Trade liberalization: what has it done for us?

The author is the Senior Policy Analyst of the civil society organization Action for Economic Reforms (AER). She is also a member of the Management Collective of AER. This article was published in the Yellow Pad column of BusinessWorld, 15 November 2004 edition.

In a June 2004 paper of World Bank’s David Dollar, entitled
“Globalization, Poverty, and Inequality since 1980,” a number of
assertions are made regarding the benefits that trade liberalization
has brought us. One of the first assertions is that the developing
world has become more and more integrated with the world economy, with
80% of the developing world’s export being manufactured exports. This
has in turn resulted in an acceleration of developing countries’ growth
rates. In fact, on average, the paper claims, the developing world has
grown much faster than the developed world. Moreover, using the very
frugal international poverty threshold of $1 day, the number of poor
people in the world has declined by 375 million, the first such decline
in history. China, India, Vietnam, and Uganda are cited as the best
performers in the globalized developing world. These, along with a
number of other propositions, give one the sense that globalization has
been a boon for developing countries.

Closer scrutiny, however, of the data and of the references of the
paper show some problematic details. In particular, while the
developing world’s exports have in fact dramatically increased in the
recent decade, only 12 countries account for 90% of developing world
manufactured exports. With regard to global poverty, while it is true
that the magnitude of poor people in the world has declined by about
375 million, the poor in China alone declined by over 400 million. This
means then that elsewhere in the world, poverty is on the rise.
Moreover, a marked bunching up of people between the $1 and $2 a day
thresholds has also emerged.

In other words, a closer examination of the facts tells us that success
in this globalized era has concentrated by region and country, with a
very small handful of extremely successful outliers. In fact, the
inclusion of China and India, the two largest countries in the
developing world, in the sample seriously biases the results of the
analysis. Standard analysis especially in recent years requires that
extreme outliers in the sample be discarded in order to get a more
realistic assessment of the situation. This is the case for many
studies that include China and India in one sample, but exclude them in
another.

How we read globalization’s record in alleviating poverty hinges
critically, therefore, on what we make of the experience of a small
number of countries that have done well in the last decade or two –
China in particular.

There is little doubt on anyone’s mind today that successful and
effective integration into the world economy can be a boon for a
nation’s development struggle. Exports and foreign investment have
played an important role in China’s development, as well as in the
rapid social transformation of the East Asian tigers. By selling its
products on world markets, China has been able to purchase the capital
equipment and inputs needed for its modernization. As cited by Dollar
himself, Viet- nam, Uganda, and India are also current day examples of
this truth. Theoretically, increased exports and imports (which is what
integration refers to) brings about spillovers in the domestic economy
that spur innovation and investment, thereby increasing economic
activity and growth. Given some other complementary conditions such as
labor-intensive investments and non-bias against agriculture, this
growth can be a great driving force for social transformation.
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There is, however, much doubt as to how successful and effective
integration can be fostered. China, after all, is no model for
straight-and-simple liberalization and deregulation. In fact, China has
arguably violated practically every rule in the received wisdom of the
Washington Consensus. In spite of not having any significantly steep or
speedy trade liberalization, very late accession into the World Trade
Organization, no real or traditional concept of private property, and a
very intrusive and corrupt bureaucracy, China has managed to outpace
every single country in economic growth race. The same can be said of
the East Asian Tigers in the 70s and 80s, and to some extent, even in
the 90s.

And yet, we hear experts, both foreign and domestic, proselytizing
about the benefits of liberalization in the most conventional sense of
the word. Multilateral institutions, research institutions, and lobby
groups have attributed our poor economic performance to insufficient
liberalization, while countries that have done much less liberalization
than we have are the top performers of the day.

Dani Rodrik, a star professor at the Kennedy School of Government in
Harvard University, has been a unwavering and consistent critic of the
standard prescriptions to liberalize, privatize, and deregulate. One of
his main points in a recent paper is that more and more, the WTO and
multilateral lending agencies have come to view the goals of promoting
development and maximizing trade as synonymous, to the point where the
latter now easily substitutes for the former. At the same time, they
have come to conclusively assume that lower trade barriers necessarily
maximizes trade. These, he says, have led to a confounding of means and
ends.

Rodrik powerfully points out that trade is but only a means to an end.
Trade, after all, has no normative significance, and is only useful
insofar as it serves broader developmental goals. That trade volumes,
average tariff rates, and even effective protection rates are used as
measures of how well the system is working is clear evidence of this
folly. The goal of economic activity, after all, is not simply to
expand trade but rather to uplift standards of living.

Rodrik proposes a number of principles which can help civil society
organizations, members of the academe, and even government approach the
issue of trade within the context of development, of which two are made
mention of here.

First, trade rules, according to Rodrik, have to allow for diversity in
national institutions and standards. This means that the World Trade
Organization should not seek to harmonize all our trade-related
institutions but instead seek to facilitate peaceful coexistence among
our national institutions and those of others.

Universal requirements for sound economic advancement can be embodied
in diverse institutional arrangements, as has been shown by the
unorthodox institutional arrangements of countries like China, India,
and Viet- nam. The logic behind this is that development needs and
countries are highly country-specific. Therefore, the institutions
needed to address them will also differ from country to country. There
is no reason to believe whatsoever that one recipe can solve everyone’s
problems. Investment strategies, property rights systems, competition
policy must all be designed in a way that is cognizant of domestic
context.

Secondly, countries should be guaranteed the right to protect their own
institutions and development priorities. In particular, the WTO should
allow countries to uphold national standards and policies in sensitive
areas when trade demonstrably undermines domestic practices. At the
same time, the WTO should defer to other international agencies
regarding its definitions of development, labor standards, etc, since
these are well beyond the areas of its competence.

Finally, Rodrik also points out that if there is one sort of
liberalization that can help developing countries significantly, it is
that of temporary labor migration. With their army of surplus labor,
the developing world can very well use access to the employment markets
of developed countries. Coupling such with policies such as return
incentives and strictly temporary work visas with huge pecuniary
measures, temporary labor migration can greatly alleviate poverty in
the developing world, as well as create dynamic spillovers into the
rest of the economy. This is an option that the Philippines can
explore, given that we are already a major source of skilled labor to
other countries.

To quote Rodrik, “Trade has become the lens through which development
is perceived, rather than the other way around.” This is a problem that
must be addressed very soon. Currently, developing countries have ceded
much policy space to address developmental needs in the hopes of
expanding trade. The only way to properly assess the benefits of
globalization is to look at reality honestly. Only after doing so can
we create system of “global governance of trade as if development
really mattered.”

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