Tuesday, January 18, 2005

Is Free Trade Good For Poor Countries?

The World Trade Organization recently released a report by a group of outside experts to analyze the WTO's effectiveness and recommend changes. One member of the group, Jagdish Bhagwati, a University Professor at Columbia and senior fellow at the Council on Foreign Relations, has an article about it in today's Wall Street Journal. (Link, but a subscription in needed to read the whole article.). He is very critical of some NGOs, especially charities, that have been active in opposing trade liberalization.

Thus, they regularly allege that poor countries suffer from systematic rich-country "hypocrisy" leading to "double standards" in trade policy, with rich countries having more trade barriers than poor ones. The facts, however, are exactly the opposite for the most part. There is greater tariff protection on manufactures in the poor countries: This has followed from the fact that the poor countries, not the rich ones, have long been given special and differential treatment in trade negotiations.

The charities also say that, while rich-country trade liberalization is good for the poor countries, poor-country trade liberalization is bad for them. What is sauce for the rich goose is not sauce for the poor gander. In this fallacy, they are arguing against a mass of empirical evidence which shows that infant industry protection is often counterproductive and costly. Moreover, what postwar trade analyses show, and what the charities do not understand, is that autarkic trade barriers make domestic markets more lucrative than exports, leading therefore to an incentive bias against exports. So even when the rich-country markets are opened further, one's own trade barriers can prevent the penetration of these markets.

Perhaps the greatest damage they have done is in their energetic campaign against agricultural subsidies in the rich countries. The removal of these subsidies is, of course, desirable as it promises aggregate income gains; and many economists have therefore argued for their removal for nearly four decades. But the charities, the heads of international aid institutions such as the World Bank, and the liberal media have now added the twist that the removal of these subsidies will also help the poorest countries known as the "least developed countries" (LDCs). Yet this is dangerous nonsense.

The economists Alberto Vales and Alex McCalla have shown that as many as 45 LDCs, out of 49, are net food importers; and as many as 33 are net importers of all agricultural products. As prices rise with the removal of subsidies, surely importers will be harmed, not helped, except in the singular cases where the importers switch to becoming significant exporters.

Are the rich-country subsidies to agriculture to be put down to hypocrisy? A substantial role in their continuance despite economists' complaints was simply that the poor countries themselves were not interested in agricultural development. They identified development with industrialization; and their own trade policies created a substantial bias against agricultural development. Thus, rich countries wanted to protect their agriculture; the poor countries wanted to decimate theirs. So a Faustian bargain resulted: Hypocrisy is hardly the way to characterize it.

I totally agree with him that trade liberalization helps poor countries as well as the rich ones, but I only partially agree when it comes to agricultural subsidies. Sudden changes can wreak havoc. It can take years for local farmers to adjust to changing import conditions, but they can adjust if they know what is coming. I would suggest that all agricultural subsidies are eliminated on a five-year schedule, say 20% per year. Prices of food would rise slowly in the poorer countries, but the local farmers, knowing that higher prices are coming and when, can expand their production, knowing that they will be compensated for it. All that is required of the local governments is to get out of the way and allow their farmers to take care of the problem.


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