. Chang says this ignores one vital point: the productivity gap between rich and poor countries today is far higher than it was in the past, so it is perfectly logical for tariffs to be higher.

For example, Britain and the Netherlands were perhaps up to four times as rich as Japan or Finland in the 19th century; today, Switzerland or the US is 50 or 60 times as rich as Ethiopia or Tanzania. Yet in Hong Kong the pressure will be on the bigger developing countries to make the big concessions on industrial tariffs, cutting them to levels below those that existed in most rich countries until the early 1970s.

History suggest that accepting the demands of Washington and Brussels would be unwise, to say the least.

I thought it would take 6 months following the general election before I sorted my political priorities out. After much umming and arring I've joined the Greens. I'll still shop at supermarkets (maybe less though) and have my doubts about the extent to which humans have had a role to play in climate change, but on other issues the Greens are ok. As I may have said in this blog before, I voted Green in the general election as they opposed the war in Iraq & the EU Constitution. They are also sceptics about the whole "globalisation" malarkey. There are very few people in British politics who are "globaphobes" (a phrase the Brookings Institute came up with in the late 90s I seem to remember). There are a few Labour MPs and possibly the odd Tory MP; apart from that there are the Greens, a few Stalinists (Morning Star/Communist Party of Britain) and the likes of the BNP/NF etc. As I don't admire Joe Stalin, and I think racism is basically sublimated sexual jealousy ("these blacks/Catholics/Muslims etc are breeding like rabbits"- a good phrase I came up with on holiday this summer is "FOR 'MORALITY' READ 'JEALOUSY') and I don't want to spend years in the Lab/Cons trying to persuade them of the error of their ways, the Greens it is.

I find it quite frightening (almost as frightening as the Oil Peak theory, which will stop man-made climate change full stop) that people are so blase about the economic threat to our way of life China and India pose. I won't have a go at people getting cheap goods from China, mainly because I've bought some myself and if you offer people cheap quality goods they'll take them. However, why are we importing so much stuff we can make ourselves? Back in the 1940s, Nye Bevan said that Britain is an island of coal in a sea of fish. Now we have next to no coal or fishing industries. More to the point, in the next few years so much will be outsourced to the Third World where will the jobs come from? We can't all go on tv reality shows and talent contests to make a living. If people didn't get up to their eyeballs in debt (and take up so much overtime) the economy would be in serious problems already. The only people who seem totally fine with the hollowing out of the UK economy are mainstream journalists and politicians. Perhaps if the former are all outsourced to India they may make a fuss. As for the politicos, most are just the yes men and women of the EU, WTO and transnational corporations.

Anyway, it will all come out in the wash, as they say.

Here's a piece which helped me realise that the Green Party is basically a good thing which should be supported.

>From the office of the South-East England’s Green MEP Caroline Lucas

December 7th,


CHINA is poised to dominate the hi-tech sector of the global economy,
according to a new report published by Euro-MP and trade expert Caroline
Lucas ahead of next week’s World Trade Organisation (WTO) talks in Hong

‘The EU’s hi-tech future: The last colonial delusion’ reports that
professional jobs previously thought ‘safe’ from ‘outsourcing’ – such as the
media, tutoring, medical provision, architecture and the law - are already
being transferred to Asia, and that China is set to eventually dominate that
sector with a fifth of its exports already classified as hi-tech.

Dr Lucas argues that with 300 million rural people expected to move to
China’s town and cities by 2020, and with an increasingly well-qualified
workforce – China produces two million graduates, including 250,000
engineers, every year – the trend is set to accelerate dramatically.

“Anxious EU workers have seen more and more manufacturing and service jobs
disappear to China and India, all the while being reassured by our
Governments that the move to hi-tech is the answer,” said Dr Lucas, Green
Party MEP for South-east England and a member of the European Parliament’s
International Trade Committee and its delegation to next week’s Hong Kong

“This is little more than a colonial delusion. With their huge numbers of
cheap, highly trained engineers and hi-tech graduates, China and India are
poised to overtake the EU and the rest of the world in the hi-tech sector

“This in turn will place the system of international trade governed by the
WTO under great strain, as richer nations shut the door on free trade to
protect jobs – and votes – at home, exactly as we saw in relation to
textiles earlier this year.”

She warned that the main losers are workers in China itself, which maintains
low wages through poor working conditions and lack of democratic
participation in the work place.

“The Hong Kong summit must agree to investigate the impact of China’s rapid
development as a trading nation on both developed and developing nations:
the economic, social and environmental conditions of the majority
everywhere must be protected from, not undermined by, the impact of
international trade.”

The EU must learn from the experience of the US, which is facing an
‘offshoring crisis’ as jobs are transferred to low-cost Asia and US workers
are laid off, the report argues.

Highly skilled jobs ranging from analysts in all sections of financial
services to hi tech engineering are already relocating to Asia. Disturbing
examples of previously ‘safe’ hi-tech and professional work now being
‘outsourced’ from the US to Asia, include:

• News agency Reuters transferring editing and picture-caption writing to
• ‘Medical tourism’: private hip replacement operations being offered in the
India for less than half the US cost – even allowing for airfares.
• Indian companies offering "homework outsourcing" charging American
students $20 an hour for personal tutoring, compared with $50 or more
charged in the USA
• A Washington DC firm employs a ‘virtual secretary’ who, based in Pakistan,
reports for work in the US via video link

“The US has acted as the EU’s canary down the mine of hi tech trade – and
its economy has been left reeling and this must be a warning to us,” Dr
Lucas said.

“The US Bureau of Labor Statistics’ forecasts show that the future for the
US is not hi-tech, rather the majority of new US jobs in the coming decade
will be in domestic services that do not require a college education and are
lower paid.

“Of the nine occupations projected to have the biggest growth in coming
years the average pay of five of them is below the poverty line for a family
of four.

“This will be Europe’s hi-tech reality too unless world trade rules are
changed to foster economic security for all.”

The MEP added: “We need an urgent debate on how international trade rules
can be made to benefit both rich and poor countries in light of China’s
development – if its leaders meeting in Hong Kong don’t rise to the
challenge now then, ironically, China’s engagement with the WTO could be the
beginning of the end for the free-trade system it embodies.”


Notes to Editors: 1. ‘The EU’s hi-tech future: the last
colonial delusion’, by Caroline Lucas and Colin Hines is
available at or from Ben on any number below.

2. Dr Lucas will be representing the European Parliament at the Hong Kong
talks – for news and comment from the talks, which run from December
10th-16th, contact Ben.

For more information please contact Ben on 01273 671946, 07973 823358 or


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