Friday, July 28, 2006

Trade Talks Breakdown Means the Poor Stay Poor

Over at National Journal economics writer Clive Crook (motto: "I am not a crook!") offers a timely exposition of exactly why the breakdown of the latest round of world trade talks is terrible news for the world's poor. In sum, this is Economics 101 again: tariffs and subsidies prevent everyone on both sides of a nation's borders from working at maximum efficiency. That's bad news for all, but especially those who are not well off.

More specifically, the problem is this. Developed nations like the United States and the European Union have large agricultural industries. They subsidize them with government payments while protecting them with tariffs on imports. That means that (a) domestic farms work at less than full efficiency, as they lack the incentives to be more efficient or simply to close down because efficiency is impossible; (b) foreign producers with the ability to produce more cheaply can't sell in the subsidized, tariff-protected markets and so lack the incentive to produce efficiently.

The foreign producers are mostly in developing countries of the South (Africa, Latin America, South and Southeast Asia) where climate, soil and labor supply can produce food more efficiently than in the North. Those countries' economic development would be greatly enhanced by free access to the huge markets of the industrialized countries. Access to markets would spur the development of more efficient means of production in those countries, giving their own people a rising standard of living both through cheaper domestic production and through the income gained by selling abroad.

Imagine that farmers in the Philippines, Kenya and Uruguay had free access to markets in the United States, Japan and the European Union. They would get hard currency for crops that they previously could grow but not sell. With that currency, they could upgrade the efficiency of their farms with better machines, fertilizers, and chemicals (also more environmentally friendly, BTW). With upgraded efficiency, more income flows to these farmers, freeing them from the need to send their children into the fields and giving them the means to build schools and hire teachers, or to build hospitals and hire doctors. Likewise, increased efficiency lowers the cost of food for domestic customers, improving local nutrition. Soon a generation arises that is literate, nourished and healthy. If this sounds to you like what happened on the American frontier thanks to far-reaching policies like the Homestead Act, then you get the idea.

But this stunningly positive scenario isn't happening because no one wants to be the first to cut subsidies and tariffs, even though the greater efficiency and lower prices would benefit the country that did the cutting as well as the countries with which that country would trade. Everyone fears (a) the short-term dislocations to their own economies that free trade brings; (b) the use of the issue by the opposition party (whichever party is in opposition in whatever country) in the next election.

We got close to making a move on this a few years ago when Richard Lugar and some other senators and congressmen from Midwestern states proposed a schedule to eliminate agricultural subsidies. The proposal died. So did the hopes of a billion of the world's poor.

N.B. that free trade doesn't equal the Return of Jesus Christ. We're not prophesying a free-market utopia. But we'd like to see informed self-interest and human decency come together with a bit of political courage to make a move on this issue, even if it's a unilateral move by a single country. Say, the United States?

Write your congressman and senator.

2 comments:

Anonymous said...

And yet we have Mexico, which was supposed to follow this rosy scenario after NAFTA, but--to put it mildly--has taken an economic turn for the worse. Perhaps something more basic than economic policy determines the course of a society's economic well-being.

I would argue that the so-called laws of economics are, in fact, nothing more than highly contingent generalizations, radically dependent on certain moral, social, and political arrangements that simply don't hold in some societies. (Remember how perestroika was going to magically transform the Soviet Union's economy?) Absent those arrangements, the laws of economics fail to operate.

We in the West, of course, have managed to maintain those laws, while expanding their provenance to virtually every aspect of our lives--but at a price. By adopting a thoroughgoing consumerism, coupled with a willingness to seek marginal economic utility at almost any social cost, we have accelterated the breakdown of our communities, our neighborhoods, and, most alarming of all, our families.

To keep up with our frantic economy, the developing nations will likewise need to make such sacrifices. I'm not so confident that they will.

Jon A. Alfred E. Michael J. Wile E. SWNID said...

Mexico's north, where most NAFTA-related activity has taken place, has been doing pretty well, actually. Mexico's south hasn't, but then there remains a great deal of corruption in Mexico's government.

As to Russia's government, nothing need be said. The kleptocratic legacy of the czars is enduring.

Neither country is yet the beneficiary of genuinely free trade and the rule of law. Nevertheless, both countries are measurably better off than they were before the relative economic reform that they have recently undergone.

Economic generalizations are just that, contingent exactly as you say. However, they are true and useful generalizations nevertheless.

And while it is true that prosperity creates its own set of problems (from our theological perspective, the most serious of which is a false sense of self-sufficiency), poverty is hardly the forge of enduring human relationships. Having relative freedom from hunger and disease is surely a good thing in its own terms. But being hungry and sick hardly is the stuff that brings families and communities closer.

The frantic lifestyle that you suggest is not so much thrust on citizens of the West as chosen by many of them. It is perfectly possible to choose a less frantic, more related way of life within a developed economy, and many do. That choice is not open to the agricultural laborers of the developing world, who arise with the sun to work until dusk to earn enough money for a meager meal. Those are the people whose interests are not served by barriers to free trade in agriculture.