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Controversies inGlobalization

CONTENDING APPROACHES TO INTERNATlONAl RElATlONS

j .'.!, EDlTEU BY

Peter M. Haas, John A. Hlrd, and 8eth McBratneyUniversity of Massachusetls, Amherst

A Division of SAGEWashington, D.C.

lIBRARY.CAUFORNIA STATE U!'lI~~I!y,FUliERTON

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COfiLEtlI.•.•S _

CQ Press2300 N Street, NW, Suíte 800Washington, DC 20037

Conlributors ixPreface xxiInlroduclion: tJnderstanding Globalization xxv

Phone: 202-729- 1900; tol/-free, 1-866-4CQ-PRESS (l-866-427-7737)

INTERNATIONAL POLITICAL ECONOMY

1 Trade Liberalization and Economic Growth: Does TradeLiberalization Contribute to Economic Prosperity? 1YES: DAVIO DOLLAR, Tne World Bank 7NO: ROBERT H. WADE, London Sctioo! of Eeonomies and Potiticst Science 19

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Copyright © 20 tO by CQ Press, a division of SAGE. CQ Press is a registered trade-ma.rk of Congressional Quarterly Inc. 2 Trade and Equality: Does Free Trade Promote Economic

Equality? 39YES: L. ALAN WINTERS, UIJiversily of Sussex 45NO: KATE VYBORNY ANO NANCY BIRDSALL, Center for GlobalDevelopment 55

Ali rights reserved. No part ofthis publication mal' be reprodueed or transmittedinany form or by any means, eleetronie ar meehanical, including phatocopy, reccrding,ar any information storage and retrieval system, withour permission in writing fromlhe publisher,

Cover design: Kimberly GlyderComposition: Auburn Associares, Inc.

3 Poverty: Can Foreign Aid Reduce Poverty? 68YES: JEFFREY SACHS, TheEar/h Ins/i/u/e ai Columbia Universily 72NO: GEORGE B. N. AYIITEY, Ameriean Universi/y 88

9 The paper used in this publicarian exeeeds the requirernents of the AmericanNational Standard for Information Seienees-Perinanenee of Paper for PrintedLibrary MateriaIs, ANSI Z39.48-1992.

4 Emerging Technology and Politicallnstitutions:Is the Precautionary Principie an Eftective Tool forPolicymakers to Use in Regulating EmergingTechnologies? 99YES: INOUR M. GOKLANY, u.s. Deparlmenl of tne Interior 103NO: JOHN D. GRAHAM, Indiana Universily, ANO SARA H OLMSTEAO,Pardee RAND Graduale scnoot 115

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5 Terrorism and Security: Is International Terrorism aSignificant Challenge to National Security?YES: SCOTT ATRAN, University ot MiehiganNO: JOHN MUELLER, Ottio Stste Universily

125129139

Controversies in globalization : contending approaches to international relations Iedited by Peter Haas, Iohn Hird, and Beth MeBratney.

p.em.ISBN 978-0-87289-505-8 (alk. paper)I. Globalization. L Haas, Peter M. lI. Hird, Iohn A. 1lJ. McBratney, Beth.

IV. Title. 6 Nuclear Weapons: Should the United States orthe International Community AggressivelyPursue Nuclear Nonproliferation Policies?YES: SCOTT D. SAGAN ANO JOSH A. WEDOlE, Stentora UniversityNO: TODO S. SECHSER, Universily of Virginia

148152164

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2009003337

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vi Contents

7 Military Intervention and Human Rights:Is Foreign Military Intervention Juslified byWidespread Human Rights Abuses? 175YES: JACK DONNELLY, Universily ot Denver 178NO: SIMON CHESTERMAN, New York University School of Law 188

ENVIRONMENT ANO PUBLlC HEALTH8 Climate Change and lhe Environment:

Can International Regimes Be Effective Means 10Restrain Carbon Emissions? 200YES: RUTH GAEENSPAN BELl, World Resources Institute 205NO: SAMUEL THERNSTAOM, American Enlerprise Inslilule 216

9 The Fulure Df Energy: Should GovernmentsEncourage the oevelopmenl Df Alternative EnergySources 10 Help Reduce oependence on Fossil Fuels? 227YES: CHRISTOPHER FLAVIN, Wortdwa/ch Insti/u/e 232NO: MICHAEL lYNCH, Stralegic Energy & Economic Research, Inc. 240

10 HIV/AloS: Should lhe Wealthy Nalions Promoleanti-HIV/AloS Efforts in Poor Nations? 248YES: KAMMEAlE SCHNEIDEA ANO lAUAIE GARRETT, Councit onForeign Reta/ions 253NO: MARK HEYWOOD, AIDS Law Project 265

oEMOCRACY, oEMoGRAPHY, ANO SOCIAL ISSUES11 Gender: Should lhe Uniled States Aggressively

Promote Women's Rights in oeveloping Nations? 276YES: ISDBEl COlEMAN, Council on Foreign Retations 279NO: MARCIA E. GREENBERG, Corne/l Law scnoot 288

12 Immigration: Should Countries LiberalizeImmigration Policies? 299YES: JAMES F. HOlllFIElD, Soulhern Melhodisl univetsttv 304NO: PHllIP MAATIN, Universily ot California, Davis 319

13 Culture and oiversity: Should oevelopmenlEfforts Seek to Preserve Local Culture? 331YES: ELSA STAMATOPOULOU, Uniled Nations 334NO: KWAME ANTHONY APPIAH, Princelon Universily 345

14 Civil Society: Do NGOs Wield Too Much Power? 359YES: KENNETH ANOERSON, American Universily 364NO: MARlIES GLASIUS, University of Amslerdam 371

Conlents

15 Oemocracy: Should Ali Nations Be Encouragedto Promote oemocratization?YES: FRANCIS FUKUYAMA, Jotins Hopkins Universi/y, ANOMICHAEL McFAUL, NatIOnal Security CouncilNO: EDWARD D. MANSFIELD: Universily of Pennsylvania, ANOJACK SNYDER, Cotumbi« Unlversily

GlossaryNotesReferencesfnlfex

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trade liberalization andeconomic growth

Does Trade Liberalization Contribute toEconomic Prosperity?

YES: Oavid Oollar, The World BankNO: Roberl H. Wade, London School of Economícs

The eco omic underpinnings of arguments for freer trade (trade liberalization)

stem from the beliel that the voluntary exchange oi goods and services

between individuais increases the well-being 01 both the buyer and the seller.

This beliel, which has served as the loundation 01 modern economics sinceAdam Smith wrote The Weallh ot Nalians in 1776, was originally a highly sub-

versive idea: that not only would trade liberalization lead to mutual benelits,

but also, increased trade and interconnections would contribute to interna-tional peace. Writ large, the argument g09S that the accumulation 01 individ-

ual voluntary economic exchanges benefits nations as a whole, Ior the bene-

fits 01 exchange aggregate and transcend political boundaries.While it is well understood tnat rapidly increasing communications technolo-

gies have facilitated nearly instantaneous long-distance exchanges involving

many more actors (whether news or financial markets) than in the past, at amore prosaic levei, so. toa, have reduced transportation costs lacilitated inter-

national trade. Thus, the costs 01 trade-both financial and temporal-havebeen signilicantly reduced, thereby lacilitating trade's rapid expansion.Coupled with neoclassical economic thinking and, in particular, the notion of

"comparative advantage"-that more specialization and trade expands eco-nomic growth even lor nations lacing absolute trade disadvantages comparedwith more productive counterparts-the reduced costs 01 trade should directlytranslate to more trade and, therefore, to more aggregate prosperity. While thetheory is well-understood, lhe question is whether trade liberalization has ledempirically to grealer prosperity.

">

2TradeUberalizationandEconomicGroVlth

Yet it is also clear to some observers that the stylized version oí Iree trade

championed by many-the "win-win" promise 01 free exchange-Iails to live

up to lhe realities oi internalional trade. Global institutions thal have been

pushing trade liberalization, such as the World Bank and t e World TradeOrganization (WTO). have been buffeted by political protest as a result. While

chapter 2 takes up the impact of Irade on inequalily, the inilial consideration

here is the impact 01 trade on overall economic prosperity. While the vast

majority of economists believe that free trade promotes aggregate economic

expansion. the policy choices required typically involve not binary choices

between trade and no-trade but, instead, more complex decisions over

expansion or contraction 01 relatively modest tariffs and export subsidies and

who is likely to benefit in the short term from trade liberalization.Aside lrom aggregate trade levels. an important policy issue involves the

"trade delicit" (total exports minus imports) for any particular nation. For manyyears, the United States enjoyed positive trade balances-meaning that it

exported a greater value of goods than it imported. However, beginning with

the sudden onset of elevated petroleum prices in the late 1970s. the nationbegan running trade delicits, and lthas done so ever since. Recent increases

in oil prices have exacerbated the situation, to the point that, by mid-2008,

trade delicits were hovering around $60 billion per month, or over $700 billion

annually, despite a relatively weak dollar (which tavors U.S. sxports byenabling foreign buyers to purchase USo products with relatively inexpensive

dollars). The political and economic concern is that consistent and increasingtrade imbalances mean that lhe U.S. economy is, in effect, borrowing lrom the

rest or the world to sustain its current consumption. Figure 1 shows the value01 U.S. imports and exports since 1960. while Figure 2 portrays the difference

between thern-exports minus imports-thus rellecting the recent large and

growing trade deficits.Trade is, or course, more than a product of economics; it involves overt

political and policy considerations as welL A general, global political prefer-

ence for market liberalization, as well as elforts by the WTO, nave had the

effect of reducing import duties and other "barriers to trace" worldwide. TheGeneral Agreement on Tariffs and Trade (GATI) of 1947, along with other sub-

sequent treaties, has reduced tariffs around the world. Many argue that reduc-ing tariffs and diminishing other barriers 10 trade have increased levels 01 eco-nomic growth. While trade barriers tend to be lower in the wealthier nations 01tne Organization of Economic Cooperation and Development (OECD), thecosts of trade have been reduced overall by lowering both economic andpolitical costs. Figures 3 and 4 detail the broad reduction in import duties lrom1989 to 2004. In addition, increased transportation costs-particularly lhe cost

InternationalPoliticalEconomy 3

Figure 1

U.S. Exports and Imports in Goods and Services, 1960-2006

Source: U.S. Oepartmenl af Commerce. Bureau ot Economic Analysis, http://www.bea.gov/index.hlm.

01 the petroleum that luels most transportation-may affect overall levels of

international trade.

The question raised here-whether tariff reductions and other trade liberal-

ization policies contribute to economic prosperity-inevitably leads to discus-

sion 01 whether these measures are prelerable to some kind oí industrial or

Figure 2

U.S. Trade Balance, 1960-2006

Source: U.S. Department ot Commerce, Bureau ot Economic Analysis, http:/NlWw.bea.gav/index.htm.

4

Figure 3

Imporl Dulies in Developing Counlries by Regian, 1989 and 2004

Source: United Nations üeveíopment Programme, Human Devetopment Repor! 2005 (New York: OxfordUniversity Press. 2005). 116. .

Figure 4

Imporl Dulies in Developing Counlries, 1989 and 2004

source: United Natlons Oevelopment Programme. Human Developmenf Report 2005 (New York: OxfordUniversity Press. 2005). 116.

Intemational Polítical Economy

strategic trade policy (such as export subsidies or tariffs on imported goods)

that is intended to benelit domestic lirms. Contemporary trade theory castsdoubt on the simple notion that more trade equals more prosperity, in par!

because 01 increasing returns to scale (that is. the cost per unit produced

decreases as more 01 it is produced). which suggests that Iree markets may

lead to dominance by one or a lew producers. Also, the benelits lrom

expanded trade may not be evenly distributed within societies. For example,il sugar tariffs were reduced in the United States, domestic producers would

be hurt while loreign producers would gain-as would U.S. taxpayers and

consumers, who would pay slightly reduced prices for sugar. Thus, even ifaggregate prosperity increases, the benelits may be highly concentrated inthe lirms or sectors that are most competitive internationally and the costs

imposed on those least internationally competitive. Furthermore, the empirical

evidence linking trade and prosperity is mixed. For ali the rhetoric surround-

ing economists' belief that Iree trade leads to greater prosperity, there are also

other means of addressing problems associated with trade liberalization, such

as economic assistance and retraining programs for workers who lose jobs asa result of the heightened competition.

The lollowing two articles ·detail opposing viewpoints by two prominent

economists: David Dollar and Robert Wade. Wade lavors a nuanced

approach to international trade policy rattier than grand "Iree trade agree-ments," while Dollar argues that trade liberalization explains the economic

resurgence 01 several developing economies.

1. Trade liberalization has made the world economy more highly inte-

grated than ever belore. Are there risks to such a highly integratedglobal economy? What are they? Do the benelits outweigh the risks?

2. Global trade liberalization has reduced tariffs and barriers to trade.

One impact 01 this is that it has made it cheaper to import manygoods. As a result. the United States has run a trade delicit for thepast three decades. What are the risks 01 running a trade delicit

instead 01 a trade surplus? What are the benelits?3. China has emerged as one of the largest economies in the world,

but its integration into the global economy and íts move toward tradeliberalization have not occurred without controversy or concern.What have the concerns been about, and who has expressed them?Consider such issues as jobs, quality standards of goods. foreign

5

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6 Trade Liberalization and Economic Growth

policy, democratization, and human rights. Are these concerns

valid? Why or why not?4. Is trade liberalization good for ali countries? Why or why not? In what

situations would a country reject liberalization as a trade policy?

5. What evidence does David Doíiar cite to link trade liberalization and

economic prosperity? Is his evidence convincing?6. Robert Wade argues that trade liberalization is not a necessary con-

dition for economic growth. What evidence does he use to argue his

point? What would Dollar say in regard to Wade's claims? Who do

vou think is right?

YES: DAVI D DOLLAR 7

YES: David Dollar, Wor/d 8ank Country Director;China and Mongo/ia1

Trade liberalization is one of the controversial issues in the debates aboutthe benefits and costs of globalization. There is no doubt that trade liber-

alization increases economic prosperity. Trade enables a country to seU moreof the things it produces relatively efficiently and to purchase in return things

that it produces not at aU or less efficiently. The notion that this exchange is a

"win-win" situation for both countries involved was deveJoped as the theory of

compara tive advantage by David Ricardo. These benefits, however, are "static"

in the sense that they represent a one-time increase in real income, rather than!eading to continua! increases in income (that is, economic growth).

A more interesting and controversial question is whether in general there are

"dynarnic" benefits to trade überalization that lead to faster growth and hencemuch larger cumulative benefits. To address this question, it is usefuJ to begin

with what one would expect from economic theory. As Pau! Romer (1986) has

suggested, traditional theories about growth and differences in income levels

among countries focused on accumulation and the "object gap" between poorcountries and rich ones:

To keep track of the wide range of explanations that are offered for per-sistent poverry in developing natíons, it helps to keep rwo extrerne viewsin mind. The first is based on an object g"p: Nations are poor because theylack valuable objects like factories, roads, and raw materiais. The secondview invokes an ídea gap: Nations are poor because their citizens do nothave access to the ideas that are used in industrial nations to generate eco-nomic value ....

Each gap imparts a distinctive thrust to the analysis of developrnent pol-icy. The norion of an object gap highlights saving and accumulation. Thenotion of an idea gap directs attention to the patterns of interaction andcommunication between a developing country and rhe rest of lhe world,

If the preferred way to grow income is just to increase the number of facto-

ries and workplaces, then it does not marter if this increase is accomplished ina c\osed environment or a state-dominated environment. That mode! was fol-lowed in the extrerne by China and the Soviet Union, and, 10 a lesser extent, by

rnost developing countries, which foUowed import-substituting industrializa-tion strategies throughout the 1960s and 19705. lt was the disappointing resultsfrom this development approach that led to new think.ing both from policy-makers in developing countries and from economists studying growth.

" ,


Romer was one of the pioneers of the new growth theory that put moreemphasis on how innovation occurs and is spread and on the role of technolog-ieal advance in improving the standard of living. According to this theory, tradeliberalization-by allowing specialization, economies of scale, and purchase ofthe latest equipment and technology-can potentially help to overcome the"idea gap" that separates poor and rich nations. The straightforward approach,then, is to write down a growth model in which access to a large world marketwiUaccelerate growth, at least for some period of time. The debate over whethertrade liberalization actually leads to faster growth is not going to be settled bytheory, however, for this is inherently an empirical questiono

In order to shed light on this question, we need to briefly review the historyof trade liberalization, noting that lhe developed countries ofWestern Europe,North America, and Iapan went through a postwar period of multilateral tradeliberalization, while developing nations mostly sal on the sidelines. Startingaround 1978, however, more and more developing economies chose to under-take unilateral trade liberalization. At about the same time, the aggregategrowth rate of the developing world accelerated, and lhe world entered aremarkable period of poverty reduction.

Next, we will need to consider whether or not one can make a convincingempirical link from trade liberalization to faster growth. Case studies, eross-country statistical evidence, and micro evidence from firms ali support the viewthat trade liberalization accelerates growth in an underdeveloped economy.

GROWING INTEGRATION BETWEEN NORTH ANO SOUTHGlobal economie integration has been going on for a long time; in that sense,globalization is nothing new. What is new in this most recent wave of global-ization is the way in which developing countries are integrating with richcountries. As in previous waves of integration, tbis change is driven partly bytechnological advances in transport and cornmunications, and partly by delib-erate policy changes.

The first great era of modern globalization ran from abont 1870 to 1914,spurred by the development of steam sbipping and by an Anglo-French tradeagreement. In this period, the world reaehed levels of economic integrationcomparable in many ways to those of today. Global integration took a big stepbackward, however, during the period of the two world wars and the GreatDepression. Some discussions of globalization today assume that it isinevitable, but this painful episode is a powerful reminder that restrictive poli-cies can halt and reverse integration. By the end of this dark era, both trade andforeign asset ownership were back down nearly to their levels of 1870-theproteetionist period had undone fifty years of integration.

I

II

YES: DAVID DOLLAR9

In the period from the end of World War II to about 1980, the industrialcountries restored rnuch of the integration that had existed among them. Theynegotiated a series of rnutual trade liberalizatíons under the auspices of theGeneral Agreement on Tariffs and Trade (GATT). In tbis second wave of mod-em globalization, many developing countries chose to sit on tbe sidelines. Mostdeveloping countries in Asia, África, and Latin América followed import-substituting industrialization strategies--that is, they kept their levels of importprotection far higher than those in the indnstrial countries in order to encour-age domestie produetion of manufactures, and they usnally restricted foreigninvestrnent by multinational firms as well in order to encourage the growth ofdomestic firms. While limiting direct investment, quite a few developing COW1-

tries turned 10 the praetice of international bank borrowing that was expandingin the 1970s and thereby took on significant arnounts of foreign debr.

The most recent wave of globalization began in 1978 with the initiation ofChina's economie reform and opening to the outside world. China's openíngcoincided roughly with the second oil shock, which contributed to externaldebt crises throughout Latin America and elsewhere in the developing world.In a growing number of countríes-c-from Mexico to Brazil to India to sub-Saharan Africa-political and intellectual leaders began to fundamentaUyrethink their development strategies. What is distinctive, then, about this latest~'ave of globalization is that the majority of the developing world (rneasured111 terrns of population) has shifted from an inward-focused strategy to a moreoutward-oriented one.

Some rneasure of this policy trend can be seen in average import tariff ratesfor the developing world. Average tariffs have declined sharply in South Asia,Latin America, and East Asia-mostly the result of decisions to unilatera1ly lib-eralize trade--while in Africa and the Middle East there has been much lesslariff-cutting (see Figure 1). These reported average tariffs, however, captureonlya small amount ofwhat is happening with Irade poliey.

Often the most pernicious impediments are nontariff barriers: quotas,Jicensing schernes, restrictions on purchasing foreign exchange for imports. InChina's case, redueing such nontariff impediments starting in 1979 led to adramatic surge in trade (see Figure 2). Whereas in 1978 external trade had beenmonopolized by a single government ministry, in the following year Chinabegan to shift to a policy of "free trade," (That phrase refers to a situation inwhich trade is not monopolized by tbe government, but rather is permitted toprivate firrns and citizens as well.) The specific measures adopted in Chinaincluded allowing a growing number of firrns, including private ones, to tradedirectly and openiog a foreign exchange market to facilitate this trade.. The immediate result of this altered strategy can be seen in the hugemcreases m trade tntegration of developing countries over the last two decades

r

10

Figure 1

Average Unweighled Taritl Rales by Region, 1980-1998

Source: Berg, Andrew and Anoe Krueger, 2003. "Trade, Growth, and Poverty: A Selective Survey." IMFWorking Paper, WP103130, p: 16.

Figure 2

Trade Reforms and Trade Volumes, China 1978-2000

Source: Dollar, Oavid and Aart Kraay. 2003. "tnstítuuons, Trade, and Growth." Journal of Monetary Eco-nomics 50 (133-162), p. 151.

YES: DAVID DOLLAR 11

of the twentieth century. China's ratio of trade to national income more thandoubled in thar period, and countries such as Mexico, Bangladesh, Thailand,and India saw large increases as wel! (see Figure 3). It was also the case, how-ever, that quite a few developing countries traded less of their income overthose two decades. Some of these countries engaged in relatively little formaltrade liberalization, while in others, such as Kenya, formal trade liberalizationwas not complemented by efforts to improve custorns and ports, with theresuItthat the country traded less of its income in 1997 than it had donetwenty years before.

The change was reflected not just in the amount, but also in the nature afwhat was traded.l'rior to 1980, nearly 80 percent of developing countries' mer-chandise exports were primary products=-the stereotype of poor countriesexporting tin or bananas had a large element of truth, The big increase in rner-chandise exports over the next two decades, however, consisted of manufac-tured products, so that, by the century's end, 80 percent of merchandiseexports from the low-income countries of the South were manufactures (seeFigure 4). Garments from Bangladesh, refrigerators from Mexico, computerperipherals from Thailand, CD players from China-this had become themodern face of deveJoping country exports. Service exports from the develop-ing world had a1so increased enormously, both traditional services such as

Figure 3 o

Change in Trade/GDP, 1977-1997 (selecled countries)

Source: Dultar, üavic. 2004. "Globatizatlon. Poverty, and lnequality sínce 1980." World Bank PolicyReseareh Working Paper, No. 3333, p. 7.

"


Figure 4

Source: Oollar, Oavid. 2004. "Globalizatlon, Poverty, and Inequality since 1980," World Bank PolicyResearch Working Paper. No. 3333. ~. 8.

tourism and more distinctively medem ones, such as software from Banga-lore, India.

At the same time as trade was being liberalized, the aggregate growth rate ofthe developing world was accelerating. We have reasonably good data on eco-nomic growth going back to 1960 for about one hundred countries, whích makeup the vast majority of the world's population, summarized in the Penn WorldTables. If you aggregate ali of the industrial countries (rnembers of theOrganization for Econornic Cooperation and Developrnent [OECD]) and all ofthe developing countries for which there are data back to 1960, you find that, ingeneral, rich country growth rates declined until the end of the century, whilegrowth of the developing world acceJerated (see Figure 5). In particular, in the1960s growth of OECD countries was about twice as fast as that of developingcountries. This was a period in which the OECD countries were benefiting frommutual trade JiberaJization while developing countries largely chose to foltowinward-oriented strategies. The rich country growth then gradualty deceleratedfrom about4 percent per capita in the 1960s to 1.7 percent in lhe 1990s.The lat-ter figure is close to the long-term historical growth rate of the OECD countries.

In the 1960s and continuing into the 1970s, the growth rate of developingcountries in the aggregate was well below that of rich countries-a paradoxwhose origin has been long debated in the economics profession. The slower

·1'"

YES: DAVID DOLLAR

Figure 5

Growlh Rales Df Per Capila GDP. 19605-19905

Source: Dollar. David. 2004. "Globalization. Pnverty, and Inequality since 1980." World Bank PolicyResearch Working Paper, No. 3333, p. 13.

growth of backward economies in that period appeared to contradict the dom-inant neoclassical growth theory, which suggested that, other things beingequal, poor countries should grow faster. This expected partem finally emergedin the 1990s, when per capita growth in developing countries reached about 3.5percent, more than twice the rate of rich countries. Since 2000, developingcountry growth has been even faster,

Poverty reduction in low-incorne countries is very closely related to the GDPgrowth rate. Hence, the accelerated growth oflow-income countries has led tounprecedented poverty reduction. (By poverty, we mean subsisting below someabsolute threshold. ln global discussions, one often sees reference to an inter-national poverty line of $1 per day, calculated at purchasing power parity.)Shenhua Chen and Martin Ravallion (2004) have used household survey datato estima te the number of individuals classified as poor worldwide based onthe $1 poverty line, back to 1981. They find that the incidence of extremepoverty (consnming less than $1 per day) was basically cut in half over atwenty-year period, from 40.3 percent of the developing world's population in1981 to 21.3 percent in 2001. ln 1981 extrerne povertywas concentrated in Eastand South Asia, and these were the regions that grew especially well over thenext two decades, dramaticalty reducing extrerne poverty.

Poverty incidence has been gradually declining througbout rnodern history,but in general population growth has outstripped the decline in incidence, so

13

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Trade Liberalizalion and Economic Growth14

that the total number of poor people was actual1y nsmg. Even in the1960-1980 period, which was reasonably good for developing cow:tnes, thenumber of poor continued to rise (see Figure 6).2 What IS really srriking aboutthe two decades that followed-indeed, it was unprecedented m hu.manhistorv= is that lhe number of extrerne poor declined by 375 milhon: wh:le atthe same time the world's population rose by 1.6 billion. While this 0\ eralldecline in global poverty is encouraging, it should be noted that the.re has beenvery different performance across regions. While East and South AS13grew welland reduced poverty, sub-Saharan Africa had nega tive growth between 1981

and 2001 and a rise in poverty.

THE UNK FROM INTEGRATlON TO GROWTHDeveloping countries became more inlegrated with the global economy ove~the last two decades of the twentieth century, while growth and poverty reduction accelerated. A natural question to ask is whether there was a link betweenthese two phenomena. In other words, could countries such as Bangladesh,Chi I dia and Vietnam have grown as rapidly as they did, had they

ma, n , tl . 1980?Thisremained as closed to foreign trade and investrnent as iey were m . I

1.820 1840 18~9' 1980

Source: Dollar, Davld. 2004. "Globalization, Poverty, and tnequatity since 1980." World Banl< PollcyResearch Working Paper, No. 3333. p. 18.

YES: DAVI O DOLLAR

is not lhe kind of question that can be answered wíth scientific certainty, butthere are several different types of evidence that we can bring to bear On it,

First, a large number of case studies show how this process can work in par-ticular countries. Among the countries that were very poor in 1980, China,India, Vietnam, and Uganda provide an interesting range of examples.

China

China's initial reforms in the late 1970s focused on the agricultural sector andemphasized strengthening property rights, liberalizing prices, and creatinginternal markets. As indicated in Figure 2, liberalizing foreign trade and invest-ment was also part of the initial reform program and played an increasinglyimportant role UI growth as the 1980s proceeded.

The role of international linkages is described in a case study by RichardEckaus (1997):

After the suceessof lhe Communist revolution and the founding of lhePeople's Republieof China, the nation's international eeonomiepolicieswere dominated for at least thirty years by lhe goal of self-reliance....China's foreign trade began to expand rapidly as lhe turmoil ereated bylhe Cultural Revolutian dissipated and new leaders carne to power.Though it was not dane without controversy, lhe argument that openingaf the economy to foreign trade was necessary to obtain new capitalequipment and newteehnologywasmade offieialpolicy.

At the same time, Eckaus notes, internarional transactions outside the stateplanning system were growing. Enterprises created by foreign investors wereexernpted from the foreign trade planning and control rnechanisms, and sub-stantial amounts of other types of trade, particularly that between townshipand village enterprises and private firms, were made relatively free. "Theexpansion of China's participation in international trade since the beginningof lhe reform movernent in 1978 has been one of the most remarkable featuresof its remarkable rransformation," says Eckaus. "While GNP was growing at9 percent from 1978 to 1994, exports grew at about 14 percent and imports atan average of 13 percent per year."

India

India pursued a11inward-oriented strategy into the 1980s and got disappoint-ing results i11terms of growth and poverty reduction. Iagdish Bhagwati (1992)crisply defines the rnain problems and failures of the strategy:

15

16Trade Liberalization and Economic Growth

r w0111d divide thern imo three major groups: extensive bureaucratic con-trais over production, investment and trade; inward-looking trade andforeign investment policies; and a substantial public sector, going wellbeyond the conventional confines of public utilities and infrastructure.

The former Mo adversely affected the private sector's efficiency. Thelast, with lhe inefficienl functioning of public sector enterprises, irnpairedadditionally the public sector enlerprises' conlribution 10 lhe economy.Together, the three seis of policy decisions broadly set strict limits 10 what

lndia could get out of its investmenl.

Under this poliey regime, India's growlh in the 1960s (1.4% per annum) and

lhe 1970s (-0.3%) was disappointing. The country's eeonomie performance

improved during lhe 1980" but this surge was fueled by deficit spending and

borrowing from abroad that was unsustainable. In fact, the spending spree led

10 a fiscal and balance of payments crisis that brought a new, reform govern-ment to power in 1991. Key aspects of its program of reform were an initial

devaluation of lhe rupee and subsequent market determination of its exehangerale, abolition of import licensing (with some important exceptions), convert-

ibility of lhe rupee on' current account; reduction in lhe number of tariff lines

as well as tariff rates, and an easing of entry requirements for direct foreign

investment.In general, India has gotten good results from its reform program, as per

capita income growth remained above 4 percent per annum in the 1990s andthen accelerated to around 6 percent after 2000. This pattern reinforces theconclusion that grawth and poverty reduction have been particularly strong in

states that have made the most. pragress in liberalizing their economies.

Vietnam

Another interesting case is Vietnam-a country that went from hasket-casestatus in the rllid-1980s to that of a dynamic exporter and darling of interna-tional investors twenty year, later, In a case study of that startling turn-araund,

Dollar and Ljunggren {l997) reflect on its proxirnate causes:

That Vietnam was able 10 grow throughout its adjustment period can beattributed to lhe fact that lhe economy was being increasingly opened tolhe international market, As part of its overall effort 10 stabilize the econ-omy, the governmenl unified its various controUed exchange rales i.n 1989and devalued the unified rate 10 the levei prevailing in the parailel rnarket.This was tantamount to a 73 percent real devaluation; combined withrelaxcd administrative procedures for imports and expons, this sharplyinereased lhe profitability of exporting.

YES: DAVID DOLLAR 17

According to these authors' analysis, this policy produced strong incentivesfor export throughout most of the 1989-1994 period, during which real export

growth averaged more than 25 percent per annum, Exports-mainly of rice at

first, but later of a wide range of exports, including processed primary prod-ucts (for exarnple, rubber, cashews, and coffee), labor-intensive manufacturesand tourist services-were a leading sector spurring the expansion of theeconomy.

While the country's current account deficit declined from more than 10 per-

eent of GDP 111 1988 to zero in 1992, Vietnam's export growth was sufficient toen.'ure that imports could continue to grow, rather than being cut back, as

míghr have been expected. Noting that investment increased sharply between

1988 and 1992, while foreign aid [from the Soviet Union] was drying up,

Dollar ando Ljunggren explain: "111 response to stabilization, strengthened

property rights, and greater openness to foreign t.rade, dornestic savings

increased by twenty percentage points of GDP, from negative levels in the rnid-

1980s to 16 percent of GDP in 1992."

Uganda

Uganda was one of the most successful reformers in Africa during this recent

wave of globalization, and its experience has interesting parallels withVietnarn's. It, too, was a country that was quite isolated economically and polit-ically in the early 1980s.

According to Paul Collier and Ritva Reinikka (2001,30-39), trade liberaliza-

tion was central 10 Uganda's structural reform program:

During the 1970s} export taxation and quantitative restrictions 011

imports characterized trade poliey in Uganda. Exports were taxed, direetlyand implieitly at very high rates. Ali exports except for coffee collapsedunder rhis taxation,

Part of the export taxation was achieved through overvaluation of theexehange rale, whieh was propeUed by intense foreign exchange rationing,but mitigated by an active illegal market Manufaeturing based on importsubstitution collapsed along with the exporr seetor as a result of shortages,volatiliry, and rationing of import licenses and foreign exchange.

The NRM government that eame 10 power in 1986 thus inherited a trade

regime th~t included extensive nontariff barriers, biased government purchas-~ng, and high export taxes, coupled with considerable smuggling. The nontar-iff barriers were gradually removed after the introduction in 1991 of autornaticlicensing under an import certification scheme, During lhe Iatter half of lhe

l'


1990s, lhe governrnent implernented a major lariff reduction program, and, asa result, "by 1999 lhe tariff system had been substantially rationalized and lib-eralized, which gave Uganda one of lhe lowest tariff structures in Africa." Themaximum tariff was set at 15 percent on consumer goods, zero for capitalgoods, and 7 percent for interrnediate imports.

Collier and Reinikka summarize lhe results of this reform eEfort:

The country's averagerealGDP growth rate was6.3percent per yearoverthe entire recoveryperiod (1986-1999) and 6.9 percent in the 1990s.Theliberalizationof trade has had a marked effecton export performanee. lnthe 1990sexport volumesgrew(at consrant priees) at an annualized rateof 15percent, and import volumesgrewat 13percent,The valueof non-coffeeexports inereasedfivefoldbetween 1992and 1999.

CONCLUSIONThese cases provi de persuasive evidence that openness to foreign trade and.investmenr-c-coupled with complementary reforms-ean lead to faster growthin developing countries. AlI of them also illustrate lhe earlier failure of import-substitution strategies based on protecting the domestic market. However,individual cases always beg the question, how general are these results? Doesthe typical developing eountry that liberalizes foreign trade and investmen t getgood results?

Cross-country statistical analysis is useful for looking at the general parternsin the data, and sueh studies generally find a correlation between trade andgrowth. As reflected in the case studies reviewed above, some developing coun-tries have had large inereases in trade integration (rneasured as the ratio oftrade to national income), while others have had smal! increases or evendeclines. In general, the countries that have had large inereases in trade inte-gration have also seen accelerations in growth. This relationship between tradeand growth persists after eontroUing for reverse eausality from growth to tradeand for ehanges in other institutions and policies (Dol!ar and Kraay 2002).

A rhird type of evidence about integration and growth comes from firm-leveI studies and links us back to Paul Romer's theories about trade liberaliza-tion and innovation, quoted earlier. Developing eountries often have large pro-duetivity dispersion across firms making similar things: high produetivity andlow productivity firms coexist, and in small markets there is often insufficientcompetition to spur innovation. A consistent finding of firm-Ievel studies isthat openness leads to lower productivity dispersion-the less efficient, high-cost producers exit the market as priees faU.While the destruction and creationof new firms is a normal part of a weIl-funetioning econorny, attention is too

;,

I

NO: ROBERT H. WAOE 19

often paid only to the destruction of firms, missing balf of the pieture. In amore open economy, there are more firm start-ups, a prime source of jobs andproductivity growth. The higher turnover of firms is thus an important soureeof the dynamic benefit of openness. In general, dying firms have falling pro-ductivity, and new ones tend to íncrease productivity.

While these studies shed some light on why open economies are more inno-vative and dynamic, tbey also remind us why integration is controversial. TherewiIJ be more disloeation in an open. dynamie economy, as some firms closeand others start up. If workers have good social protection and opportunitiesfor developing new skills, everyone ean benefit. But without such policies, therecan be some big losers,

The economic historians Peter Lindert and Jeffrey WilJiamson (2001, 29-30)make a nice point about the different pieces of evidence linking integration togrowth: "The doubts that one can retain about each individual study threatento block our view of the overal! forest of evidenee. Even though no one studyean establish that openness to trade has unambiguously helped the representa-tive Third World economy, the preponderance of evidence supports this con-clusion." Going on to note the "ernpty set" of "countríes that chose to be lessopen to trade and factor flows in the 1990s than in the 1960s and rose in thegloballiving-standard ranks at the same time," they conclude: ''As far as we eantell, there are no anti-global victories to.report for the postwar Third World.We infer that this is beeause freer trade stimulates growth in Third Worldeconornies tcday, regardless of its effects before 1940."

NO: Robert H. Wade, London School ofEconomics and Political Science

There is nothing that economists agree about more than the virtues of freeor almost-free trade.! Nicholas Stern, former chief economist at the World

Bank, declared in 2008, "95 percent of the arguments for protection are rub-bish, and the other 5 percent don't work in practice,"! Iagdish Bhagwati, a dis-tinguished trade economist, claimed that belief in the superiority of the free ornear-free trade strategy over the "import substitution" strategy is alI but uni-versal among economists, "insofar as any ki.nd of consensus can ever be foundin our tribe," 3 A survey of economists' opinions elicited responses to twenty-seven propositions about the economy from about 1,000 economists in fiveindustrialized countries, in terms of "generally agree," "agree with provisos,"

Trade Liberalizalion and Economic Growlh20

and "genera1ly disagree:' Of the twenty-seven, "tariffs and import controlslower economic welfare" elieited the most agreement. Flfty-seven percent ofthe whole samp\e-including 79 percent of t~e American eeo~~nüsts. (~oughonly 27 pereent of the French econolmsts)- genera\lyagreed with it. .

Economists typica1ly deploy words sueh as protecttOl1Ism and protectlOM"lst asautomatie negatives. To seek to persuade by ensuring that the phenomenooeanoot be described without simultaoeously being given a normative evalua-tion is a standard rhetorieal technique, bur it makes for bad science. Phrasessuch as "price c1istortion" and "financial repression" show the same tacticdeployed 10 the same end-to load the seales in favor of ~ee markets.

This free trade consensus has justified the World Banks emphasls on tradeliberalization as not just one policy reforrn arnong many but as the queen ofreforms. Its Structural Adjustment Loans over the 1980s and 1990s earn~dmore trade liberalization conditions than those m any other policy domam ..

To see how these ideas shape eountry policy today, take the case of Mongoha.The goverrunent tbat took power as communism ended in 1991 swungto thenoncommunist extreme and embarked on fast, unstrateglC economlC liberal-ization. It was hailed as a star pupil of the Washington Consensus. But theindustrial sector eollapsed, urban unemploymeot soared, people retreated mtopastoralism, pastoral yields eollapsed, and social indicators fell (h:V1ng beenhigh relative to pef capita income in the bad old commumst days).. ..

However. the goverrunent did want to retain one primmve índustrial policy:a tax on the export of unproeessed wool (an instrnment the Enghsh govern-ment had used to develop the wool industry in competition with already-established competitors on the Coutinent in the fifteenth century). The AsiaDevelopment Bank offered the government a big loan (roughly $200 million)-on condition that the government drop the export taxo The governmentobliged, removed the export tax, and Mongolia's wool carne to be processed inChina and Italy, Good for China and Italy, bad for Mongoha-whicl1 conttn-ues to struggle with high unemplovment. overpopulation in the pastoral econ-omy, and a large eurrent account defieit. Mongolia's experienee [lhrstrates thatthe alternative to an "inefficient" industrial sector, measured 111 world market

priees, ma)' be not an "efficient" one, but none. ... .Fast forward to 2002, when a German Development Bank mlSSlOnarnved 111

Ulan Bater to help with the country's World Trade Organization (WTO) acces-sion. The mission discussed Mongolia's situation with the World Bank countrydirector and floated the idea of restoring an export tax on Llnprocessed wool.The World Bank countr)' director put his fool down, declaring, "That would begoing backwards. We don't want the governm~~t to intervene i~ the eeonomy.We want the gavernment to stick to free trade. I In the Mongoha story, we see

NO: ROBERT H. WADE

the Asian Development Bank, the World Bank, and the postcommunistMongolian government giving a high priority to free trade policy, as if therewere no sensible a1ternative.

The idea that trade has almost magical developmental effeets is frequentlyreiterated from authoritative positions in the international development com-muniry, as in World Bank president Paul Wolfowitz's declaration that, "Ir istrade that will allow poor countries to generate growth .... It is trade that hashelped 400 million Chinese escape poverty in the past 20 years and the samecan happen elsewhere," Fudging the important distinction between "trade pol-iey" and "trade quantities and values," such staternents assume that freer tradepoliey reliably generates more trade and that more trade reliably improvesindicators of economic development.

In the same vein, most cornmentators in the West agree that the early 2007collapse of the \'\ITO's Doha Round trade negotiations-aimed at intensifyingthe Uruguay Round's multiJateralliberalization of trade and investment (whileretaining tough proteetion of intellectual property)-was a bad thing foreveryone except some speeial interest groups. They paint a post-Doha seenarioof erumbling multilateral Irade arrangements, proliferating bilateral orregional trade agreements ("stumbling blocks" rather than "building blocks"),and trade quarrels seemingly imrnune to. the WTO's Dispute SettlementMechanism. They also say that developing countries are the big losers, beeausevarious aid-for-trade and trade facilitation rneasures written into Doha will besuspended while agricultural support in the United States, the EuropeanUnion, and Iapan will continue, making it more difficult for developing coun-tries both to sustain their own agrieulture in the face of eheap food importsand to export agricultural products to the developed countries' markets-andthus assuming that they should specialize more in agriculture, their "compar-ative advantage."

The larger norma tive vision is of a "globalized" world where national bor-ders have little economic signifieanee, except perhaps to restrain labor migra-tion. As Martin Wolf of the Pinancial Times says, "It cannot make sense to frag-ment the world economy more than ít already is but rather to make the worldecol1omy work ClS if it were the United States"-that is, with national bordershaving no more economie signifieance than the borders between V.S. states.f

Yet one need look no further than the Latin America-China comparison tosee that something is amiss with the free trade consensus. Twenty years ago,Latin America was the champion liberalize r, while China not only retainedhigb barriers to trade and foreign investrnent and capital flows but also aIlowedits government to continue to steer lhe economy. Latin Arnerica was expectedto ascend to the First World while China would languish in the Third WorId.

21

Trade Liberalization and Economic Growth22

110\"ever China is the great success story; it is now a majorTwenty years on, '. , .. .. and many fewer of its people are living ll1 poverty.world econormc power, . r .

Latin America, meanwhile, experienced an export boom,. from $100 btl10n 1~1981 to $750 billion in 2007. But the export boom was in pr~mary products,Latin America's growth now depends heavily on China's: the industrial se~torhas been eroded; and its poverty headcount (number of peopl~ living on ess

d) . d fr 140 million in 1980 to 210 million m 2005.than $2-a- ay soare om ' '.' IThis essay will argue that both theoretical developments and n:w em~1!lca. ll f thinking of the free trade consensus. Indeed, rt shows that

eV1denceca lar a re IWUU . ki di tIh does not hold among the subset of economrsts wor ng rec y

t e consensus . . d busid d trade policy Economists-in-general, political lea ers, usmess

on tra e an· ifti d fleaders, and concerned citizens should pay attention to the shi mg groun .0_

theory and evidence, taking a questioning approach to the claim that ti ade liberalization is a necessary condition for economic progress and even more so to

h I· th t it IS' an almost sufficient condition for econorruc progressoteCa1m at i ... IBut these days trade is not the only highly contennous ínternanona . eco-

.. . o too are foreign investment and inteIlectual property nghts,nomic issue; so, ) . d i tbecause international business in the West is increasingly íntereste ll1mves -ing in foreign locations, as distinct from producing at horne and exportmg.

. body for multilateral trade and 1l1vestment, the WTO,The rnam governance l' d fhas some strongly antidevelopmental features, and reform efforts shoul ~cuson removing these features while protecting what IS valuable-notabl) the

Dispute Settlement Mechanism.

GIVENS ANO NOT GIVENSTo clear the ground, here are some propositions that can be taken as given.

Some trade is better thau no trade (but no one champions autarky, not

even Kim Iong li of North Korea).

Trade can expand markets, lower costs, intensify competiti~n, dissemi-nate knowledge of tastes and technology, and raise produCt1V1ty.

Countries that have sustained fast growth have experienced a rising share

of trade in GDP.

In these cases, the broad direction of change in trade barriers has been

downward.

Very high average tarifEs (say 50 percent +) and large variations in effec-tive tariffs berween one sector and anotber reflecting not national strat-

NO: ROBERT H, WADE 23

egy but inertia or interest-group pressures constitute a "bad" traderegime. As between this bad regime and free trade, free trade wins handsdown.

But this last is a phony choice. The policy question generally is, "Should thegovernment now give high priority to [urther and across-the-board trade liber-alization?" as distinct from ali the other things that compete for the governoment's attention. Part of the answer should rest on the answer to the question,"Is trade liberalization reliably associated with subsequent hígher growth andlower poverty?"

Here are some further propositions that are more controversial.

The claims for large growth benefits from trade liberalization tend to bebased on computable general equilibrium (CGE) models. These modelstypically rest 011implausible assumptíons that bias the benefits upward,notably the assumption that full employment persists through the liber-a1ization (so no account is taken of lost output due to higher unemploy-rnent). Moreover, the models typically ignore distributional effects.

Prior trade policy liberalization is not sufficient for subsequent highertrade/GDP or for subsequent higher GDP growth rates, as seen from thenumber of cases where trade libera1ization has not had these effects.

Case study evidence suggests that trade protection can be good for eco-nomic growth and diversification of production. The case study evidenceincludes the historical experience of now developed countries, almost allof which used substantial protection during their indnstrialization. (Thisis not to say that trade protection is generaily good for growth and diver-sification, still less to say, "more trade protection is better.")

• The effects of a given level of trade protection depend on how it isdesigned and how long it has bem in place. They depend, for example, onwhether protection is granted unconditionally or against performancerequirements of protected industries or firms.

Trade liberalization has diminishing returns. When average tariffs are 10percent, a 10 pereent eut has smaller effeets than when average tariffs startat 40 percen t.

The effects of trade liberalization depend on how fast it is done and howSOOI1 after the establishment of new industries. Gradual trade liberaliza-tion is likely to have more benign effects than fast liberalization, and líb-eralization after learning-by-doing has oecurred has more benign effectsthan liberalization eoncurrent with the establishment of new activities.


The effects of trade liberalization depend heavily on the production anddemand characterisrics of the goods and services whose production isstimulated and those whose production is curbed. A trade Iiberalizationthat stímulates the production of goods and services with increasingreturns and high income elasticity of demand and curbs the productionof those with decreasing returns and low income elasticiry of demand-possibly as a result of complementary industrial policies-will have bet-ter results than one thar does the opposite.

The effects of"bad" trade regimes on growth and poverty maycome froma second set of causes that produce both the bad regime and lhe slowgrowth. The "bad" trade regime may be more a symptom of growth-inhibiting features than a direct cause, in the sense that a strong trade lib-eralization of even a "bad" regime (ler alone one closer to average) may notbring improvements in overall performance on its own and may evenmake things worse, See the case of Mongolia, above, and country A, below.

China's rise to be the workshop of the world for labor-intensive manufac-tures poses a developmenl headache for the rest of the developing world,including Latin ~merica and sub-Saharan Africa. It is deeply irresponsi-ble for Western developrnent organizations such as the World Bank toadvocate trade liberalization and export-orientation country-by-country,on the assurnption of"other things held constant in the rest of the world,"Without special measures of industrial policy, existing and incipient man-ufacturing activity is likely to be knocked out by the China factor.

Before coming back to these complex:ities,let us rehearse the standard argumenr,?

FREE TRADE THEORYIf the residents of London and Manchester both gain by trading, why notequally the residents of England and Portugal? Wbat difference does a nationalborder make? If two autarchic economies start trading with each other, bothwill gain as each moves to specialize in its "cornparative advanrage," Therefore,according to free Irade theory, trade is good and more trade is better. If aneconomy currently has tariffs or restrictions on imports, it can almost alwaysgain (improve efficiency) by lowering or rernoving them, regardless of startinglevei, even if other countries rnaintain protection. In the words of a Pinancial

Times editorial, "The case for trade liberalisation is simple: it is not wise tothrow rocks into your OWIl harbours. Liberalisation has run aground [in thefailure of the Doha Round of trade negotiations I because its defenders bave

".11

NO: ROBERT H. WADE 25

failed to make that simple argument," 10 Another homely analogy is oftendeployed to make the sarne case: if the bicycle does not keep moving forward,it will topple over. (Only a noncycJist could beli.eve this!)

The core proposition of this popular theory is thal fully employed resourceswill be utilized more efficient1y in the absence of barriers to trade. It assumesthat fuller exposure to international competition does not cause higher unem-ployment, 50 the efficiency gains from lifting trade barriers are not measuredagainst the various kinds of costs associated with higher unernployment.Where, as is common in developing countries, the economy's main problem isfailure to fully utilize its resources rather than failure to direct them into themost efficient uses, this assumption is deeply problematic.

The principie of comparative advantage, formalized by David Ricardo inthe early nineteenth century, forms the theoretical foundation of free tradetheory. This principie states that even if one country could produce ali goodsmore cheaply than other countries, it would benefít=-in the sense of experi-encing a one-tirne increase in total consumption in the move from no trade tofree trade--by specializing in the production and export of its relatively cheap-est good (the good in which it has a comparative advantage) while importingthe rest of its consumption bundle. Should each country do tbe same, thewhole world would gain. What is more, rising trade tends to narrow incomeand price differentials among countries-e-such as the present 350: 1 ratio ofAmerican to Ethiopian average incomes, or 50:1 when average incomes areadjusted to take account of differences in the purchasing power of the twocurrencies-even as production structures become more divergent. Capitalflows to where labor is cheaper, and knowledge and new technologies flow inthe same direction. If economic activities are characterized by diminishingreturns (as is assurned), economic activity and incomes become spread acrossspace more evenly as trade and capital rnobility grow.

Evidence for Free Trade

An impressive amount of evidence seems to support this argument. Since the late1960s, a dozen major studies have examined the impact of trade regimes on eco-nornic growth, income distribution, poverty, and other development indica-tors. I1 These studies confinn that free or alrnost-free trade produces the best eco-nomic results (with some small exceptions), and that countries with freer, lessdistorted trade regimes have better development performance than countrieswith less open, more distorted ones. In the words of one such study, "The bestevidence avai\able shows ... the current wave of globalization, which startedaround 1980, has actually promoted economic equality and reduced poverty" 12

t

I"<,

---_ ..~..-- _ ... _----

26 Trade Liberalizatian and Economic Growth

The implications of this fincling go well beyond trade policy. Import rariffsand import controls are only a subset of the ways in which governments try toalter the composition of economic activity. The neoclassical mainstream theo-rist believes that most such interventions are a mistake-not just one mistakeamong many, but a mistake so big as to constitute one of the main reasons forthe slow progress of most developing countries. As a cause of poor develop-ment performance, bad government intervention dwarfs other domestic fac-tors such as lack of natural resources and "inherent" market failures (those notcaused by government ), and also external factors such as faIling terms of trade,volatility in exchange rates between the major currencies, and rich countrytrade regimes rigged against exports from developing countries.P The freemarket argument is derived from classical liberalism, which sees "the state" asartificial and "the market" as natural, and the two in fundamental tension.

The proposition that real-world states are even more imperfect than real-world markets has not been subject to testing in any direct way, but the manystudies of trade policy do constitute the most systematic testing of propositionsderived frorn it. Through their support for free (or always freer) trade, they alsosupport the me'ta-beIlef that imperfect markets are generally better thanimperfect states, and therefore that states should, by and large, be shrunk. Andso these studies of trade regimes also support the allergy in neoclassical eco-nomics toward anything called "industrial policy,"which involves the state pro-tecting or giving preferential resourçes to certain sectors, such as infant indus-try protection.l"

New Trade Theory

However, the foundational ideas of free trade advocates-the line of theoryassociated with Smith-Ricardo-Heckscher-Ohlin-Samuelson-deal with thestatic efficiency gains from trade, as in the reallocation of existing resources dueto the switch from no-trade to trade, causing a one-tirne increase in the levelof GDP per capita. This is quite separate from the proposition that a rise in thetrade-to-GDP ratio causes higher growth rates (faster expansion of availableresources), and also frorn the separate proposítion that trade policy liberaliza-tion (cutting tariffs and nontariff barriers) causes higher growth rates.

Also, the foundational ideas assume that international trade is inter-industry trade (English cloth in exchange for Portuguese wine, for example):they assume a "representative" producer of each produet and hence no varietyin firms; they assume that the free international rnarket wilJ "automaticaJly"shunt every national economy into its comparative advantage specialization bythe sarne "invisible hand" mechanism that operates in the domestic economy;


they assume that countries have no spatial structure between them or withinthem-no elustering or agglomeration; and above all, they assume that dimin-ishing returns to econornic activities prevail over íncreasing returns. On thiswobbly pyramíd of assumptions and factoids econornists' confidence in freetrade is based.

In the rnid- to late 1980s, "the deep slumber of a decided opinion" (to use).5. Mill's phrase) suddenly stirred to life. A number of younger economists--including Paul Krugman, Elhanan Helpman, Gene Grossman, and PaulRomer-tried to develop theory capable of explaining two glaring facts notexplainable by standard theory:

I. very large spatial clisparities in income and wealth persist over decadesand centuries, even within well-functioning market economies (north-ern and southern Italy, for exarnple), and still more between countries atdifferent levels of development that are engaged in international trade;and

2. most trade is of the kind that earlier trade theory assumed away: intra-industry trade (ltalian shoes to India, lndian shoes to Italy).15

The resulting stream of literature .came to be known as "new trade tbeory."Ir incorporated more "realistic" assumptions, such as imperfect competition,increasing returns to scale, and knowledge spillovers frorn innovating firrns tofollower firms; and it allowed for different products (grain, apparel, machinetools) having clifferent intensities of these characteristics and so having differ-ent potential for further growth and diversification.

New New Trade Theorv

New trade theory retained the earlier assumption of no differences betweenfrrms-the assumption of a "representa tive" firrn, By the early 2000s, however,large-scale data on firm-level participation in international trade became avail-able, making it elear that differences among firms matter for understandinginternational trade. Most firrns, even in traded-goods sectors such as manufac-turing, agriculture, and rnining, do not export: in the United 5tates in 2000,only 15 percent of firms in these sectors exported. Also, among exportingfirrns, exports are higbly concentrated: the top 10 percent of V.5. exportingfirms account for 96 percent of aggregate U.S. exports. These stylized factsabout firrn differences prompted a new wave of literature-c-known, clunkily; as"new new trade theory"-that was developed by Mare Melitz, 5tephenRedding, Richard Baldwin, and others.l"

, \


The policy implications of this theoretical upheaval have hardly begun tobe developed, but it is clear that they seriously complicate the old verities.Still, even those who have done most to develop the new theories-and toshow theoretical mechanisms by which eountries might gain from managedtrade-tend to lean baek toward free trade as the best practical policy, as inPaul Krugman's dictum, "Pree trade rules are best for a world whose politicsare as imperfect as its markets."!? They justify the retreat to free trade by ref-erence to the danger that more strategic policy would be "hijaeked" by spe-cial interests. Yet they make no analysis of this claim, in contrast to thesophistieation they bring to the arguments against free trade. As for the oper-ational economists in organizations sueh as the World Bank, they don't paymuch attention to the new theory. They have strong career incentives to pre-seribe with certainty-"I know what country X should do even before I getOu! of the airplane"-and they can be more certain if they believe in a singlebroad policy package for alI countries, whether Mongolia, Sri Lanka, orBrazil. Tbe eommitment of operational economists to this orthodoxy limitsthe diffusion of the new ideas, beeause the World Bank has a strong "cowbell"effect, a disproportionate weight in shaping others' beliefs about what is trueor not true.

Iheorles of Increasing Returns. Multiple Equilibria, and Spatial Structure

The mos! profound challenge to the theory of compara tive advantage comesfrom beyond the new and newer trade theories-from a broader, less trade-speeific economics of "multiple equilíbria" and spatial structure, which some-times goes under the name of "new economie geography." 18 Ralph Gomery,William Baumol, Paul Krugman, Anthony Venables, Dani Rodrik, andAnthony Thirlwall are leading thinkers in this strearn.'?

The empirical starting point for this theoretieal approaeh is the fmding thatthe location of a given industry in one eountry or another is often not a mat-ter of comparative advantage but of accident and path-dependence. There isno reason of comparative advantage to explain why Switzerland has long dom-inated the wateh industry, why Taiwan now dominates the production of lap-tops (but not their branding), why Pakistan specializes in soeeer balls andBangladesh specializes in hats rather than the other way around, or whyLiechtenstein's big eompanies specialize in, respeetively, power tools,microwave meals, and false teeth20 It turns out that industries have different"retainabiliry" seores, in the sense that some industries, onee established, aresheltered frorn the blast of full competition and can earn "super-normal"returns, beeause would-be cornpetitors find it difficult to break in.


The new stream of theory shows how, in a world of increasing returns(rather than constant or diminishing, as in standard models), the existing mar-ket equilibrium may not be optirnal, The existing allocation of industriesaeross countries is (a) fragile and (b) not neeessarily "globally" optimal (glob-ally in the sense of better than any feasible alterna tive, not in the geographicalsense). But the market laeks a mechanisrn for getting to a global optimum. Thetheory suggests that trade liberalization would not neeessarily shunt the econ-omy into a more desirable position than it could have reached with moreactivist trade and industrial poliey, contrary to Ricardian trade theory. The the-ory of compara tive advantage, being eoncerned with how an eeonomy can bestexploit íts present stoek of resources, eannot tackle the trade-off between aet-ing today to maximize short-terrn effieiency and acting today to accelerate theeconomy's shift of tomorrow's eomparative advantage into higher value-added, higher return products.ê'

One of the key analytical mechanisms is the link from spatial proximity toproductivity, a link which is generally characterized hy inereasing returns("proximity promotes productivity"). Denser spatial configurations of eco,nomic aetivity-more frrms and more skilled people in the same space-promote productivity more than looser ones, IIp to some point of diminishingreturns due to congestion and other eosts. This kind of market "externality"underlies the irnportance of clustered networks of supporting industries forthe growth of any one industry.

For example, u.s. military proeurement is a giant industrial poliey proteet-ing whole chains of high-tech supplier industries in the United States underthe justification of "national seeurity," which allows the U.S. government togive proteetion to firms produeing in the United States while demanding thatother eountries give up proteeting their own.22 The U.S. govenunent paid for50-70 percent of total R&D expenditures in the United States from the 1950sto the mid-1990s, mostly under cover of the defense umbrella. But the oppo-site tendencies are also in evidenee. As Boeing switches component suppliers toChina, U.S.-based component suppliers stop produeing in the United States;U.S. supply networks fragment, causing knoek-on costs to other industries:and Chinese firms buy U.S. cornponent-rnaking technology, the better to sup-ply companies sueh as Boeing from China.

INDUSTRIAL POLlCY ANO INTER-STATE COMPETlTIONThe "new economic geography" rheory suggests a new rationale for "infantindustry protectíon," a long-but-grudgingly accepted partial exeeption to thepreseription of free trade. In eonventional trade theory, the infant industry

,•...•..

30 Trade libernlization and Economic Growth

exception is presumed to apply-if at all--<mJy to newly-industrializing coun-tries trying to lay down basic industries. But rnultiple equilibria theory sug-gests that the continuous teehnologicaJ evolution of the.world economy meansthat parts of many industries are "infants" ar any one time. even in the mosttechnologieally advanced ecouornies. The task of governments, even inadvanced economies, is to capture "high retainability" industries for their juris-diction, using trade and other industrial policy instrurnents-e-even at the costof short-terrn inefficiency. The new thinking suggests how strategic industrialpolicy (including trade as.weUas technology and education policy) can help insecuring the economy's place in higher-potential industries with higher"retainability" scores. But as a general rule, the intervention should be tempo-rary so that the market eventually supports the better equilibrium unaided. Ofcourse, ali governments-not just that of the United States-try to disguisewhat they are doing, so as to get others to do what they sar: "we must aliembrace free trade," The strategy couJd be called "optimal obfuscation,"

In these terms we can make sense of the observed intense rivalry betweennations as they jockey for industrial advantage-a far ery from the harmoniousworld of comparative advantage theory (whose assumption of mutuaJ interestsrather than conflicting interests is one of its strongest selling points for theinternationaJ development cornmunity). Developed nations are silently imple-menting mercantilist industrial poliey not mainly with trade instruments suchas tariffs, but with more subtle, less noticeable behind-the-border instrumentssuch as anti-dumping Iegislation, anti-trust, rules of origin, health standards,and espeeiaJly government proeurement; and, as suggested earlier, they ofteninvoke national seeurity to justify support that cannot be coneealed. This inter-nation rivalry helps to explain why the business sehool myth of multinationalcorporations as free-floating, eosmopolitan entities owing allegiance tonowhere is just that-a myth. State support tends to be geared toward high-teeh firms regarded as "nationals" of the same state: the United States channelsits support more toward A.meriean firms than to foreign firms operatingwithin its borders, as do the other two centers, Europe and [apan-China.

ln these terms we can also make sense of the difficult-to-deny motive behindthe Doha trade talks agenda, whích was devised almost entirely in service ofU.S. and EU interests=-to "hold back" developing countries from advancinginto industrial and serviee areas now dominated by the developed countnes.PFor the theory shows that produetivity growth in the less-productive tradingpartners of an advanced country is not neeessarily in the interests of theadvanced country-such growth in China and Vietnam is not necessarily inthe interests of the United States. Paul Samuelson recently developed an argu-ment along these lines, showing that as China, for example, catehes up in the

','


production of goods that had been produced in the United States (whetherthrough ou!sourcing or through domestie innovation), U.S. export prices fall,worsening rhe U.S. terms of trade. The United States stil! benefits frorn trade,relative to "no trade,' but less so than before24

However, ali this new thinking remains within the tradition of trade theoryinsofar as it assumes away unemployment, finaucial instability, and tradedeficits. When these noticeable effeets are factored in, the case for strategicindustrial and trade policy-for not letting the market work freely-becomeseven stronger. The objeetive of strategic policy is to enable resources to be com-bined and employed in a nationaJ economy when those resourees would not beemployed-or would be employed less productively-if the economy werefully exposed to efficiency criteria derived from world market prices. Its corol-lary objeetive is that this assistance be delivered in sueh a way that learning-by-doing takes place, so that after a time the strategic policy support can be redi-rected to other resouree combinations. (See country B, below.)

DLO EVIDENCE REVISITEOIn short, new and newer. theory no longer support the old truth about freetrade being, with only partial exceptions, best in theory. The case for free tradehas been further undermined by (a) exposure of the serious defects in themajor studies referred to earlier which purport to find that freer trade is betterin the real world, (b) new evidence on struetural changes during development,and (c) evidence from the development trajectories of the pre- andpost-Second World War industrializers.

Constraints on space prevent more than a bald summary. It turns out that lheimpressive support for giving a high priority to further trade liberalization is notimpressive when the methods, data, and conclusions are subject to unbiasedscrutiny, For exarnple, following a large-seale review of the existing literature onthe relationships between trade líberalization, growth, inequality, and poverty, aset of econornists concludes that "the results are weak: we find no robust evidencethat inequaliry, or indeed growth, are determinants of cross-coul1tryvariations inpoverty .... [A]ny claims regarding growth and poverty or trade liberalization(even globalization) and poverry should be interpreted with extrerne eaution."2S

Meanwhile, an independent panel of economists tasked with evaluatingWorld Bank research on development policies said of the bi~ cross-countrystudies allegedly showing that free market policies are best:

We see a serious failure in the checks and balances wi.thin the system thathas led the Bank to repeatedly trumpet these earlyempirical results with-

32 Trade Liberalizalion and Economic Growlh

out recognizing their fragile and lenta tive nature .... Once the evidence ischosen selectively without SUPP0l1ing argument, and empincal skepti-cism selectively suspended, the credibility and utility of the Bank'sresearch is threatened.é?

New Cross-Country Evidence

Not only does the existing evidence adduced in support of free trade, or fur-ther trade liberalization as a policy priority, turn out to be weak, but also, newempirical findings contradict the conventional view. For exarnple, DaniRodrik, Ricardo Hausmann, and Lant Pritchett find that spells of accelerated(national) growth often occur spontaneously, without preceding "reforrns,' oronly marginal ones, whether in trade or anything else. They identify more thaneighty episodes since 1950 in which a country's growth rate increased by atleast 2 percentage points for at least seven years-almost ali of them withoutpreceding Iiberalization or opening.ê?

Again, we now have good evidence that the dominant process in develop-ment is not increasing specializatíon in tine with compara tive advantage (ris-ing Gini coefficient of sectoral shares in production), but diversification of pro-duction and employment.é'' Not just the familiar diversification fromagriculture to manufacturing and 00 to services, but also diversification withinmanufacturing. As poor countries get richer, sectoral production and employ-ment within manufacturing becorne more diversified among sectors.Diversification dominates specialization right up to a per capita leveI at thelower end of the "old" OECD countries (such as Portugal in the early 1990s)-above which, specialization dominates diversification. And as suggested by theGomery-Baumol-Krugman-Venables work, the pattern of diversification ineach country seems to have a large element of arbitrariness or randomness, inthe sense that it retlects "self-discovery" of export opportunities and cost struc-tures by a small number of entrepreneurs whorn others then copy.

The evidence confirrns the intuition that a central process of development ismastery over an expanding range of activities, rather than specialization in"what one does best today' Since diversification is central, the questionbecomes whether "the market" can be relied ou to promote diversification-learning to master an expanding range of activities-sufficient to sustaincatch-up growth; and if not, what the state can do to accelerate the processoThemarket may encourage diversification iuto "nearby" products (those with sim-ilar inputs) but with much the same value added. Diversification to more dis-tant products with increasing returns and higher income elasticity of demand,and higher potential for further diversification (from radios to steel, in the


Korean case) may well require a push from the state. This kind of state pushinto products distant from present ones (requiring the supply of new privateand public inputs) might be called "leading the market," Diversification toproducts in between "nearby" and "distant" might entaíl the state's "followingthe market"-helping to support private entrepreneurs to do (some of) whatthey would want to do anyway.29

Historical Evidence

Fiually, the historical evidence from development trajectories gives little sup-port for the proposition that t:.radeliberalization reliably generates higher eco-nomic growth and lower poverty. Almost ali the now developed countries usedsubstantial trade protection during their rapid development stage. Britain wasone of the most protectionist of countries for three hundred years until itattained industrial superiority in the mid-nineteenth century and started tochampion free trade for ali (except for its own colonies, of course).30 In 1820Britain's average tariff on manufactured imp011S was between 45 and 55 per-cent, compared to tariff levels ranging between 6 and 20 percent in WesternEurope; yet British manufacturing came out on topo The Unit:ed States was "themother country and bastion of modern protectionism" during the nineteenthand first half of the twentieth centuries, in the words of economic historianPaul Bairoch'! At the end of the nineteenth century, when U.S. per capitaincome (adjusted for purchasing power) was about equal to that of the averageof developiug countries today, its industrial tariffs averaged close to 50 percent,compared to levels around 10 percent in developing countries today. At thesame time it was also the world's fastest growing economy, rapidly ascendingto No. l.

The newly inelustrialized East Asian countries (japan, Taiwan, Sonth Korea)managed their trade as part of a larger industrial policy for the best part offorty years, such that industries to be nurtured to international competi-tiveness initially received substantial protection that was conditional onperformance-especially on rnovement toward international prices and qual-ity standards; as they became internationally competi tive, protection wasscaled back-as it was also scaled back if they continued not to be competitive.Hence, at any one time, the East Asian countries showed fairly high dispersionof effective protection rates across industrial sectors, quite contrary to the "lowdispersion" prescription of neoclassical trade policy.32 Of course, some of thesupported industries "failed," in lhe sense of not becoming internationallycompeti tive. But as Thomas Watson, the founder of IBM, is reputed to havesaid, "If you want to be more successful, increase your failure rate,'

34Trade Liberalization and Economic Growth

The East Asian countries provide conerete examples of how protection eanbe cornbined with competition, of how "inward orientation" can be combinedwith "export orientation:' lt takes fundamentalist liberal faith to argue thatthese countries, which nave demonstrated the fastest development in history(recent China aside), would have done even better had they practiced free mar-ket economics.Y As for China, it maintained average tariffs of more than 30percent for decades up to the mid-1990s, when it was already growing anddiversifying very fast. Recall the contrast in development performance between

China and Latin America made earlier,Many economists, however, dismiss the historical evidence on grounds that

the causality is always undear. Maybe the United 5tates or Korea did grow fastwith protection, they say, but tbey could have grown still faster with less p~o-tection. These traditionalists prefer to rely on computable general equili-brium (CGE) models, with clearly spelled-out assumptions and c1ear lines ofcausality-which tend to support the claim that trade liberalization producesbig gains in national income. But the big gains generally appear only when themodels make very unrealistic assumptions, such as the notion that employ-ment is unaffected by cuts in tariffs. 50 the temptation is for the analyst to workbackward from the desired gains to the selection of appIOpriate assumptionsand coefficients. ln the end, the trade debate goes on and on because protago-nists use two different ontologies, or beliefs about what kind of evidencecounts, which may be roughly summarized as "history" versus "mathematics."

OPTIMAL TRADE POLlCYNo one argues that a strongly inward-oriented trade regime-vwith high, uni-form and unconditional import protection plus export taxes-is better than aliberal trade regime; The point is that trade liberaJization has been oversold,and does not deserve the priority it reeeives in the international developmentcornmunity" Further openness is not always in every country's national inter-est, and a prescription of freer trade and freer investment (through the WTOor through bilateral trade agreements) is not generaUy in the global interest-though it is in the colleetive advanced country interest, given that sueh globalrules rnake it more difficult for developing countries to diversify and upgradeinto more technologically sophistieated products other than as subcontractorsof advanced country firms. That is, the preseription supports the collective"prirnacy" projeet of the United States, European Union, and japan, to keepother countries and firms asymmetricaliy dependent on them.

J5

To clinch the point, consider two countries, A.nd B.36 A is a member of theWTO; it undertook comprehensive trade liberalization in 1994-1995 (cutting

NO: ROBERT H. WADE

tariffs to a maximum of 15 pereent and removing all quantitative restrictions);and rt bas implemented far-reaching liberalization within tbe domestic econ-orny, i.nc~uclingprivatization, foreign ownership of national companies, fullrepatrtatron of profits, and the like. It is next door to North America. B is nota member of the WTO; it has maintained quantitative restrictions and tariffsof 30-50 pereent; much ofits trade is through state firms and import monop-olies, and foreign ownersh.ip of national companies is restricted. It is far fromNorth America and Europe.

Orthodox thinking would identify A as the Jikely success story. In fact, A isHaiti, which has had dismal economie performance, wh.ileB is Vietnam, whichhas grown at more than 8 percent a year since the mid-1980s, with sharplyreduced poverty, and which has rapidly but strategically integrated with theworld economy, its h.igh trade barriers notwithstanding.

Now consider eountry C. In 2003 the country carne under the "provisional"administration of the U.S. govemment after the United States and aIliesreplaced the previous regime. The U.S. administration passed several detailedne~ economic Iaws, including almost free trade, privatization of publie enter-pnses, fuU fo~elgn ownership of domestie eompanies, full repatriation of prof-its, and foreign ownersh.ip of national banks; and it dedared that thesearrangements should be impossible to reverse by an incoming national govern-ment. In effeet, the U.S. administration was trying to lock in arrangements ofthe country A kind. Country C is Iraq.. Trade policy will be an even more controversial subject going forward thanrt has ~een in the recent past, especially because of China. First, the ability ofChina s manufacturing agglornerarions to produce a wide range of rnanufac-t~ed goods at 50 pereent of the cost of other producers poses the aeute ques-tion of how manufaeturing ean flourish elsewhere. (At this point, Ch.inese doormakers are even able to ship doors to landlocked Mali and outcompete localearpenters.) Inereased speeialization in (diminish.ing returns) commoditiesand raw materiais is bad news for the people of Africa and Latin Ameriea, andbad news for the prospects of a wider diffusion of the material benefits ofgrowth. It is a recipe for specialization in poverty, except for those luekyenough to produce commodities with high income elasticity of demand (suchas fish from Iceland). Getting the "proximity-productiviry" dynamie to work inthese economies has to involve some kinds of protection, even though not onlythe West but now also China will insist otherwise. .

Sec?nd,.trade policy will also be involved in the West's strategy for eurbingCh~nas ability to develop ItSown world-beating firms. The West is anxious that;bma not be aliowe.d to foliow Iapan and Korea with their Toyotas andamsungs; rather, Chinese furos should be accommodated as junior partners

35

36Trade liberalization and Economic Growth

to Western firms or wiped out. Getting China to lift restrictions on trade, for-eign investment and capital flows, and eschew a "developmental state"-inother words, gelting China to behave "responsibly"-is a key part of the

strategy"The policy implieations of this argument-at both national (developing

country) and multilateral level-are anything but straightforward. Withinbroad limits, beyond which everyone would agree that a policy is crazy, thereis no one-policy-fits-all for strategic trade polícy akin to the universal freetrade policy of neoclassieal economies. Like other powerful poli c)' instruments,trade proteetion can be used wel! and it ean be used badly, The faet that it hasoften been used badly does not mean that it cannot be used well, and the gainsfrom usíng it well are high compared to possible substitute instruments, suchas targeted subsidies, whieh tend to be more diffieult for developing countrystates to implement. Sensible policy prescription starts here.

The next step is to diseard the neoclassieal distinetion between "ínward ori-ented" trade regimes and "outward oriented" ones, or at least to qualify it torecognize that a given trade regime-slleh as Iapan's in 1950-1980, SouthKorea's in 1955-199O-can be both, in the sense of including poliey-basedincentives for both import substitution and export promotion but in different

sectors at any one time.Then one has to reeognize that import·substitution is the mother of rnost

(not all) new exports, for the good reason that learning to produee for thedomestie market-given that the demand already exists-is easier than pro-ducing for export sales. Further, import substitution policies do not necessar-i1ygive rise to cozy monopolies. Proteetion and eompetition ean go together,even though, historieally, proteetion has often been designed in such a way thatit does cut competition, whether intentionally or not. Proteetion ean coexistnot only with domestic eompetition, but also with (buffered) internationaleompetition. For example, governments can use the price and quality gapbetween domestic and internationally-available versions of the same produetto ealibrate proteetion-as in, ")'ou have two )'ears to bring your price andquality to within X percent of the imported priee, and you ean get access toseveral kinds of publicly-supported faeilities in order to do so; but after twoyears we wil! phase out the proteetion." 38

Finally, oue has to see trade poliey as a subset of a larger strategie develop-ment poliey designed to build on inereasing returns and the proximity-produetivity mechanism, rather than seeing trade policy as the queen andindustrial policy as a pawn. As suggested earlier, both new theory and new evi-denee suggest that a low and uniform levei of trade restrictions and tariffs isneither a necessary nor a sufficient conditioD for a suceessful growth strategy.

NO: ROBERT H. WAOE 37

Ou the other hand, rising trade/GDP and foreign investment/GOP are indeedlikely outcomes of a sueeessful growth strategy, and if these ratios are pre-vented from rising-perhaps by advaneed countries' rigging their traderegimes against upgraded exports from developing countries-the strategyma)' nOI remain sueeessfuJ.

For neoclassieal economists brought up to believe the c1assic liberal postu-late of "natural" markets vs. "artificial" government, this line of argument isupsetting. For others, the ehallenge is to develop guidelines for strategic tradepoliey which correspond with empirieal evidenee from the suceessful develop-ing eountries, which have some foundation in theoretieal mechanisrns, andwhieh are not wide open to hijacking by vested interests. Then they have totranslate these guidelines into revisions ofWTO treaties, World Bank prescrip-tions, U.S. and EU preferential trade agreements, and other eomponents of theWeSlern primacy project.

CONCLUSION"Does trade liberalization promote economie progress?" is the wrong questionoSueeessful countries have used both proteetion and liberalization, often simul-taneously in different seetors, and their protected seetors have changed overtime. Proteetion is a powerful policy instrument, which-like any powerful pol-iey iustrument-ean be used well or used badly. At least in its poliey doeuments,though not always in its on-the-ground operational advice, even the WorldBank has softened its earlier belief in free trade as optimal for ali countríes.t?

The Doha trade round, now on life-support, eonstitutes a bad deal for devel-oping eountries, beeause it requires them to make big euts in tariffs on bothagricultura] and industrial products in return for advanced countríes' cuts inagricultural support, In re~ponse to the blockage in multilateral negotiations,advanced countries are falling over themselves to negotiate bilateral andregional trade agreements. Though deplored by many champions of free trade,the growth of spaghetti-ball inconsistencies of trade rules via these preferentialtrade agreements may be the best hope for generating cornrnitment to a newround of multilateral negotiations onee Doha fails.

lu any new round, foreign direet investrnent and knowledge protectionism(aka intel!eetual property rights) will 100m large, because international busi-ness is keenly interested in clearer mies and stronger enforcement. But devel-oping eountries will then be in a stronger position to resist-and especially toresist WTO insistence on lhe principIe of nondiserimination ar "national treat-ment" (foreign firms must be treated no worse than domestic firms), whichrnakes it diffieult for the developing countries to nurture dornestic firms. Yet,

38 TradeLiberalizationandEconomicGrowth

ironically, the ground may be beginning to shift on the West's preference forstricr national treatment and strong knowledge protectionism, because far-sighted Western firms are already calculating that in twenty years' time, whenChinese firms have established operations in the West and talcen out clutchesof pa tents and copyrights, they themselves will need some flexibiJity to dis-criminate against Chinese firms. China, on the other hand, is now familiar withthe multilateral game and supportive of the WTO, even to the poiot of nolonge r regarding the U.S. threat of taking it before the Dispute SettlementMechanism as equivalent to sailing a warship along the Chinese coast.

Going forward, we should give up on lhe ambition of reaching another BigTrade and Investment Deal that all must signo Progress is more likely to bemade by asking, "What are the ten key challenges that 'lhe world' must act onin the next ten years, and what changes should be made to the multilateral (andbilateral/regional) trade regime to address them?" Only closed-rninded neo-classical economists who mistake policy means for economic ends--or whosupport the western primacy project-would say that the answer includes,"More across-the-board trade liberalization in order to move the global polit-ical economic arder further towards one in which sovereign states have nomore ability to influence flows of goods, services, or capital across their bordersthan the states of the United States."

trade and equal ity

Does Free Trade Promote EconomicEquality?

YES: L. Alan Winters, University of SussexNO: Kate Vyborny and Nancy Birdsall,

Genter for Global Development

Chapter 1 addressed the issue 01 whether trade liberalization promotes eco-

nomic prosperity. This chapter tackles an even knottier problern--the effects

01 trade on economic equality-both because the impacts 01 international

trade are difficult to assess and because definitions 01 equality vary signili-

cantly. When you imagine a society 01 economic equality, what do you con-

sider? That every individual earns approximately the same income? lhat basic

needs are met lar everyone? (And, what is a "need"?) That every individual

has access to conditions (such as education) that would enable her to earn a

living? Among the many competing delinitions 01 what "economic equality"

might mean, the Millennium Development Goal targets (discussed in chapter

3) are one means 01 setting minimum international goals lar equality.

Layered on top of the conceptual issues entailed in defining economic

equality is the problem 01 choosing the unit 01 analysis along which to gauge

its extent within a given context. For example, il (in)equality is to be measured

internationally, using states as units 01 analysis, the process will involve taking

the mean income (ar some other aggregate statísfíc) for a given country and

comparing that statistic cross-nationally. Another form of inequality can be

measured at the intra-national levei: haw much income inequality exists within

nations? Yet another means 01 measuring inequality locuses on the purely indi-

vidual levei, withaut respect to national boundaries. Of course, each af these

varying levels of analysis will provide different perspectives on how equal ar

unequal economic outcomes are without regard to how people attained their

income ar how it compares with that 01 others in the society.

"

40TradeandEquality

In measuring economic inequalities, a common measure is lhe Gini coefficient,

which rspresents lhe ratio of the cumulative share of individuais (represented onthe horizontal axis in Figure 1) to Iheir cumulative share of income (lhe verlical

axis). A society with an equal distribution of income will be represented as the 45-

degree tine connecting endpoints of lhe two axes. while soeieties wilh moreunequal distributions wilt be represented with steeply-sloped curved lines. The

larger the Gini coetficient-the ratio 01 shaded area in the figure compared with

the entire triangle-the more unequal the distribution of economic outcomes.There are multiple ways 01 measuring Gini eoefficients, and the results vary

depending on whether they are aggregated at lhe individual, atio ai, or inter-

national levels. Measured thls way, tne Gini eoeffieient 01 world income

inequalily inereased batween 1970 and 2000, as represented in Figure 2. And

income disparities are partieularly pronounced in some nations, such as thosein the developing eoun ries 01 Latin America and Afriea (see Figure 3). Another

factor complicating these ealculations is whether equalily is measured beforeor after any governmental transler payments, sueh as publie welfare, pension

payments, subsidized or publie edueation and housing, and so on. Needless

to say, lhose who wish to make a political point can ehoose among oornpetmç

statistics to support their views.

UilHJ

InlernationalPoliticalEconomy 41

Figure 2

Gini Coeflicient Df World Income Inequality, 1970-2000

source: Y. Oikhanov. "Trends in Global Income Dlstributlon. 1970-2000 and Scenarlos for 2015," UnitedNations Develcpment Programme, N'\V York, 2005. 37-43.

This chapter questions the impact of trade on economic inequality. At one

levei, it is natural to think that trade is advantageous to wealthier nations that

are able to capitalize on more educated populations and superior technolo-gies. But these advantages in trade expand income gaps cross-nationally,

while intra-nalionally widening gaps between high- and low-skilled workers.

On the other hand, trace brings economic possibililies 10 workers globally andhelps to lower prices for alI. What to some is "free Ira de" is viewed by others

as exploitative when the economic exchange occurs between vastly unequalactors. Because trade produces not just exchanges of finished products butalso changes in wheregoods are produced, tensions arise involving manufac-

turing facililies owned by multinational corporations in developing nalions,

particularly those characlerized by substandard labor practices. Yet, despitecondilions that many in the Wesl would abhor, even some social liberais -such as New York Times columnist Nicholas Kristofl-view the possibilities 01jobs ai "sweatshops" as a net improvement in living conditions.

The mobility of both goods and means of produclion contribules to a com-

plicated relationship between trade and immigration, which also complicatespolicy responses. For example, policies that would restrlct immigration mayserve to increase pressures to send manufacturing facilities overseas, and

vice versa. This effecI, in turn, complicales domestic political responses to"outsourcing" and immigration policy. Those actors (such as orqanized labor)who favor policies Ia "protect" U.S. workers thus face a Irade-off betweenwanting to restrict immigration (lar lear 01 losing jobs to immigranls) andencouraging outsourcing.

42 Trade and EQuality

UGini Coelficient ollncome Inequalily by Region, 1970-2000

Figure 3

source: Y. Dikhanov, "Trends in Global lncome Dislribulion, 1970-2000 and Scenarios for 2015," ImitedNalions Development Programme, New York, 2005, 37-43.

Trade policy is also influenced in important ways by domestic políticalconstituencies-perhaps none so strong and enduring as the polítical sway

held by larmers in wealthy nations. Subsidized farmers in the United States,

the European Union, Japan, and elsewhere produce and sell crops at belowmarket rates at the expense 01 farmers (or prospective larmers) in some devel-

oping nations that could compete were it not for these agricultural subsidies,export contrais, tariffs, and so Oll. And yet, as Figure 4 indicates, agricultural

support has grown in the developed nations in recent years.The impact of trade on economic equality is one 01 the most politically

potent and economically compelling issues raised by globalization. Owing to

i

I'

Inlernational Poliljcal Economy 43

DilUiSupport 10 Agriculture in High-Income Counlries, 1986-1988 and 2004

Source: United Nations Developmenl Programme, Human DeveJopmenl Reporl 2005 (New York: OxfordUniversily Press, 2005), 129.

the complexities involved, the two articles thal lollow are not diametrically

opposed in their views on this issue but nonetheless represent diHerent per-

spectives on the líkely impacts 01 Iree trace. Kate Vyborny and Nancy Birdsall

argue that trade tends to increase inequalities, while Alan Winters suggests

that overall inequalities will be dampened by Ireer trade.

1. How do you measure "equality"-by income? By standard 01 living?And between whom do you measure it-between countries?

Between individuais within a country? Between ali individuais in the

wortd? What is most Iair?2. Is economic equality a desirable goal? An achievable goal? Why or

why not? Aside from moral reasons, why is equality important?3. Opponents 01 globalization and free trade olten cite the poor work-

ing conditions and low wages 01 "sweatshops" and lactories set up

....Trade and EqualiPj

in developing nalions by wealthy multinalional companies as evi-dence tbat free Irade does not promote equalily. Proponenls of freetrade say thal lhe jobs and wages provided at Ihese factories arebetter than the local alternatives, allowing those workers achieve ahigher slandard oi living. Which argument do you agree with? Why?

4. What challenges does Alan Winters cite before considering wheiheríree trade promotes economic equality? How does he address thesechallenges?

5. How do Kate Vyborny and Nancy Birdsall propose to address lhe

inequality brought on by trade liberalization? What specific policiesdo they recommend? Do you agree with lheir policy proposals?

YES: L. ALAN WINTERS45

YES: L. Afan Winters, University of Sussex andCentre for Economic Po/icy Research

.11 ,.1

Unfortunately, the question "Does free trade promote ecooomic equality?"doesn't adrnit an easy answer. It depends on what you mean by"economic

equaliry" and by "free trade"-and even then it depends on the specific cir-cumstances of the case. Iwill argue that free trade is likely to promete equalityoverall, but that there are clearly some senses and circumstances in which itmal' not do 50. A closely related question that, indeed, is sometirnes confusedwith the title question, is "Does freeing international trade reduce poverty?" I

have done a good deal of research on the latter question over the past decadeand, while explicitly recognizing the existence of exceptions, I would answer,"Almost always yes," I

GROUND CLEARINGSo what do we mean by "econornic inequality"? There are many significantdimensions to inequality and poverty-such as access to power, cultural fulfill-ment, freedorn from violence--but I shallfocus just on the economic variablesof real income and consumption. The latter typically tracks verl' closely withwealth, however, so I will not even deal with wealth explicitly. When Ideal withpoverty, I will refer to people with incomes below the (very low) poverty Unethat is often fixed, for international comparisons, at $1 a day per head at 1985inrernational prices.

The principal question in regard to inequality is "Between whom?" There arethree obvious alternatives: between countries, between individuais (or house-holds) within a country, and between ali the individuaIs in the world. The Iastof these alternatives combines elements of the first two, allowing, so far as thedata permit, for the fact that some lndians are richer than some Americans, butthere is no simpie mathematical formula for the combination.

The definitive discussion and measurement of these different concepts is thebriUiant book by Branko Milanovic (2005a), which shows that about 80 per-cem of world income inequality is due to differences in mean income betweencountries, while only about 20 percent is due to differences within countries.The former statistic has increased significantly si.nce around 1980, and the lat-ter a little; overall inequality has also increased a little, but not dramatícally.ê

The remaining concept to define is "free trade." Strictly, the:re is no suchthing-all trade costs effort to conduct-but we could imagine international

I',\

'ti' Trade and Equality

trade free from ali interferences by government. Even this limited sort of free-dom is relatively rare, however: many imports pay no tariffbut still face inspec-tion for, say, conformity to local safety standards. Hence we need to be ratherpragmatic about the definition and hold to a notion of trade that is reiativetyfree from official frictions and conducted with velatively efficient logistics andphysical infrastructure. Precise measurement of the degree of trade frictionposes serious challenges (as we shall see), although we can often identifychanges in the "freedorn of trade"-that is, trade liberalizations-easilyenough.

TRAOE ANO INTER-COUNTRY INEQUALlTYTrade liberalization mal' affect inter-country inequality in two ways: either alicountries free their trade but the consequences for national income per headdiffer by country, or only some countries do 50, which will affect distributioneven if ali economies respond to liberalization the same way, Remernber thatinequality wil! be reduced if the poor experience strong growth relative to therich. If aI! countries achieve the same grawth rate, inequality-which is almostalways measured as a reiative magnitude--wil! be unchanged.'

Obviously, the experience of different countries will vary in detail, but somescholars have argued in theory that trade between rich and poor countries sys-tematically benefits the rich countries and harms the poor ones (see Winters2008 for a brief account). There is no hard evidence at ali to support this the-ory. Over any given period, some countries will do relatively badly, by defini-tion, and wil! get relatively poorer, but this outcome is not systematicallyrelated to their initiallevels of income or their economic structures. In fact, theevidence suggests that, once we make allowance for the fact that policies aregenerally better in rich than in poor countries, poorer countries tend to growa bit faster-that is, they catch up, reducing inequality, albeit slowly As exarn-pies, think of Borswana, Chile, Korea, and Mauritius, which have ali grownfrom very low levels of income and have ali opened up their economies prettystrongly, too.

To make the discussion more concrete and more policy-relevant, let usnarrow the question a !ittle. Suppose that we have a set of rich and largely openeconomies-those of the OECD-which show steady growth: wiJI develop-ing countries improve their chances of catching up with them by opening uptheir economies stronglyi That is, does openness boost developing countries'incomesi?

Economic theory offers many reasons to expect a countrys own trade liber-alization to stirnulate its economic growth, at least for a period:

YES: L. ALAN WINTERS 47

specializing in goods for which world prices exceed those that would be

available at home

reaping economies of scale

• improving performance in the face of new competition, and

• benefiting from better inputs and technologies available from abroad

None of these effects is guaranteed, though, so whether trade does stirnulatedeveloping countries' incomes is ultimately an empirical matter, Over the1990s, several highly visible global cross-country studies argued that opennessis good for income levels, but at the decade's end, these srudies were subjectedto a searching criticism and reworking by Francisco Rodriguez and DaniRodrik (2001). These authors showed that the earlier studies' measures ofopenness were not appropriate to the theories they propounded, that theirresults were sensitive to particular but extraneous features of the data, and thatthe econometric methods they used fai!ed adequately to identify causationrunning from trade Iiberalization to growth. Rcdriguez and Rodrik also foundit hard to replicate some of the results reported in the Iiterature, raising someconcern about their accuracy,

The difficulty of establishing ~ empirical Iink between liberal trade andincorne arises from at least four sources (Winters 2004). First, apart fromextreme cases such as North Korea (c1osed) or Hong Kong (open), it is cüfficultto measure a countrys trade stance accurately: for example, tariffs need to beaggregated across goods, quantitative restrictions assessed and then aggre-gated, and the levels of predictability and enforcement of trade policies mea-sured. Second, causation is difficult to establish, for actual openness, which isusually measured by the ratio of international trade to national incorne, isalmost certainly the result of growth as well as a possible cause of ir. But thereis also concern that even policy- based measures, such as average tariffs, couldface the same problern, because growing countries might be more willing toliberalize. There are technical fixes for this analytical problem, but rhey leave at

least some doubt,Tbe third chal!enge is that, while liberal trade policies are likely to be some-

what beneficia! under any circumstances (because they enlarge the set ofopportunities for economic agents), a lasting effect almost certainly requirescombination with other good policies and sound institutions as wel!. Tbis nec-essary combination makes it difficult to isolate the individual effects of tradereform-indeed, it raises the quéstion of whether it is even worth trying to doso if policies always come in packages. It also raises the issue of "which otherpolicies"-that is, when is trade liberalization most effective? This situation

.'

Trade and Equali\y48

becornes even more complex if, fourth, openness could cause improvements inother policies and institutions. For example, countries with sirnple, open traderegimes appear to be less corrupt, and open economies have less inflation. Both

outcomes could be associated with higher incomes.Since 2001, further work has re-established to most economists' satisfaction

that openness does generally enhance income-at least conditionaJly.Researchers have worked hard to establish causation by isolating those parts ofinternational trade that are genuinely not caused by income (such as economicsize and distance between rrading partners) and asking if they, in turn, causehigher incomes; it turns out that they do (see Noguer and Siscart 2005).Researchers have also determined that at least a minimal degree of labor mar-ket flexibility, firm entry flexibility, financial access, and human capital invest-ment are appropriate complementary policies if liberalization is to have strong

effects (Chang, Kaltani, and Loayza 2005). . .Further scrutiny of the connection between openness and Jl1come exarrunes

possible causal links between openness and growth separately. Maoy studíesassociate openness with faster accumulation (that is, investment) and haveobserved that policies that hinder investment will reduce the benefits of tradeliberalization. A second key linkage is between openness and productivity.Everyone agrees that improved productivity is necessary for sustained. eco-nornic growth and developmenl, and that it is the onJy secure hasis for hígherincomes at the levei of the individual worker. The evidence from country, sec-toral and firrn-level studies suggests very strongly that opening up interna-tional trade stimulates productivity. Part of the way in which it does so is byallowing more efficient (exporting) firms to grow faster than less efficient ones,and allowing import competition to pick off weaker domestic firms. Suchrationalization effects may lead to short-term poverty concerns, for failingfirms cau easily harm their workers and owners. But equally clearly, long-termprogress requires adaptation and adjustment, so that higher productivity canbecome the norm and generate higher incomes throughout a sector, One suchcase is the Chilean experience-in which firms were allowed to disappear dur-ing the trade liberalizations of the 1970s and 1980s, and the economy eventu-

ally emerged much stronger and richer.Despite the econometric difficulties of establisbing beyond ali doubt that

openness enhances income, the weight of experience and evidence seems tolean strongly in that direction. Thus, by boosting growtb am~ng countrres,trade liberalization can narrow the gap between wealthy, industnahzed nationsand poor, developing ones-an important component of global inequality.Liberalizers have to undertake other reforms as well, but to a fair extent weknow what these are: for example. reasonably flexible labor markets, capital


markets~ and corporate regulations that allow new fírrns to emerge, and decentport facilities and administration to allow goods to get in and out,

Moreover, even the critics (Rodriguez and Rodrik 2001) concede that thereis .no coherent evidence that openness adversely affects income. One mightthmk of paralIels with the debate 011 smoking. There was a long period duringwhich the weight of evidence was sufficient to convince most rational peoplethat smoking was harrnful to health, although proof conclusive by either scien-tifi~ or JUd'~lal standards had not been achieved. And during this period, justas m today s openness and growtb debate, the hold-outs often cited specificcounterexamples as if they overturned the general presumption.

TRADE ANO INTRA-COUNTRY INEQUALlTYLet us ~ow turn to whether international trade raises or lowers inequality withincountries=-and the related question of whether it causes or cures poverty. Thebaseline facts are that liberalizing international trade certainly affects people'srncomes, that It can affect overaU inequality either way, that there is a little evi-dence .that i.twidens inequality in poor countries, and that, although it can drivesome individuals imo poverty, it tends to reduce poverty overall. I shall considerthe arguments in two steps. First, as we have seen, trade liberalization tends toincrease growth, so we need to ask how growth affects inequality. Second, we canmove inside the aggregates to ask how trade affects individual incomes and theninfer poverty/inequality effects from this perspective.

Economists have long argued that economic growth tends, overall, to reducepoverty (see Fields 1989). David Dollar and Aart Kraay (2002) recently quan-tified this assertion by relating the mean income of the poor-the bottom 20percent of the income distribution-to overaU mean income plus some of theadditional variables that economists associate with influencing the rate of eco-nomic growth and that are often argued to affect the distribntion of income.Among these variables, tbey found that, wbile inflation appeared to have anadverse effect on the poor OD top of its growth-reducing effects, factors such asgovernment consurnption, the rule of law, democracy, social expenditure, pri-mary school enrollment, and rwo rneasures of openness had no effects otherthan their effects on economic growtb. While there were some instances inwhich growth was associated with rising poverty, Dollar and Kray's results sug-g~st that, on average, these instances were balanced by those in which growthdísproportíonately benefited the poor.

An overview of the growth and inequality liter ature by Martin Ravallion(~001) reviews the data and their shortcomings and reminds us that even ifrich and poor receive proportionately equal increases in income, the rich stiJI

50 Trade and Equality

receive several times more absolutely. Ravallion a1sodiscusses the role of initialincome inequalities in determining the effect of growth on the number ofpoor-the concept known as "poverty-elasticity." The greater the inequality,the lower is the share of aggregate growth that accrues to the poor and, hence,the smaller the nurnber of those who are likely to be pulled out of poverty byany given growth incrernent' Ravallion concludes that ali these aggregateapproaches to poverty lose information by ignoring differences between indi-viduals: one needs, as the title of his article suggests, to look beyond the aver-ages. If this advice is important for estirnating the effects of growth on povertyand inequality, it is doubly so for estimating the effects of trade and tradereforrn, for these effects wili typically be far less evenly spread over individuais,

seetors, or regions than will "regular" growth.Two more reeent contributions shed further light on the issue. First, Kraay

(2006) revisits the Dollar and Kraay exercise with better data and methods, butfinds the basic results unchanged. For longer periods-above, say, six or sevenyears-by far the largest determinant of whether a country has redueedpoverty is whether jt has grown. Changes in incorne distribution do oecur, butthey account for only about 6 to 8 times less of the change in poverty than does

growth.Second, Milanovic (200Sb) uses a similar dataset to explore the effects of

growth and openness on the whole of the distribution of income by looking atthe share of total income accruing to 'individuals with incomes in each decileof the distribution, allowing the openness effect to vary with the levei of aver- >

age income. He finds that, for poorer couotries (below around $8,000 perannum at interuatiooal prices), openness is unequalizing-that is, higherincomes grow by more than lower ones-presurnably because the richer mem-bers of society are better placed or better equipped to take advantage of theopportuoities it offers.Above the ($8,000 yearly) threshold, openness is appar-ently equalizing, perhaps because its ability to curb market power is more

important where incomes are higher.The conclusion frorn ali this scholarly analysis is that there is not much evi-

dence that growth worsens inequality, even when it is caused by openness,although one study has suggested that it might do so in low-income economies.There is no evidence that growth or, in the long run, openness, is bad for the poor.Figure 1 offers a useful summary view. It reflects growth and inequality over 117periods since 1970 for which we have reasonably good and comparable householdsurveys for two years for the same developing country: about 70 countries arecovered, so some countries contribute more than one period to this exercise.When income is rising, there is no clear tendency in inequality (see the righthandcolurnn); when income falis (see lhe lefthand column), there is some tendency for


Figure 1

Source: Mar~in Ravallion, "Globalization and Poor Peo le'ture, University of Melbourne, 2005. p . lhe Debate ano Evidence," Max Corden í.ec-

inequality to do so, too. Notice, however, the entri .nse, poverty falls (00 average) d vi ies on poverty: where mcomes

an vice versa.

Finally, let us turn 10 lhe direet ff f .After ali, even if ine uali (ov e, ects o, trade liberalization on households.great deal of what ~contyomPl'stsert}lld?ehsnt change 1I1 aggregate, there may be a

ca c urmng" wh b h hplaces in the ineome distributí T' ' ere y ouse olds ehange

fl unon, reanng the h h ld .which ineome is defined h h ld c ouse o as the basic unit for

, ouse o tortunes dep d h .generated by liberalization affe t th . ~n on ow lhe pnce ehanges. . c eir consumption and f .distmguish three ehannel f causati sources o mcorne. Is o causatron: the p . f dmarket for labor, and the role of h '. nees o goo s and serviees, lhe

I e taxation and government expenditure.

Taxation

The role of taxation and governme .. .tieated analytically Criti f ndtexpenditure IS important but not sophis-

. 11 ics O tra e hberaliz ti fr tlreduces governrnent reven TI h a on equen y argue that ittaxes is higher for p ue. re sare of total revenue provided by trade

oorer couotnes than for ri h . .major issue at low Ievels of . d cones, so this IS potentially a

econormc evelopm t B . cple link between trad . c d tari en. ut, fi ract, there is no sim-

e Ierorrn an tanff revenue I .are reduced, total collections actuall . . n many cases, as tanff ralesfewer exemptions are sou ht y increase because, at lower rates of tax

. g or granted it is le h hil 'evasion, and lhe volume of t d h' SS wort w e 10 engage in taxra e-t e taxbase-increases.

..ã

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52Trade and Equality

Of COLtrSe,as the tariff rate falls to zero, tariff revenue rnusr .150 eventuallyfall to zerQ-a zero tax raises zero revenue no matter how large the tax base.But whether the revenue loss affects services for the poor is essentiaUy a polit-ical decision, albeit one constrained by a country's administrative capaeity, and50, too, is the choice of alterna tive taxes to replace revenue losses. That is, thereis no law of physics requiring that losses of governmenr revenue must hurt thepoor-c-rhat is a decision taken by govemments, which often prefer to hit thepoor rather than other constituencies.

Prices and Markets

A more interesting link is that between trade policy and the prices of the goodsthat poor households consume and produce. The bulk of the world's poor areself-employed in either low-level agriculture or the informal sector of theeconomy.f Thus their incomes are directly affected by price changes induced byinternational trade. An increase in the priee of something that the householdsells (labor, good, or service) increases its real income, while a decrease reducesit. Equally important, prices also matter to households as consumers, just asthey do to individuaIs who earn wages, salaries, or rents,

Whether trade-policy changes on the border get transmitted into pncechanges for poor or nearly-poor households depends on factors such as trans-port costs and other costs of distribution, the structure of markets, and domes-tic taxes and regulations, Some impediments, such as transport costs, areunavoidabls, although they mal' be increased by policy deeisions such as thelevying of fuel taxes or provision of inadequate infrastructure. But some otherimpediments represent direet econornic inefficiency, such as permitting mar-keting monopsonies (where there is only one buyer for a produet or serviee) ormonopolies (only one seller),

Price transmission is likely to be particularly ineffective for poor people liv-ing in rernote rural areas, possibly preventing families from rnaking markettransaetions almost completely. Such isolation saves the poor frorn any nega-tive shoeks emanating from the international economy, but it also preventsthern frorn experiencing positive shocks or the secular benefits from opennessthat were the subject of the previous section, Their problem is toa little glob-alization, not too much. Thus rhe policy conclusion of most of this literature isthat governments should pursue complementary reforms such as enhancedinfrastrueture or human capital accumulation to try to conneet poor house-holds to the rnarket and thence to the border, while at the same time remain-ing aware of the possible adverse consequences for subsets of these newly con-nected populations.


There rnav also be extreme price changes-either to zero as existing exporttrades are destroyed, or to iufínity if imports disappear, These drasticchanges ean cause drarnatic losses of income, which may be very painful butnonetheless illustrate the gains that ernanated from trade in the first place.

A household's abilíry to adjust to a trade shock-say, by switehing produc-tion toward goods whose prices have risen-clearly affects the síze of anyirnpact it suffers. For many of the poor, a major constraint on improving agri-cultural productivity following an externa I liberalization, by making sueh anadjustrnent, bas been shown to be the absence of key productive assets (draftanimals, implernents), capital, credit, or infonnation. These demonstrationsagain highlight the importance of complementary policies targeted at smallfarmers to enable thern to benefit fully from new trading opportunities-forexarnple, fostering asset accumulation, improving access to credit, and provid-ing good-quality extension services.

Adjustrnent is also the mechanism by which shocks ia one market spill overinto another, as consumers substitute from expensive to cheaper goods andproducers substitute frorn lower-priced to higher-priced goods. If thesespillovers are concentrated onto just a few products or regions, they can be sig-nificant Iocally, A major attraction of liberalizing small-scale agriculture is,arguably, that the elireet beneficiaries (farmers) spend much of their extraincome on goods and services-such as construction, personal service, andsimple manufactures-tbat are provided locally by other poor people.

Factor Markets

For the self-employed, the main determinant of incorne is the dífferencebetween the prices commanded by their output and those paid for thei:rinputs, but for employees it is factor prices (wages) or employment opportu-nities. Obtaining employrnent is one of the surest ways out of poverty, whilethe loss of a job is probably the most common reason for the precipitatedeclines into poverty that attract most public attention. The structure of thelabor market is critical to how trade liberalization gets translated into wageand employment ehanges. If wages rise, many wage-earoefs will typically ben-efit. If, on the other hand, wages are sornehow fixed and adjustment occursthrough employment, the smalJer number of lucky individuaIs who get thenew jobs created by a trade Iiberalization are likely to win big increases inincome. Thus, who gets the jobs becomes an important issue. Sometimes thelucky ones will be the poor, but at other times the jobs go to additional work-ers from households that already bold formal employment or to more skilledworkers.

Trade and Equali\y54

Where unskilled labor is abundanl, the goods it produces will be plentifuland hence relatively cheap in the absence of international trade. But these arethe goods that will be exported when trade is opened up, and hence trade Iiber-alization will generally relieve poverty, However, not ali deveioping countriesfali into this c1ass. For example. many Latin American and African countriesenjoy very strong endowments of natural resources, and so liberalization willstimulate these sectors rather than labor-intensive ones. In these cases, an activeredistribution policy-including helping the poor to obtain access to land,skills, markets, and so on-may be required to spread the benefits of openness.

One of the features of the past twenty years has been the grçnving skillsgap-the excess of skilled wages over unskilled wages--even in developingcouutries. This effect is unexpected, given the analys;s of lhe previous para-graph, but some authors attribute the wideuing gap to openness. Various [ea-

sons are given for this surprising development.

The arrival of China ou the world scene may have fixed the levei of

unskilled wages very low.

• Wheo ccuntries liberalize, they import new capital equipment, whichtends to need more skilled than unskilled labor to work .

• The business of exporting requires skilled labor or calls for quality that

only skilled workers can provide.

The tasks that relocate from developed to developing countries as tradeopens up are unskilled in the former but skilled relative to existing jobs inthe latter-hence their transfer raises the relative demand for skills.

The increasing skill gap generally raises inequality.The arguments in this section are almost bound 10 vary a good deal from

case to case. Detailed research has not thrown up any universal regularities forthese direct effects of trade on poverty or inequality. lt has, on the other hand,shown that, with sufficient information, we can predict some of the effects-which is useful for designing policies to support a trade liberalization. It hasalso shown that the key issue to consider is how trade (or any other) reformaffects the way people earn their living. This consideration is not just a matterof looking at the labor market, however. because the poor are frequently self-employed. Instead, it arises because while rnosr households consume largenumber of goods and services, and in fairly similar proportions, they have verymany different and much more specialized ways of earning their incomes.Thus, for identifying differences across households (inequalities), we need to

focus on the income-generating component.

NO: KATE VYBORNY ANO NANCY BIRDSALL 55

CONCLUSIONThe conclusion of this survey is símultaneously sim le and co .the evidence suggests strongly that p mplex. Sirnply,. openness to trade te d bmcomes over the medi um ter n Thi n s 10 oost averageeffect on inequality and so lib 1 lizi IS growth has relatively little systernaticalI.There wi\l be so~e excepti:ra ~mg ~a:e tends to be poverty-reducing over-

At a more cornplex levei Ihen~,. ut t e road t~ndencies are well-established.on the real incomes of ho~seh Iduect;ff~IS of liberalizing international trademay be either positive or ~ega~iv: \;; iS

oo~: be s111~1and, where they are not,

when the household's ch teristi, n possible to predict these effectsarac enstics are kno b . h

inforrnaticn no general te denci wn, ut in t e absence of detailed, n encies or results can b I" d

the "average" trade liberalizatio li h e re ie upon. Thus, whileeffects are very Iikely to red 11erall we urt so~e households, its growth

uce overa poverty significantly.

NO: Kate Vyborny and Nancy BirdsallCenter for Global Deve/opment '

Pree trade has increased gl b I . .tries that h d o a mcome as well as the total income of coun-ave opene up to rt However h d

groups within countries see differe ti I' ' w e~ tra e opens IIp, different1.' n Ia mcreases 111their .

groups ma)' lose income in absolute terms In . II mcome, and someas those for which trade leads to bi . the p~st in some countries-suchhave, initially gained h thlgmcreases m agricultura! exports=-the poor

, . more t an e nch B t thtendency in most countries h .. u over e past three decades, theof markets for goods a d ~s bheenm the other direetion. The globalization

n services as tended to b fi I .and so has tend d t . . . ene rt t te relatively rich more,e. o merease income mequality.

Because trade ISbeneficial in itself as w liare needed for cou t . e as a catalyst for other changes thatn nes 10 grow and redglobalization have I I uce poverty, efforts to block trade anda most a ways ended .th . .

c\osing off borders to tr d . WI countnes losmg out. Instead ofable ways to com ra ~ ~e1efore, the best solution is to find fair, sustain-out from major economí t ehift°ssesand ease the transition of those who lose

normc s s such as t d lib ai' .Opportunities for the poor and middl Ira e I er izatron, and to open upnornic opportunítíes Th I" e c asses to take advantage of new eco-

. ese po teres are unpo t [. '. .SUppor! for trade Iiberalízatí I1 r ant or mamtammg political

ou, as we as fo tecti htrous declines in consumpti S h .. r pro ectmg t e losers from disas-. . on. uc policies are n d d b th .

and mternationallevels. ee e at o lhe natoonal

i'

J

·,


FREE TRADE INCREASES INCOME

We know that trade allows countries to specialize in what they produce mostefficiently, increasing global income, and then exchange it for the products ofothers, making ali countries better off-even those that are not "best" at pro-

ducing anything, where producers can compete only by paying lower wages.

The basic insight of David Ricardo into how trade can unlock a country's com-

para tive advantage is well summarized in Paul Krugman and MauriceObstfeld's textbock (1999), which offers the example of two countries, Home

and Foreign. Home produces cheese at the rate of one hour of labor per pound,while Foreign produces cheese at six hours per pound; Home produces wine at

two hours of labor per gallon, while Foreign produces wine at three hours of

labor per gallon. In other words, Home has higher labor productivity in bothindustries. But, as Krugman and Obstfeld note,

[A]n hour of Home labor produces only 1/2 gallon of wine. The sarne hourcouJd be used to produce I pound of cheese, which can then be traded forI gallon of wine. Clearly, Home does gain from trade. Similarly. ForeigncouJd use I hour of labor to produce 1/6 pound of cheese; if, however, ituses the hour to produce 1/3 gallon of wine it could then trade the 1/3 gal-lon ofwine for 1/3 pound of cheese. This is twice as much as the 1/6poundof cheese it gets using the hour to produce the cheese directly. In this exarn-ple, each country can use labor rwice as efficiently to trade for what it needsinstead of producing íts irnports for itself ... " (1999, 4-21).

Trade also stimulates investment. For example, when clothing can be

exported with lower tariffs fi:om a country, more foreign companies invest in

clothing factories there. Open trade can aIs o encourage the transfer of technol-

ogy to developing countries-a U.S.-based company is more likely to investand share technology with overseas suppliers in order to increase the quality

and reliability of its own goods, and this enhanced technical capability mayeventually spill over to the suppliers' domestic industries (see 5aggi 2002).

Of course, the real world is more complicated than these examples may

suggest. But the basic principIe that trade increases the income of tradingcountries is one of the best verified findings in economics (Sachs and Wamer

1995; Edwards 1993). (There are two exceptions to this principIe, which we dis-cuss later.)

lHE ROLE OF RELATIVE INEQUALlTY

50 we know that trade increases total incorne. But does it rnatter how tradeaffects the distribution of income? Does inequality matter, too?

NO: KATE VYBORNY ANO NANCY BIROSALL 57

A thought experiment: if you could choose to make one change to your soei-ety, which of the following options would you c~oose>

I. Everyone has at least a minimwn standard leveI of incorne, but the rich-

est 5 percent have one thousand times that standard.

2. The poorest 5 percent have at least one-tenth the income of the richest 5

percent.

If yOli considered option 2. wby did you do so? What is the inherent virtue ofa more equal society? While absolute income is dearly important, it turns out

that relative income is also important for a number of reasons.First, relative income plays a major role in how content we are. Adam Srnith,

the first economist, noted that in one society a man may need enougb incometo buy a linen shirt in order to retain his dignity, while in another that expen-

diture may be seen as a luxury (Hirschman 1973). Surveys of people's relative

happiness reveal that individuaIs report being happier when their ownabsolute income is higher, but also when their income is higher than that of

others in their reference group (Easterlin 1995). This concem for relative well-

being becomes important only above a low threshold=-in abject poverty, peo-pie are primarily concemed abour rneeting their basic needs (Ravallion and

Loksbin 2005). (As globalization has brcadened people's access to information

abont the broader world, they may be comparing their income to a broader ref-erence group as well-see Box I).

Second, inequality may actually affect economic growth, the driver of any

improvements in absolute income. Attempting to force perfect equality iscounterproductive, for some levei of ineqnality provides an incentive for peo-

pIe to work hard and innovate. But beyond that leveI, inequality can alsobecome counterproductive. Such "destructive inequality" reflects inefficient

privileges for the rich, a kind of social and econornic discrimination that

reduces incentives for effort, investment, and innovation, and in general cutsthe potential for productive contributions by the poor (see Birdsall 2007b).

This destructive potential is more of a problern in poor countries, where, for

example, capital markets are less developed, and so those without collateralhave little aecess to credit. Evideuce suggests that growth has been lower in the

past several decades than would have been expected in countries below a cer-tain income levei (about U5$3,200), where incorne inequality is relatively high

(described bya Gini coefficient higher than .45-see Box 2)IThird, high levels of inequality can have a range of negative social and polit-

ical effects. Because the size and economic power of lhe middle class, in partic-ular, is thought to play a major role in democratic accountability, the "missing

· .

Trade and Equality58

Box 1Inequality among Whom?

middle" may be one of the reasons some states have such weak institutions andpoor public services: the poor have toa little clout and access to informationand are toa consumed with the day-to-day challenges of survival to exert muchpressure on the goveroment, and the rich are able to compensate for lhe poorquality of government services by using connections, offering bribes, ar justpaying for private schools or clinics instead (see Birdsall 2005, 2008).

So, if inequality is important in and of itself, how does free trade affect it?The real world is, of course, much more complex than the basic examples justdiscussed. As it turns out, opening IIp to trade affects different people'sincomes in different ways. The losers-even when they lose only relatively toothers-are often more vocal than the winners in tbis process, and they are


How Do We Measu:re:'7.ln=e~q:lI~al:iI~Y:?-------------Box 2

~ ,

t>u Trade and EquaJity

more likely to attribute the chaoge to trade than are the winners, As one man-ufacturer says, "When NAFTA carne into force, we closed a factory in Carrada,wbere four hundred people lost their jobs, and replaced it by opening anotherone in Soutb Carolina, where we hired eight hundred people. Now the fourhundred in Canada bate free trade, and the eight hundred in South Carolinathink they got the job because they are qualified, and don't care about freetrade,'

The gains also tend to be spread out-cheaper clothes, food, and appliancesaffect everyone's budgets, especially those of the poor, but people tend not tobe aware of these benefits as the result of free trade, and they are unlikely tolobby for free trade because of them. And where the (potential) losers are well-organized, wealthy, ar influential, their voices are heard more loudly-as withsome wealthy farmers in rich countries who reap millions of dollars in agricul-tural subsidies at the expense of the poor abroad who could otherwise exportcrops such as sugar (Elliott 2005). 50 we must take reports oflosses from tradein contexto

ECONOMIC THEORY ANO ECONOMIC REALlTIESLet us take a closer loôk at the theory and evidence of the effects of trade Iib-eralization on 'inequality across and within countries,

Economic theory suggests that developing countries entering the globaltrading system in the most recent, post-World War II period of globalizationwere likely to gain more from this Iiberalization than richer countries becausethey were less integrated into the global economy at the start and so had moreto gain-and because, from a lower initial income, those income gains couldbe more rapid (Lindert and Williamson 2001). (Of course, to the extent thatsome have liberalized less than iodustrialized countries, they should, in theory,have gained less, and so would not have converged or caught up with richercountries. )

What about inequality within countries? Economic theory predicts thatfreer trade wiU redistribute income in a country away from the factors of pro-duction (land, capital, skilled or unskilled labor) that are scarce and towardtbose that are more abundant, compared to the proportions avaílable in theworld as a whole.ê Thus, ín rich, industrialized countries, which have an abun-dance of capital and skilled labor, the wages of unskilled labor should go down,while in poor countries, which have an abundance of unskilled labor, thosewages should go up.

50, what has actuaUy happened? Pirst, has free trade reduced inequalityacross countries?


Across developing countries, teade should, theoretically, increase the incomeof all those that participa te, and especially of those that begin more closed andso can more fully exploit an opening. 111 reality, however, some-such asChina-have grown rapidly while trading more, closing the income gap withthe rich world, but rnany others-particularly in Africa and Latin America-have noto There seem to be two exceptions to the expected income benefits oftrade for developing countries.

The first exception is where there are unusual pre-existing trade distortionsbenefiting some countries over others, such as free trade areas (such asNAFIA) or preferential trade agreements (that is, special trade privileges forthe poorest countries, such as the Africa Growth and Opportunity Act). Whenother countries then open IIp, this special access gíves the previous beneficiar-ies less of an edge, and they can lose income (see Yyborny 2005). In this case,compensation may be required to ease the transitian-these proposed trans-fers of "aid for trade" for the poorest countries were the subject of much dis-cussion in the (now dormant) Doha Round of global teade negotiations.

The second and more important exception is that in a global market, coun-tries producing goods, such as primary cornmodities, may lack the people,financing, ar access to broader markets that would encourage diversification,especially into manufacturing ar new services-the kinds of production thatwould drive the development of technology and change the countries' compar-ative advantage over time. This inability to diversify tends to reduce econornicgrowth in the long run (Lindert and Williamson 2001). Concern about thispossibility has led many countries to try to nurture "infant industries" by elos-ing themselves off to trade. But this approach has-consistently failed, as tryingto opt out of globalization has led to those countries' losing out. This patternleaves countries with a strong comparative advantage in production of primarycommodities in a bind-how best to develop a manufacturing base? lt seemsthat many ingredients are needed: investing in education and health to developa productive workforce, improving infrastructure, reducing corruption andstreamlining regulatory processes to reduce costs to businesses, ensuring afunctioning justice system tbat businesses can rely on to resolve disputes, andmaintaining a stable macroeconomic environment. As it turns out, some havedane better than others in managing these other factors and in diversifyingtheir production to include manufacturing and services as well as primarycommodities. Those countries have grown more rapidJy and reduced the gapbetween their average income and the average income in rich countries(Birdsall2007a).

What about inequality within countries: has trade increased inequality inrich countries and reduced it in poor countries, as theory predicted?


It is critical to understand that trade is not always lhe key factor-and it isnever the sole faetor-in bringing about changes in lhe eeonomy, includingthose affeeting inequality, And it is particularly difficult to tease out lhe effectsthat trade Iiberalization has had; while a country liberalizes. many otherehanges may be occurring, so simply looking at the changes in the levei ofinequality over that time is not enough to establish a relationship. For instanee,technologieal change, whieh affeets the types of jobs that are available, is amajor driver of inequality-and it has tended to aecompany trade liberaliza-tion. Also, some studies have found that the proportion of yOllng people in asociety is a major determinant of overall inequaliry, so a baby boom mightaffeet income distribution independent of changes in trade (Higgins andWilliamson 1999).

Countries that are more open to free trade are likely to share many.othereharacteristies in addition, so simply comparing ineome distribution betweeneountries that have and have not opened up is insufficient as well. This is partof the reason that any single study is insufficient to prove the answer one wayor another. To establísh a causal link requires eareful quantitative analysis con-trolling for these other factors. The evidence that trade increases overallincorne is well established; but its effects on inequaliry have been less fullyexplored. Later, we sometimes refer simply to ehanges in trade eoinciding withchanges in inequality, without implying any necessary eausallink.

In today's rich countries, as expected, there has been an increase in inequal-ity coinciding with broad-based trade liberalization since the 1980s (Lindertand Williamson 2001). In fact, only a relatively small part of this increase is dueto trade; the evidence suggests that at least haIf has been driven by other fac-tors-most importantly, improvements in technology (see Lawrence andSlaughter 1993; Sachs and Shatz 1994; Wood 1994, 1995). More sophistieatedequipment and cornpuring power have made many jobs obsolete, redueingdemand for unskilled labor. and so wages for unskilled labor have gane downrelative to those for skilled labor.

But in some poor countries-in particular, those in Latin America-freetrade has not brought the expected declines in inequality.' Why not?

Some of the increases in inequality in liberalizing developing countrieshave likely oceurred because of other faetors occurring at the same time as lib-eralization. The liberalization of Latin American countries in the 1970s and1980s eoincided with the entry into the world market of more competitivecountries, including China and other Asian exporters (Lindert and WiUiamson2001). Mexico was a higher-wage country than its new competitors-in tbiscase Mexico was the richer country in the dynamics of trade liberaliza-tion described earlier, and so we would expect its inequality to increase.

NO: KATE VYBORNY ANO NANCY BIRDSALL 63

Liberalization in some countries, inc1uding Chile and Mexico, coincided withremoval of policies that had favored less skilled workers, such as powerfulunions in Chile and protection of low-wage industries in Mexico. 50 unskilled,low-wage workers saw their relative wages fali compared to their more skilledcounterparts.

But some of the increases in inequality have happened because the worlddiffers from the simplifying assumptions of the textbook. For exarnple, in thereal world, there are more than two countries and two goods. In the real world,a worker who has completed high school-and so is considered "skilled" inBangladesh-e-is counted as comparatively "unskílled" in the United States(wirhout a college degree or English language skills). Let us now consider indetail some of the ways io which the real world becomes more complicatedthan the theory, allowing free trade to bave some disequalizing effects.

Adjustment Costs

First, there are short-term costs of adjustment to changed patterns of produc-tion-for example, low-skilled jobs in garment faetories may be lost, whílelow-skilled jobs in toy factories are .generated. The same individuais may movefrorn the garment to the toy factories, but they ineur costs in searching for andtraining for their new jobs. These eosts are difficult to measure, but are l.ikelyregressive, simply because hurdles sueh as searching for employment are morecostly for the poor (Fernandez de Cordoba, Laird, and Serena). And the effectsof unemployment and bankruptcy may be permanent for the poor, so repeatedshocks can increase inequality (Diwan 2001). During periods witbout work,the poor may be forced to sell off productive assets (such as farm equipment,a milk cow, or a sewing machine); their children may drop out of school andnever return (Székely 1999).

Advantages for Countries with Most Productive Assets

The inequality implications of trade theory outlined earlier build on theassumption that the main difference between countries in determining whatthey produce and trade is the differenee berween their endowments-onecountry may have more unskilled labor and land, the other more skilled laborand capital. But this assumption leaves out the major productivity differencesbetween countries-c-producing lhe same good or service may require more ofthe total inputs in deve\oping countries than in developed countries (Easterly2004). In other words, everything else being equal, a hundred workers may beable to produce more widgets per hour in the United States than in Nigeria-

trace andEquality64

because of frequent power cuts in lhe Nigerian widget pla.nt, higher costs toship wídger inputs and the finished widgets to and from the factory because ofpoor roads, higher operating costs from licenses and export procedures with aless efficient or corrupt government, and so on. Such differences in productiv-ity help to expLain wlry 80 percent of alLforeign investrnent occurs among lheinduSlrialized counlries, while just 0.1 percent ofU.S. foreign investment goes

to sub-Saharan Africa (UNCfAD 2001).Recall that the gains from trade by Home and Foreign (discussed at the begin-

ning of this chapter) demonstrated that lower- and higher-productivity coutriesstill gain from trade in aggregate income, even when a country can compete onlyby offering lower wages. But what do these differences mean for inequalityl Forinequality within countries, Easterly argues that these productivity differenceseffectively make skilled labor and capital more scarce in Iúgher- productivity richcountries, so tney would benefit more from trade Iiberalization. But the effect onintercountry ínequality also depends on how freer trade affects productivity dif-ferences. Trade can lead to technology transfer, which increases productivity. 50the effects of trade may depend on the extent of this effect.And if trade increasesinvestment, that may also change factor endowments by making labor morescarce compared to capital. For inequality between countries might suggest thatindustrialized, higher productivity countries could experience a greater benefitthan lower productivity countries because a larger share of the ínvestment that

trade helps to stimulate would flow to .thern.In addition to these productivity differences, the change in global demand

for goods and services has increased rhe demand for skilled labor, due to tech-nological change and the resuLting global growth in sectors with more compLexinputs. Demand for skills has risen faster than the supply of skilled workerseverywhere, despite the fact that more and more people are going to university,including across the developing world (Levy 1999; Duryea and Székely 1998;Terrell 2000). The earnings of those with a higher education relative to thosewithout have therefore continued to rise. Because in many countries educationis reinforcing initial advantages instead of compensating for initiaL handicaps,the resulting rendency is growing income inequality.4

Costs of Market Failures on the Poor

The classic exarnple of a market failure is that of pollution, as the poliu ter cap-tures lhe benefits of polluting without paying the full costs. Because free trademakes global proeluction chains possible-allowing firrns to shift productionor switch suppliers between counlries-the costs of market failures such aspollution often shift to the poor citizens of poor countries with the weakestinstitutions to control them. Anel global integration allows firms to shift green-

NO: KATE VY80RNY ANO NANCY BIRDSALL 65

Bias against the Poor in Global Economic Rules

lt is better to have I b dOrganizatio -th a ru es- ase system-such as the World Traden an no systern ai all; such a system hei I .

field cornpared to the d i L . . ps to evel the playmgmost powerful countrie: :~~:~ a:e~:~~i~: ,:ernationaL affairs, in which the

more powerful countries are also able 10 influe:~~I~ol~e. But th: dcher andtation of global ruLesto their own d e eSlgn an unplemen-countries. And within those d a vantage, at the expense of the developing

ticular against the poor, who h::~~i~:~gv~~~~::~:' ~he mies are slanteel in par-vorce at the negotiating table with t di eir government and even less•• ra ng partners.

The effort 10 reduce rich cou tr . ul... n y agrlc turaL subsidies and tariffs that dicnmmate agamst poor countries is a d s-bies in industrialized countries ma~oo exampLe·thDomesticagriculturallob-une ual o . . er more at e negotiatmg table than

. q pporturunes for cotton farmers in West Africa do D .tnes are at a disadvantage in gLobaltrad d h . evelopmg coun-e an ot er negotiaf d hest and poorest countries need transfe . . . tons, an t e small-ticipate effectively-to command the;: o~aid :om rich ~ountrie~ simply to par-and analyze the potential effects for the~ o~d~COn01ll1C expertise to negotiate

tions, For example, about one-half oflegal cases ::::;:t~~:e\S;:othe ~egotthia-trade violarion known as "d ." .. . agamst eumpmg are initiated against develo iproducers, who account for 8 percent of aUexports (Birdsall 200St ng country

SOlUTION: COMPlEMENTARY "FAIR GROWTH" POLICIESDespite th di I" .gLObalizati:n ~:;~~zolsntg tethndenciesthey can have, trying to block trade and

Wl our exception caused h I .economically (Lindert and Willi w O e countnes 10 lose outof the chapter the benefit f ~mson 200.1). As we stressed at the beginningis not the ansv s o tra e are signíficant, and staying on the sidelines

answer,

Instead, the best soLution is to find fair .Lossesand ease the transitio f tl ' sustainable ways 10 compensa te theand other major econ . shift tose who lose out from trade liberaLization

omlc s I S as well as to . . .poor and middle classes t b ' open up opporturnnes for the

_ o ecome upwardly mobile b kinew economic opportunirí Th . . y ta ng advantage ofmes. ese policies are imnort ..caLsupport for trade liberali . mpol ant to mamtain poli ti-

zation, as well as for equity h htrade are poor. Ul w ere t e Losers from

·,


Even where trade makes some people worse off and so increases inequality,it is still possible-and desirable---for everyone to gain if the "winners" fromtrade compensa te the "losers" with a portion of their increased income. Sincetotal income in a country will increase with trade liberalization, such partia Itransfers would still leave everyone better off than they started (Dixit andNorman 1980; Corden 1974). This sort of compensation is particularly impor-tant for poor people in poor countries, because they have the fewest assets tofali back on and less access to information about opportunities in other sectors(for example) and so are the least well-equipped to deal with the transitionsthat trade can bring (Bannister and Thugge 2001). The less diversified econo-mies in many low-incorne countries also mean that a larger proportion ofworkers may lose their livelihoods at once, making it more difficult for allof them to find new sources of income.

But it turns out in practice that such compensatory policies often do notcome through for these people, for a number of reasons. First, there is a strate-gic problem-governrnents and voters do not usually face a choice of a pack-

age of free trade plus compensation, so it is difficult for the poor to demandthat trade liberalization take place if and only if they are adequately compen-sated. Governrnent revenue also takes a hit when tariffs are cut, particularly insome of the poorest countries which rely heavily on tariffs for revenue, makingboosting transfer programs unattractive. Finally, because the poor tend to beless organized and less politically effective, redistributive programs may nevertake place, and when they do, they often respond to more vocal entrenchedinterests, transforming these initiatives 'into a regressive tax rather than a safetynet. For exarnple, Senegal's pragram to cushion the effects of its economicreforms channeled state money to privileged groups within the system (civilservants and university graduates), while doing nothing to protect the urbanand rural poor frorn rising consumer prices and unemployment. Often, eventhose subsidies originally meant for the poor are quickly captured by the mid-dle c1ass and the rich.

lt is also logistically difficult for governments to make lump-sum transfersto the "losers" from trade, for there is a major challenge in identifying who haslost from trade, especially in poor countries where large segments of the pop-u1ation work in agriculture ar the informal sector (Bannister and Thugge 2001;Winters 2000; Ravallion 1999). It is also difficult to justify paying those whohave lost because of trade and not because of other economic shifts such asadvancing technology making their jobs obsolete. (This identification problemhas been an issue with rhe V.S. federal program to assist those who have lostjobs because of trade-the Trade Adjustment Assistance, ar TAA program[GAO 2007].)

NO: KATE VYBORNY AND NANCY BIRDSALL 67

So what can be done to compensare lhe losers? Strengtheni.ng general socialsafety net policies sueh as food vouchers and adult job training programs islikely the fairest and most sustainable way to compensate tbe losers. The designand implementation of these programs still requires attention to ensure thatthey reach those who need them mosto A broader set of "faír growth" policiesthat will ernpower the poor and the middle elass to take advantage of new andexisting economic opportunities-such as social investments in education andhealth, and fairer application of tax systems and regulatory changes to helpsmall businesses formalize and grow-is also needed.ê

A GLOBAL SOCIAL CONTRACTSome policies to address the equity effeets of trade, such as strong social safetynet programs, can be made at the national level. But because of the politicaland economic challenges just outlined, the only way they are likely to become

a reality is with at least some intemational support. The (now dormant) DohaRound of international trade negotiations has incorporated discussions on"aid for trade," including funds to compensate countries for adjustment coststo liberalization and/or to help countries better take advantage of new tradingopportunities (Hoekman and Prowse 2005). But so far, these commitmentshave been prablematic because they may not be binding and the aid may notbe additional. And tbere has been almost no discussion of funding to ease theadjustment costs of the poor within countries, or to underwrite what may be alonger-term need for support for social safety net programs. These transferpayments are in the interest of rich as well as poor countries: fairer compensa-tion can help to build broader support for trade liberalization that allows eco-nomic expansion and opportunity in the industrialized world as well.

There is also a need for compensatory policies that fali into the global arena,which cannot be addressed on the national level. Global regula to r)' arrange-ments and rules are needed to manage global market failures, such as climatechange, and to discourage corruption and other anticompetirive processes (aglobal antítrust agency, for examplej.P These global pragrains are particularlyimportant for the poor, but they would benefit everyone in both rich and poorcountries. In principie, they could be financed internationally by some rnech-anisrn that mimics taxes within national economies, such as a levy on interna-tional aviation ar on carbon ernissions.

Pree trade does not always-and eannot by itself-increase economic equal-ity at the national or globallevels. But in combination with these proposedpolicies at country and international levels, it can be a powerfuJ instrument toincrease wealth and welfare equitably.

.",

poverty

Can Foreign Aid Reduce poverty?

YES: Jeffrey Sachs, The Earth Instilute ai Columbia UniversityNO: George B. N. Ayittey, American University

More Ihan 3 billion people--nearly hall lhe world-Iive on less Ihan $2 par day.Tens 01 Ihousands 01 children die every day Irom condilions associaled wilh

poverty, more than 1 million each year Irom diarrhea alone. Millions lack

access 10 Iilesaving immunizations Ihal are routine in the West. More Ihan 1

billion lack access 10 adequate water supplies. Figure 1 delails lhe qeo-

graphic distribution 01 the poor worldwide, indicaling that while progress wasmade in most 01 lhe world-including significanl improvemenls made in East

Asia-over

a recenl Iwenly-year period, lhe percentage of those living in

extreme poverty increased in sub-Saharan Africa. Slatistics such as these areooth appalting and overwhelming: how can malerial excess and deprivation

exisl side-by-side in our "globalized" world, and how can lhe relatively privi-

leged provi de assislance 10 lhe "bottom billion"?The Uniled Nalions Development Programme (lhe principal developmenl

nelwork wilhin the UNjo the World Bank (Internalional Bank for Reconstructionand Development), and the International Monetary Fund (IMF) are the princi-

pal multilateral inslitutions for economic development and debt reliel. Alter lhe

Marshall Plan of 1947 helped 10 rebuild nations in Europe following World War

.11, President Harry Truman inslituted bilateral loreign aid as a feature of U.S.foreign policy. In lhe 1960s, Presidenl John F. Kennedy established lhe U.S.Agency for Inlernalional Developmenl (USAID)-which provides development

assislance as well as humanilarian aid-and lhe Peace Corps-which sendspeople to Iive and serve in developing nalions. The Camp David accords of1979 calapulled Israel and Egypt 10 lhe top 01 nations receiving U.S. foreignaid. although recently they have been supplanted by developmenl assistanCe10 Iraq. The 1980s and 1990s saw reductions in U.S. foreign aid, but in the

Intemalional Polltícal Economy 69

Figure 1

~~~~~~~31eof Total Population Living O" Less lha" $1.08/day,

1. ::~ .~!. '. , ,_ ) ·h: ..Source: M. Ravallion and S. Chen "How Have the W ' • .:8ank Research Observer 19, no. 2' (Fali 2004)' 152 ortc's Poorest Fared since the Early 1980,?" World

Note: $1 OBlday and $2 151d . ... . ay are mternational povertv unes expressed in 1993 PPP.

wake of lhe lerrorist attacks on Se lemb .a potentíaí impediment 10 I . P er 11, 2001, aid began to be seen as

erronsrn and it h' .larly in Iraq and AIgh' .' as increased smce then, parti eu-

arnstan. Figure 2 sho b ..aid conlributions by lhe OECD's O ws su stantíal mcreases in foreignsince 1960. evelopmenl Assistance Committee (DAC)

In response 10 extreme world v ..Summit in 2000 po erly, the Unltec Nations, in its Millennium, agreed upon a set of Mil .to be reached b I enruum Development Goals (MDGs)

y year 2015 as a way I 'd'Poverty. (See labl l' J o gUI Ing future efforls 10 addresse tn effrey Sachs' ..goals.) One 01 th . s contribution lor a briel listing of these

e irnportant comrnit .Weallhy nations I . . .1 ments required to meel the MOGs was loro increase theír alo 10 O 7a largel that had b . I .- . percent 01 gross national income

. een In p ace stnce lhe mid-1 'natlons remain lar short of lha! goal Th U. 960s. However, rnost 01 these. e nited State .any olher natíon in raw figures-more Ihan $21 b'lr s contributes more thanI ron m 2007-yet lt sits ai the

pover\y

Figure 2Mel üíücial Development Assislance Disbursed by OECOOeveloprnenlAssistance Commillee, 1960-2005

Source: OECO-OAC, online oatauase (accessed February 16, 2008).Note: Aid inctudes total assistance disbursed by ,11 members 01 lhe OECO Oevelopmenl Assistance

CommiUee (OAC).

bottom 01 lhe lisl in terms 01 its aid donations as a proportion 01 gross national

income (GNI), 01 which il gives just 0.16 percent. Only live nations-Norway,

Sweden, Luxembourg, Oenmark, and Nelherlands-have reached lhe UN lar-get 01 0.7 percenl 01 GNI, and tne. average ter tne OECO's Oevelopment

Assislance Committee is just 0.28 percent.Some lorms 01 "aid" are motivated more by internal politics and support tor

strong domestic constituencies in the developed nations than by recognition

01 the need lor improving conditions elsewhere, and they may in turn harmdeveloping nations. For example, lood aid in lhe lorm 01 expor I subsidies ín

developed nations and delivery 01 heavily-subsidized or Iree lood 10 develop-ing nations is often a polilical effort 10 support domestic larmers (eilher in theUnited States or in Europe), and may serve 10 arlilicially depress lood export

prices and, therelore, exlinguish lood production possibililies in developing

nations. Furthermore, the larm policies 01 lhe developed world ali serve to

stírnulate production, thereby lurlher depressing world lood prices and stunt-

ing larm production in lhe developing world.Three principal disagreemenls shape debates about loreign aid: (1) lhe

extent to which it is simply an instrument 01 loreign policy, and therelore

notintended to actually improve the lives 01 those most in need; (2) which types01 loreign aid are most benelicial in combating poverly, regardless 01 the rnoti-vation; and (3) the relative importance 01 foreign aid compared with olherlorms 01 economic activity-such as international trade-in raising living stan-

Internalional Political Economy 71

dards. The Iwo articles Ihat follow resen .prospects lor loreign aid intluenci p I varylng perspectives on the

cmq lnternational de elpoverty, Dr; George Ayittey arg th I v opment by reducingues at a ree press and . d .ary are important ingredients to develo rnent.whí m ependent judici-large increases in development aid I p , while Jeffery Sachs advocates

a ong the unes 01 lhe Marshall Plan.

1. Do wealthy nations have an obli atio ..nations? In what ways can forei n;i n to provide aid to poor

tool by wealthy nations? Does it ~att! ~~ ~S~d as a toreiqn policyare when they provide aid? Wh h a onor nations' motives

. yorwynot?

2_ The Monterrey Consensus is an agreement am 'wealthy nations that recognizes lhe importance 01 t~~e :~~e:orl,d spoverty in poor nations, lt alfirms the "aid for t d" uClngwhereby foreig .d . . ra e concept. I n ai IS glven to poor nations in order to improve thern rastructure needed for Irade O _.Ihis lhe b t . o Vou agree with this concept? Isaid be us:~?way to reduce poverty? In what other ways can foreign

3. What recommendalions does Jeffrey Sachs make for com barpoverty? Whal justilications does he cite? O . Ingproposals? . o vou agree wlth his

4_ Whal does George Ayitt -Iaid's failure to reduce I ey CI.e as lhe biggest reason lar loreign. poverty m Atrica? He proposes "smart aid"

an alternative. Whal is "smart aid"? Wh t . as. a are ItS key components?

.~,

poverty72

YES: Jeffrey D. Sachs I The Earth Institute atColumbía Universíty

. I d international efforts to promote eco-n the broadest terms, nationa an ld d . g the past fifty years have beenI d the wor urmnomic development aroun . f large parts of sub-Saharan

. h h table exceptiOn ohighly successfl.11,wit t e no . erty. The biggest development

, d 111 extreme pov d'Africa which remam trappe " ith re than half the worl s pop-, "vast regiOn WI mo ,

successes have come m Asia, a, di K a and many other countnes-tl ' Chma ln Ia, ore, h

ulation. Economic grow r in , h' Ih ducation, and infrastructl.1re- a:ealong with pl.1blicinvestments 111 ea t , livi standards in world history. Aid

id . 'ovement m rving d . lf ipowered the most rapi lmp', ins.The fact that Asia can fee Me IShas played an enormous role m those galm~. that began in the 1960s, heavily

h Green Revo unon ,due in no small part to te. nd hilanthropic sectors. The fact that diseasesupported by the U.S. public a P d ' ' portant part to global aid sue-

d harply IS ue m unburdens have come own s , ' d 'mmunization coverage,. di tton widespree 1cesses such as smallpox era .ica d th uptake of oral rehydration to fightmalaria control (outside of Africa) , an ul e, growth has slowed markedly is

h f t that pop anon hdeath from diarrhea. T e ac , ina eff t which the United States as

, rt d famrly plannmg e or s, Ka success of aid-suppo e Th f t that countries such as orea,

, th 1960s e ac dhelped to initiate since e . c ing successes grew out of U.S. an

h il d became manu1actunnMalaysia, and T a an d technological upgrading.

id Corcore infrastructure anJapanese ai l'

~~~~g:I~~NETC~:~~I~~~t:~o:~~~~IN ,, e in deploying development asslstance as

There are now sixtyyears of expenenlc t in low-income settings. Develop-, mtc deve opmen id '

a tool in prornoting econo , bli d private contributions. When ai ISI b a ll11X of pu ICan ,(O DA)ment aid has ong een, . s Official Development Assístance .

from the public sector, rt ISknown a I d j'mportant and successful role. e have p aye an ,

Both ODA and private asslstanc , d velopment assistance mf h reatest successes m e p )

in development. Many o t e g th h Public-Private Partnerships (PP s ,the past six decades have come ,roug d hilanthropic leadership of

, 'li I' k ODA with pnvate-sector an Pwhich typiCa y m

LP Comn~issionMinority Report, "Revamp~gh' ti le which is based cn excerpts from the H.E d Gayle E..Smith (2007), was prepared Ul

T .15ar l~ > As istance," by Jeffrey Sachs, Lec Hindery }r.. ano ce the 2008 U.S. presidential eleclion.U.S. Forelgn st , alce inro account developments SUlAugust 2008 and does not t

YES: JEFFREY D, SACHS 73

various kinds. The Green Revolution in lndia was spurred by such a partner-ship. The campaign against polio, which is on the verge of eradicating thatdread disease, is a partnership of several public and privare institutions, inc\ud-ing the World Health Organization and Rotary International,

Of course, aid has worked in conjunction with powerful market forces, mostimportantly international trade and investment-t11e forces of globalizationhave helped to spread the benefits of advanced technologies to ali corners ofthe world. Aid should certainly be seen no! as a substitute for market-Ied devel-oprnent, but rather as a complementary component of market forces, espe-cialiy for impoverished countries that lack sufficient infrastructure, income,and creclitworthiness to mobilize needed investments on their own behalf viamarker forces and domestic budget revenues.

The special role for ODA as one of several complementary forces of eco-nomic development was weU described in the Monterrey Consensus, a 2002agreement among the world's nations, which the United States strongly sup-ports and repeatedly backs. That agreement is notable in recognizing the inter-connections among private capital flows, international trade, and ODA-all ofwhich are vital to economic development of the poor countries. Rather thanpitting trade against aid, the Monterrey Consensus explains why they are bothvital and cornplementary, and, indeed, why aid is vital to supporting tradecompetitiveness of the poorest countries. The Monterrey Consensus has there-fore contributed to the new concept of"aid for trade," in which ODA is used tohelp poor countries to improve their international trade, mainly by buildingthe infrastructure (roads, ports, power) needed to support trade,

U.S. Commitments to Economic Development and Poverty Reduction

The United States has long recognized that it cannot and should not carry theworld's development financing burden on its own. Support for economicdevelopment in the poorest countries rnust be a shared global effort, based onagreed targets. The United States and partner countries have therefore pursuedshared global goals for several decades, achieving great successes in diseasecontroI, increased food production, the spread of literacy and numeracy,increased school enrollments, improved infrastructure, and many other coredevelopment objectives. By far the most important of the shared developmentobjectives today are the Millennium Development Goals (see Table I) adoptedb.yali nations in the Millennium DecIaration of the year 2000 and reconfirmedreglllarly since then, including at the G8 summits.

The MilIennium Development Goals (MDGs) constitute a very importantinstrument for effective U.S. deveIopment assistance for the foUowing reasons:

· ,

74

75YES: JEFFREY D. SACHS

Table 1

The world has agreed to the goals and reconfirmed that support each yearsince 2000.

The world has agreed to a trade and financing framework in lhe Monter-rey Consensus.

The MDGs address extreme poverty in ali its interconnected dimensions:income, hunger, disease, deprivation.

The MDGs promote long-terrn economic growth and wealth creation byencouraging countries to focus on productive investments to end thepoverty trapo

The MDGs are arnbitious and yet achievable,

The MDGs are quantitative and time-bound, therefore offering objectiveindicators of suceess and aecountahility.

Current Levels 01U.S. Ollicial Development Assistance inComparative Perspective

Although developmenr, defense, and diplomaey are the three pillars of U.S.national seeurity, the eurrent investrnents in national security are almostentirely i.n the direetio.n of defense spending. In 2007 defense spending was$611 billion, while spending for diplornacy eould be estimated at around $9billíon and that for development assistanee at $22.7 billion. The alloeation ofofficial development assistanee is equally important. U.S. aid is dividedbetween "bilateral" aid, given by the U.S. governroent direct1y to other coun-tries, and multilateral aid, given by the V.5. government to intemationalorganizations sueh as the World Bank, lhe African Development Bank, andthe Global Fund to Fight AIDS, TB, and Malaria. Distressingly, only aroundone-quarter of overall bilateral aid is spent on development direeted at long-term poverty reduetion and disease control. The vast bulk of aid is devoted toemergencies and V.S. politica! aims, rather than to the objectives that are mosteffectively served by official developrnent assistance: long-terrn economicilevelopment.

The United States is the largest aid donor in terms of absolute amount, asshown in Figure Ia, but this fact is hardly surprising since it is a!so by far themost populous donor country, with a 2006 population of 299 million, com-pared with 128 million in [apan, 83 million in Gennany, 60 million in the

'. whüted Kingdom, 63 million in France, 9 million in Sweden, and 5 million inNorway. ln per capita terms, however, Norwegians average $629 per person inaid, while Americans average only $76 per person. As a share of national

>.

76

DljjijFNel ODA in 2007 amounls

D\lIII'· _Nel ODAin 2007-as a percentage 01 GNI.

Souree: OECO. April 4. 2008.

YES: JEFFREY D. SACHS 77

income, U.S. aid is actually the lowest arnong donor countries, as shown inFigure lh.

Since 1970, most donor countries have pledged to achieve the target of 0.7perceot of GNP as OOA (following a recommendation of ao InternarioualCommission headed by Lester Pearson), and reiterated that pledge many times,most recently in the Monterrey Consensus. I Only five countries-s-Denmark,Luxernbourg, the Netherlands, Norway, and Sweden-have consistentlyachieved or exceeded that goal. All of the otber seventeen donors in theOECD's Development Assistance Cornmittee (OAC) have fallen short, despiretheir adoption of lhe target.

FolJowing lhe 2002 Monterrey Conference, rnost donor countries set a specifictimetable to achieve the 0.7 percent target. Donors in the (pre-enlargement)European Union agreed to contribute at Ieast 0.51 percent of GNP as OOA by2010, and 0.7 percent by 2015. The United States, despi te its strong andrepeated support for the Monterrey Consensus, has not yet made concreteefforts to achieve the target of 0.7 percent of GNP. The current U.S. leve! ofOOA, alas, remains stuck at 0.16 percent of GNP (2007)-lhe lowest leveiamong ali twenty-two donors in the Developrnent Assistance Cornmittee.Unlike the European Union, the United States has established no timetable orpolitical consensus to reach that goal, despite its pledge at Monterrey to makeconcrete efforts to do so.

Private Development Assistance

During the 1960s, the idea took hold in various forums that the rich countriesshould support the poor countríes with an annual transfer of .I percent.ofnational income. This transfer, in turn, was to be divided between ODA, tar-geted at 0.7 percent, and aid from private donors, targeted at 0.3 percent. Whilea few donor goverrunents have achieved the 0.7 target, however, no donorcountry's private sector has come dose to reaching the 0.3 percent of GNP tar-get for private developrnent assistance.

Meanwhile, it is often saíd that development assistance is passé, since pri-vate financial flows of all kinds (development assistance, foreign direct invest-rnent, foreign portfolio investrnents, and so on) now swamp official flows. StilJ,this fact does not make ODA obsolete, because lhe private capital flows areheavily concentrated in middle-income countries and in low-incorne countrieswith high-value natural resources such as hydrocarbons, minerals, or preciousmetaIs. Private capital flaws bypass the world's poarest countries, whích lackthe basic infrastructure-c-roads, power, ports, c1inics, and schools-s-rhat isneeded to attract private investments in the first place. ODA is complementary

Poverty78

to private capital flows, and it rnust generally precede private flows into impov-erished regions. We should therefore think about using ODA to create thebase-in infrastructure, health, skills, and other necessary conditions-to

attract private capital.Similar points can be made about trade. An open trading system is essential

for economic development, including among the poorest countries.Developing countries need to import technology from abroad and must payfor that technology through their own exports. For this basic reason, export-led growth has been vital for economic success in recent decades. To achieveexport-led growth, poor countries need to maintain relatively open tradingsystems (featuring 10w to moderare tariffs and convertible currencies), whiJerich countries, including the United States, have to keep their own bordersopen to the exports of tne poor countries. However, even trade reforms such as

these cannot substitute for official development aid.

WHAT WORKS ANO WHAT DDESN'T WDRK W\TH DOAThe discussion 0[1 aid effectiveness is clouded by confusions, prejudices, andsirnple n\.isunderstandings. Many studies try to find a correlation betweenoverall aid and economic growth; when they find little positive corre1ation,they declare aid to be a failure. But the low correlation does not prove that aidis failing, since much of the aid is directed to countries in violence, famine, ordeep econorrUc crisis. lt ought not to be a surprise, therefore, that aid often cor-relates with "economic failure"-not because aid has caused the failure, but

rather because aid has responded to it.There has been vast development success internationally, including stunning

increases in average incomes, life e)(pectancy, child survival, literacy, schoolcompletion rates, and other gains, in most parts of the world. When we look atODA success stories, however, we find that aid is most successful when it isindeed used for development assistance. ln other words, the ODA tool trnly is

a development rool.Here are several greal success stories of development assistance:

• The Asian Green Revolution. During lhe 1950s and 1960s, theRockefeUer Foundation and other donors spurred the deve10pment ofhigh-yield seed varieties and new techniques for modernized farming.The U.S. Agency for International Deve10pment (USAID) helped tofinance the rapid uptake of these new technologies, including theimproved seeds, fertilizer, and irrigation. Dramatic successes wereachieved in the 1960s in India and pakistan, and later in China, SoutheastAsia, and other parts of the developing wor1d.

YES: JEfFREY D. SACHS 79

Smallpox Eradication. ln 1967 the World Health O' . . (bli rgarnzanon WHO)esta ished the Smallpox Eradication Unit and I h dd . aunc e a donor-supporte worldwide campaign to eradicate the di Bisease. y 1980 WHOwas able to declare rhe world free of smallpox. '

Family Planning. During the 1960s the U S gov . d vari... )" ernment an vanousorgaruzanons (including the Ford F dati. oun ation and the PopulationCouncil) launched a global effort to spread access t dt" b d . . o mo em contracep-IOn, ase on individual voluntary choices The uptake of thc ti h d . ese contra-e.p rve met o .5, supported by international and U.S. funding h b

widespread (th h 'U I ' as eenoug sn argely bypassing sub-Saharan Africa) Asresult of these actions, together with declining child I" adi li morta ity ratessp~ea mg teracy, and broader economic trends, fertility rates and o :lat~on growldthrates have declined sharply throughout most of the ~e~~-opmgwor .

The Campaign for Child Survival. In 1982 UNICEF I h d.. aunc e a cam-palgn to promote child survival, based on the powerful bikn G com inanon

v.bo astf OBro growth monitoring of children, oral rehydration ther-~py, re~s ~eding f~r nutrition and immunity to infectious diseases andimmuruzations agamst childhood killers. Backed by develop t'·I th kaze eni men assis-ance, e pac age .enjoyed a remarkably rapid uptake, enablin man of

the poorest countnes to reach at least 80 percent I' .. g ymmuruzanon coverage .

• Treatment for AlDS TB d Mal ., , an ana. After years of international ne -lect and underfmancing, international donors agreed to ste u theirac~ons tofight three killer pandemic diseases: AIDS, tubercutsi~ (TB)th, malana. At the urging of the then UN secretary-general Kofi Anna '

ey formed a new Global Fund to Fight AIDS TB d M I' n,) ) an a ana as ameans to pool their resources and invite countries to formulate nationalstrategies that would be backed by development aid. ln a period of onlfive years, the Global Fund successfuUy financed the access of more thanb rnillion HIV-rnfected individuals to antiretroviral medicines: the distri-uuolu of mo~e than 30 million bed nets (protective against m~squitoes);;1:y;n Afnca; and the treatment of more than 2 million individuais fo;

. t t re same time, the United States launched the PEPFAR (P id 'Emergen PI f AI resr ent scy an or DS Relief) progranl to extend AIDS .and tr' prevennon

eatment programs in low-income countries.

There are six crucial lessons in these development success stories:

First, the interventions are based oG

. h the rnai n a powerful, low-cost technologyrven t at e mam underivi Df'ymg orce o economic development is tech-

poverty

objectives that motivated the programs in the first place. Instead, the pro-grarns work on much more specific objectives, which can be measured,audited, evaluated, and reassessed as needed.

These six specific points all come down to one overarching lesson: be practicalwhen deploying development aid-understand the targeted inputs, the out-puts, the financing, and the objectives.

YES, JEFFREY D, SACHS 81

80

" h f Idevelopment assis-, ir is not surpnsmg t at success unologícal advance, I I d'ffusion of a powerful technology. such as

h' ica\ly invo ves tne Itance ryp .' d .n contraception. or Internethigh-yield seeds, immuJ1lzauons, mo er

connectivity.. I r to deliver based on standard-

S d the interventions are relative yeas) '. .ib d decon , h' Modern technologles are em o ie

ized protocols and local owners IPl' .e d livered on a specific timetable. ti s for examp e, ale e

in systems. Vaccma ton , . . ldin ds are deployed in specific pack-hildr d hlgh-yle g see

for young c en, an bi ti s of seed fertilizer, irrigation,, (ch as com ma 10n ,ages of farm mputs su 1'5 to deploy the technol-

l ion) The key to successand agricultura extension . b d .entifically sound. administra-ogy in a system that 15 evidence- ase ,SCI. I c ible and tailored to local condlt.lons.tive y reasi ,

. lied at the scale needed to solve theThird, the interventJOns are app I . th examples cited earlier was

. bl The key to success in eunderlymg pro em.. d ~I in technology, but rather thenot the demonstrat1On of the un e lr g hich it could make a díffer-

f th h logy at a sea e m w Ideploymeot o ie tec no . kn and once the expert system

. II th teehnology 15 own,ence. Typlca y,onee e . ibl building on zlobal strate-has been identified, rapid scale-up 15 pOSSl e, o

gies and local adaptation and suppor!. .. . e reliabl funded. Ali of the success stones

Fourth, the mterventlons ar . dY f 'years so that participatingd tl 5 over a peno o many ,

involve bu get ou ay d fin ' and therefore can estab-countries can be confident of sustaine . anemg'd ca acity-building.lish institutional systems and provide traL11L11gan P

. al d ing support from many gov~• Pífrh the interventions are multtlater , raWL11 hal-

1 , . The greatest development eernments and international agenCies. I k f i.nfrastructure-are

.t hunger dísease. ac olenges-ex.treme pover Y'. "in le donor country. Moreover, abeyond the financing capaclty of an) 5 g . f mall and disparate

fi . h congenes o 5 c

unified effort is more ef cient t .lo a d delivery meehanislTIs haveprojects, at least once the techno ogles an

been developed.. . uts oals and strategies, SO that

Sixth, the interventions have speClfic L11P , g :. . Ive clear stra!e-d Ali fthe success stones mvo

success rates can be assesse '. o . . hectares planted with high-gies sueh as coverage rates of ImmUl11ZatlOnS, b k They do not

, . I' f mallpox ou! rea s.yield seeds, and timely ISOauon o : ching goals-such as "eCO-directly aiJTI for excessively broad a11 overar. "or "end of terror"-

. .u » «; I of law," ar "democracy,nomic growth, or ru e . alTIOngthe i.ndirect and 10ng-ter01though broad goals sueh as rhese were

MODERNIZING U.S. DEVELOPMENT ASSISTANCE INlHE lWENTY·FIRST CENTURYDevelopment goals must be made clear and appropriate, the technologies mustbe identified, the systems for delivery must be assessed, and rhe multilateralfinancing must be assured. In this section, I consider eaeh of these aspeets ofV.S. governmental efforts to provide Official Developrnent Assistanee.

lhe Goals

The priorities for V.S. development assistance should be based mainly on ruedeveloprnent eommitments that the United States and the rest of the worldhave made in recent years, after considerable diplornatic and scientific discus-sions and negotiations. At the core of the effort should be the MillenniumDevelopment Goals, which are already the central organizing tool for mostdevelopment agencies and multilateral developrnent institutions around theworld. The MDGs have the profound advantage not only of specifying explicitand quantitative targets, but also of automaticaliy aligning U.S. efforts withthose of partner countries, thereby massively leveraging American resourcesand expertise. The foeus of the developrnent chailenge is in those regions stilltrapped in extreme poverty, or those places suffering extremely high burdensofhunger, disease, or lack of infrastructure. This means that U.S. efforts shouldbe mainly direeted toward sub-Saharan Africa, Central Asia, the Andeanregion, Haiti, and the remaining pockets of extreme poverty in South Asia,Development aid for middle-income countries (such as China, Brazil, andMexico) should be scaled back aecordingly, since these regions ean generallyfinance their own investrnent needs,

or each of the MDGs, there is a set of core interventions, based 011proven~Y-eost technologies that can spur rapid advances toward the goals. The UN

1UenniumProject, among other studies, has identified the powerful tools at

;J

. ,

82 Poverty

our disposal in each of the key areas of need. While much can be said abouteach area, the following recommended interventions should be noted:

Income poverty: microfinance; electricity generation (off-grid and on-grid); all-weather roads; access to cell phones and Internet; improvedpopulation health (see below)

Hunger: improved food production through the extension of "GreenRevolution" technologies (high-yield seeds, fertilizer, smal!-scale irriga-tion, agricultural extensíon services); micronutrient supplementation forVitamin A, iodine, zinc, and iron; nutrition interventions for low-weightchildren; school feeding programs. with take-home rations for pre-school-aged children

Universal school completion: construction of schools; training ofteach-ers; wireless Internet connectivity for (solar-charged) computers atschools; separate hygienic facilities for girls and boys; mid-day feedíng 'programs

Gender equality: time-saving infrastructure for rural women (water,power, mílls, and clinics, within reach of vil!ages); micro-fmance forwornen's groups, improved inheritance and property rights

Reduced maternal mortality: emergency obstetrical theatres in all sub-district hospitais; training of assistant medical officers (AMOs) to per-form emergency procedures; use of wireless phone systems to createemergency-response units for arnbulance services

Reduced child mortality: integrated management of childhood illnesses(IMCI), including diarrhea, malária, acute lower respiratory infection(ALRIJ, vaccine-preventable diseases, parasitic infectíons (worrns),micronutrient deficiencies, and expert systems for neonatal care;increased use of communíty health workers, supported by mobile phoneand Internet connectivity

Control of AIDS, TB, and malaria: packages of preventative and curativehealth services, such as access to medicines and universal protection byinsecticide-treated bed nets in the case of malaria

Universal access to family plarming and contraceptive services: logisticsand supply chain management for contraceptive availability; community-worker outreach to ensure access to family planning services and contra-ception on a voluntary basis

Safe drinking water and sanitation: application of modern hydrologicaltools to ídentify sustainable water sources, based 011 seasonaJ and annual


runoff, rainwater harvesting, sustainable use of groundwater, andimproved year-round water storage; investments in sanitation systerns,including septic tanks and recycling of hurnan and animal wastes in ruralareas, and piped wastewater treatment in urban areas

While there is much debate about "development assistance" in the abstract,there is near consensus on the use of aid to expand access of the poor to vitaland proven technologies. Aid-skeptic Wílliam Easterly, for exarnple, endorses

this approach:

Put the foeus back where it belongs: get the poorest people in tbe worldsueh obvious goods as tbe vaccines,the antibiotics, tbe food supplements,the improved seeds, the fertilizer,lhe roads, lhe boreholes, the water pipes,the textbooks, and tbe nurses. Tbis is not making the poor dependent 00

handouts; it is givioglhe poorest people the health, nutrition, education,and otber inputs tbat raise lhe payoff 10 their own efforts to better their

líves.?

lhe Delivery Systems

Much is made of the difficulty of delivering such technologies to the poor-focusing on perceived high risks of corruption, misrnanagement, and otherdelivery failures. Yet such fears have been shown time and again to be mis-placed as long as the aid is practical, subject to monitoring, adapted to local cir-cumstances, endorsed by local communities, and embedded in a sensible deliv-ery system with audits and evaluation. In recent years. enormous successeshave been achieved in the mass distribution of anti-malaria bed nets, the massscale-up of new vaccines (through the Global AUiance for Vaccines andImmunizatíons), the mass treatment of children for worm infections, the massincrease in primary-school enrollments and completion rates by eliminatingschool fees, and the mass access of farmers to high-yield inputs throughvoucher systems. In ali of these cases, success has resulted from transparency,specificity, accountability. and auditing of delivery systems.

The Financing

The basic principies of fmancing are clear, Pirst, donor aid should be directedat communities and regions that cannot fund their own development efforts.As the Monterrey Consensus rightly noted, this means an emphasis on the leastdeveloped countries, particularly on sub-Saharan Africa as a major focus forfínancing. Second, aid should avoid program designs that aim to have thepoorest of the poor pay for vital services. Attempts to seI! bed nets or health

. ,

84 Poverty

insurance or medicines to the poor have inevitably led to lhe exclusion of largeparts of the population (especially iu rural areas) from coverage. Third, donoraid should be a mix of bilateral and multilateral initiatives, divided roughlyhalf-and-half. The United States will not, and should not, aim to fund thedelivery of services on its own; such efforts should reflect a pooling ofbilateral(that is, governmental) donors, international organizations, the private sector,and private philanthropy (including foundations and individuais). In somecases, such financing mechanisms already exist, but il1other cases they need tobe created. Here is a quick rundown.

• 'Hea\th financing. The Global Fund to Fight AIDS, TB, and Malaria(GFATM) has become the most effective instrument for multilateralfinancing. The United States should increase its contributions to theGFATM, in conjunction wirh increases by other donor partners. There arecurrently three "windows" at the Global Fund (for the three diseases). Atleast two new funding windows should be opened: one for "health sys-tems" (nurses, community health workers, clinic construction and facili-ties) and one for other readily controllable "neglected tropical diseases"(soil-transmitted helminthes, lymphatic filariasis, trachoma, onchocerci-asis, and schistosomiasis),

• Education financing. The Education-for-All (EFA) initiative of theMillennium Development Goals is backed by a Fast Track Initiative (FTI)that is largely funded by the United Kingdom. The United States shouldjoin the U.K. and other donors in ensuring full fmancing for EFA-FTI.

• Agriculture financing. There is an urgent need for increased multilateralfinancing for improved agricultural productivity and food production ofsmallholder subsistence farmers in sub-Saharan Africa and other hungerhotspots. The Gates and Rockefeller Foundations have recently estab-lished an A1liance for a Green Revolution in Africa (AGRA), with initialfinancing of $500 million. The World Bank and the International Fundfor African Development (IFAD) are prepared 10channel increased assis-tance to smallholder agriculture, but so far they lack the requisite backingof donors to do so at the needed scale.

Infrastructure financing. Some infrastructure, notably telecommunica-tions and Internet cannectivity, is being expanded rapiclly on the basis ofprivate-secror investments. Other infrastructure, including roads, power,ports, and large-scale urban warer and sanitation systems, will requirevery substantial public financing. Currently, infrastructure financing isprovided in a somewhat haphazard way by a variety of donors, including


bilateral donors, the cancessionary financing window of the World Bank(the International Developrnent Association, [DA), the regional develop-ment banks, lhe European Investrnent Bank, and others. There is no over-ali coordination to ensure that total financing is in line with total needs.What is needed, therefore, is a new pooled fmancing system for criticalinfrastructure, especially for sub-Saharan Africa-and the United Statesshould pia)' an important role in developing that systern.

THE STRUCTURE DF U.S. DEVELDPMENT ASSISTANCEThere is a strong case for moving U.S. development assístance to a new, sepa-rate, cabinet-level Department for International Sustainable Development(DflSD). The new department would house the existing USAID, PEPFAR, thePresident's Malaria Initiative, the Millennium Challenge Corporation, andemerging initiatives in climate change, especially vis-à-vis the developingcauntries. The case for a separate department rests on tbe following principIes:

The need to upgrade U.S. development assistance as a pillar of U.S.national security

The need to improve U.S. government rnanagement and expertise in pub-lic health, climate change, agronomy, .demography, environmental engi-neering, and ecanomic development.

The need to work effectively with similar cabinet-level departrnents andministries in partner countries.

The need to depoliticize development assistance, so that it can be directedat the long-term investments that are critica! in lhe fight against poverty,hunger, disease, and deprivation.

• The need for coherence of U.S. policies that irnpact international sustain-able development, including ODA, trade relations with low-incamecountries, efforts on climate-change adaptation and rnitigation, andefforts 011global public health and disease control,

The current system, in which USAID is a part of the Departrnent of State, isfailing. V.S. aid is excessively politicized by connecting aid with short-term for-eign policy exigencies (such as the war in lraq and the Israel-Palestine crisis).It would be very useful to msulate development aid fram such short-termdiplomatic pressures. Moreover, USAlD has been gutted of much key talentand staffing, and the U.S. government is currently unable to attract the bestyoung experts in development fields-and it will remain unable to do so until

86 Poverty

the status of sustainable development within the government is improved. Theorganizational upgrade in the United Kingdom from a mere subcabinet devel-opment agency (the Overseas Development Administration) to a cabinet-Ieveldepartment (the Department for International Developrnent, DflD) has dra-matica!ly increased that nation's standing, reputation, and expertise in the areaof internationa! development. DflD is far abeael of USAlD as a global tbougbt-leader in elevelopment policy, anel Dfl D's departmental rank is playing a keyrole in tha t success.

The new U.S. cabinet -levei departrnent woulel have severa! specific tasks inits start-up years, in aelelition to the elevelopment cba!lenges already descríbed.DtlSD would bring together countless aiel programs now strewn in a eliscon-necteel way across the U.S. government. It woulel bolster technical competence(in hea!th, agronomy, engineering, climate, hyelrology, finance, anel other areasrelated to sustainable development), and it would fíx the procurement andcontracting systems, widely regarded to be broken. lt would promote résults-based aid elelivery, with monitoring, accountability, and audits. DflSD wouldbe much better placeel than USAlD to work with counterpart Ministries ofInternational Development and to coordinate multilateral efforts. DflSDwould promote partnerships with civil society and the private sector.Businesses, especially, would be encouraged to utilize their technologies (ínsectors such as health, agriculture, energy, logistics, finance, and ICT) in part-nership with the U.S. government anel multilateral agencies.

THE FINANCING DF U.S. DEVELOPMENT ASSISTANCE INlHE NEXT ADMINISlRATlONThe current levei of worldwide official development assistance--rougbly $100billion per year, of which roughly $25 billion is directed to sub-SaharanAfrica-is widely and repeatedly acknowleelged-by the United Nations, theG8, and the donor countries in the OECD Development AssistanceCommittee-to be inadequate to support the achievement of the MillenniumDevelopment Goa!s. This is a very important point for U.S. politicalleadersand the broaeler public to recognize. The global community, inclueling the U.S.anel other governrnents, have repeatedly acknowledged the need for muchmore aiel anel promised significant increases. Yet the administratíon andCongress have not yet elelivered on those prornises, most importantly the com-mitments maele in Monterrey, Mexico, in 2002 to support the MDGs:

Werecognizethat a substanrial increasein ODAand other resourceswillbe required if developing countries are to achieve the inrernationallyagreeddeveloprnent goals and objectives, including thosecontained in theMillennium Declaration.!

YES: JEFFREY D. SACHS 8;

Ttwas in that context that the countries agreeel to rnake concrete efforts tomeer rhe 0.7 percent target. The recognition that much more aiel is needed hassince been reiterateel on severa! occasions-at the G8 summits, the UN WorlelSummit in September 2005, and several follow-up UN General Assernbly ses-sions anel special meetings 011 the MDGs. Many significant studies, includiogthose of the UN MiUeonium Project and the Africa Commission (launched byBritain's then prime minister Tony Blair), outlined bottom-up estimates of thecosts of achieving the MDGs. The UN Millenniurn Project found that theOECD-DAC elonors would neeel to contribute arounel 0.54 percent of GNP asof 2015 in order to co-finance the MDGs on a global basis. Since ODA will beneeeled for other purposes as well-such as disaster relief 01' post-reconstructionfinancing-the UN Millennium Project recommended that elonor countrieshonor their commitment of 0.7 percent of GNP, in oreler both to enable sue-cess in the MDGs and to meet other challenges that will surely arise.

The overwhelming problern is that, until now, these repeated pledges havenot been fulfilled. Real cash flows of ODA have hardly risen since 2004, espe-cially taking into account global inflation anel exchange-rate movements,While Presielent George W. Bush promiseel in 2002 that the MilIenniumChallenge Account would be funded at the levei of $5 billion per year by fis-cal year 2006, in fact the funeling has been under $2 billion per year. Poorcountries, unsure whether the prornises will ever be fulfilled, are therefore notable to plan for the future, and they are certainly not able to rely on pledges tomake rnultiyear investment decisions, inclueling investments in capacity andtraining.

The United States shoulel now join the European Union in setting a specifictirnetable for increasing aid through the period to 2015. The United Statesshoulel comrnit to reach 0.5 percent of GNP no later than 2012, anel 0.7 per-cent of GNP by the year 2015. Such a guaranteeel scheelule of aid would under-pin global success in achieving the Millennium Development Goals by 2015,anel would put the worlel on a trajectory to achieve the end of extreme povertyby the year 2025 (as I have elescribeel in The End of Poverty4). Of the total aidpackage, roughly half the U.S. aid should be allocated through multilateralchannels (such as IDA; the Global Funel to Pight AIOS, TB, anel Malaria; anel aoew Global Fund for African Agriculture), and roughly half should be allo-cateel through U.S. bilateral initiatives (such as PEPFAR, the President'sMalaria Initiative, anel other effective programs).

In closing, it is well to rernember the worels of General George Marshall in1947 in launching the concepts of the worlel-changing Marshall Plan-wordsthat can help us to find a way to a renewed motivation anel success in U.S. for-eign policy. The rationale of the Marshall PI.n, one of the most successful U.S.foreign policy initiatives in history, resonates today:

poverty88

It is logical tnat the United Sta\alesshould dl~e::~:t~~e~hi;::~~, ~~i~~O~~assist in the return of norrn: economlC rwhich there can be no political stabilityanelno assured peace.ou~ 1'0:cy

. , aainst an country or doctrine but agamst - Ul1oel,IS directed not ao Y ur ose should be lhe revival of a

poverry, desperanon ::ed\::r~~s~:: ~o;rmit the emergeoceof politica\

:~~~:~a~c~::~;o"~s in which free institUtiOn::la~~~:t~:Uv~~i~~:s~;;~:;I arn convil1ced, must not be on a plecem . I fu .develop. Any assistance that this Govermnen,t ~1aY5render m t ie tureshould provide a cure rarher than 'l mere palhatlve.

NO: George B, N, Ayittey, Amerícan Uníversity

, , ' ense economic potential and, yet, faltering

A~~::~::;r~:r~::,a~:~i~~gnS of recent GProgre~s~:i:~~~V::r::::. bl k F rrner UN Secretary- enera .

prospeets remam eax, O . . , Ab 'a Nigeria that Afriea was fail-. 005 Afn n Union surnmrt m U), 'the )anuary 2 ica G I (MDGsl This warning was

. M'll . m Developmenl oa s • 'ing to meet its I enmu , d N' ,. frican Development director,

I by the Unite ations lUeehoed two years ater '11 ,"Th [Airicanl continent wil! fail to

, H bo.j 1Congo-Brazzavl e, eGilbert oung o, u .: I lf b 2015" IIn reeent years, however,reach the goal of slashing poverty m ia Y , Af" 's ai'd

. . h bilized to come to rtca 'tbe internatlonal eommllluty as mo d G8 leaders pledged to write off $40

Ina2005meetinginGleneagles,Seotla~ "d Afri (to $50biliion) by2010.billion of poor nations' debts and to ,doubHeaill to daJn

IC: Germany, Chancellor

th G8 sumrmt m e Igen ,

~:eiae~:r~;~r~g:~n p~aced debt reli~f a:':f ~o:~ s:~~st::r~;::e~~;~:~~;s~~ !~agenda, Elsewhere, a eacophonous ga aX) I' li tion of Airiea's crip-Airiean heads of state ar~ de~e~dia:gd mZ~~~::t e:~e:h: promises rnade inpling $350 billion for; gnAfri (By )une 2007, only 10 percent of those prom-Gleneagles to double ai to rca. d I d 2007 to be the "year for Afriea:'

b ali d.) Also Cluna ee areises had een re rze ' '. f Afriea's plight appears to followA cynic might note that all rhis eoncern °dr k eoncerts are held to

, d fi' I Every deca e or so, roca ten-year attentlOn- e icit eye~. f Africa's woes (starvation, war, refugees,whip up mternauonal compasSlOn or b . nious wrmgling over

. I sare drawn up, ut aenmoand disease): mega-p an . b d the eampaign fizzles. A deeade

. d I" ensues: yeaIS slip y, an " .fmanem" mo a It,es, . B I' 1985 tbere was Live" Afri . itiative is unveJled. ac ( 111 ,. .later, another grand nca in ." held b the United Nations to boost aidAid" and a "Special SesSlOnon Afrlca Yl d $25 billion "Special Initia-to Afriea. Tnen, io Mareh 1996, the UN launc te a

.'

NO: GEORGE 8. N. AYITTEY 89

tive for Africa." Witb c1ockwork preeision, the plight of Afriea again took cen-ter stage at a UN conference in Septernber 2005. Expect anotber major initia-tive in 2015.

The "more-aid for Africa" campaign has beeome so steeped in emotional-ism, overt racial sensitivity, and guilt (over colonial iniquities) that pragma-tism, rationality, and efficiency have been sacrificed, 50 many Western govern-ments, development agencies, and individuais have tried to help a continentand its people that they do not understand, More than $450 billion in foreignaid-the equivalent of six Marshall Plans-has been pumped into Africa since1960, with negligible resuJts. HelpingAfriea is a noble exercise tbat has beeomea tbeater of the absurd, in which the blind are leading the clueless,

lt may sound uncaring, but the truth is that Africa really doesn't need for-eign aid, In faet, the resourees it desperately needs ean be found in Afriea itself,Providing more aid to Afriea is akin to pouring more water into a bueket thatleaks horribly--obviously, plugging the leaks ought to be the first order ofbusiness. But even then, the provision of more foreign aid wil! make little dif-ference unless it is coupled with meaningful refonn. So far, African leadershave shown little interest in reforming their abominable politieal and eco-nomic systems.

AFRICA'S LEA'KY BEGGING BOWLAfrica has the resourees it needs to launcb self-sustaining growtb and prosper-ity. Unfortunately, the problem has been a leadership that is programmed tolook only outside Afriea -principally to the West-for sueh resources. Theresult has been hopeless dependency on foreign aid. When the African Unionunveiled theNew Economie Partnership for African Development (NEPAD) in2000, it was trumpeted as "Africa's own initiative," "Afríca's Plan," "African-crafted," and, therefore, "African-owned," NEPAD talked of "self-reliance" andargued forcefully that Africans must be "masters of their own destiny." Still, itsought $64 billion in investments from the West. The partnership's fate wassealed when, seven years after its launch, Senegalese President AbdoulayeWade-one of the arehiteets of NEPAD-dismissed it as "a waste of time ofmoney which had failed to produce concrete results," 2

At a workshop organized for the Parliamentary Sub-Conunittee on ForeignAffairs at Ho, Ghana, Dr, Yaw Dzobe Gebe, a fellow at the Legon Center forInternational Affairs at the University of Ghana, stressed tbe need for theAfrican Union to look within the eontinent for capital formation to build aviable continental union witb less dependency on foreign aid: "With an accu-mulated foreign debt of nearly $350 billion and estimated capital requi.rement

> \

90 Poverty

of more than $50 billion annuaUy for capacity building, it is time Africa begins

to look within for capital formation. Experience in the last 40 years or more of

independenee and association with Europe and America should alert Africanleaders of the fact that there are very limited benefits to be derived from benev-

olence of the deve!opment partners."?An irate Namibian, Alexaetus T. Kaure, weighed in:

What I want to talk about is the uncritical belief-especially by Africanleaders-that somehow Africa's salvation and development will comefrom outside. This state of affairs has in turn led to the development of anumber of industries in Europe and North América to reinforee and sus-tain that be!ief. ... Yau would always hear of a eonferenee on Afriea, forAfricans bul not by Afriean" to diseuss this or that issue, being heid inplaees like Paris, London, Stoekholm, Washington, Toronto and, ofcourse, Brussels. And as you are reading this piece now, there is one goingon in Brussels-termed EU-Africa Week. This eonference will discuss arange of issues such as (goad) governanee, social rights, corruption,inegualities and-vulnerable groups and the role af the media in develop-ment among others.

Now most of these issues don't need a roeket scientist to actualize themand thus there is no need for these endless eonferenees. To make thingseven worse, the very same people who are supposed to implernent mostof the good praetices in their countries and who are either unable arunwilling 10, are the anes frequenting these conferenee halls. For them, ofcourse, it's just another short holiday and opportunity for shopping and abit af extra cash through S&T (per diern)."

Africa's investment process may be compared to that leaky bucket. The levei

af the watet therein-GNP per capita-is determined by inflows of foreign

aid, investment, and export earnings relative to outflows or leakages of imports(food, luxury consumer items), corruption, and civil wars. In 2005 Afriea's bal-

ance of payment situation showed a payment defieit of $21.7 billion. Thisdeficit had to be financed by new borrowing, which would increase Africa's for-

eign debt, or by the use of reserves, which were nonexistent for most Afrícancountries. This number, however, does not teli the fulJ story. Hidden from view

was a much grimmer story-Ihe other, more serious leakages.According to one UN estimate, "$200 billion or 90 percent of the sub-

Saharan part of the continent's gross domestic product (much of it illicitlyearned), was shipped to foreign banks in 1991 alone."5 Capital flight out ofAfrica is at least $20 billion annuaJly. Part of this capital flight represents wealthcreated legitimate!y by business owners who have little faith in keeping it inAfrica. The rest represents Ioot stolen by corrupl African leaders and politi-

NO: GEORGE B. N. AYITTEY 91

cians. Former Nigerian Presidem Olusegun Obasanjo charged that corrupt

African leaders have stolen at least $140 billion (f95 billion) from their peoplein the decades since independence.v

Foreign aid has no! been spared, either. Said The Economist; "For every dol-lar that foolish northerners lent Africa berween 1970 and 1996,80 cents flowed

out as capital flight in the same year, typically into Swiss bank aecounts or tobuy mansions on the Cote d'Azur," 7 At the Commonwealth Summit in Abuja,

Nigeria, 011 December 3, 2003, former British secretary of state for interna-tional development, Rt. Hon. Lynda Chalker, revealed that 40 percent of wealthereated in Afriea is invested outside the contínenr. Chalker said African

economies would have fared better if the wealth created on the continent wereretained within: "If you can get your kith and kin to bring the funds back and

have it invested in infrastructure, the economies of Afriean countries would bemueh better than what there are today," she said.f

On Oetober 13,2003, Laolu Akande, a veteran Nigerian freelance journalist,wrote:

Nigeria's foreign debt profile is now in the region of $25-$30 billion, butthe president of the Institute of Chartered Accountants of Nigeria, ICAN,Chief [aiye K. Randle, himself an eminent accountant and social com-rnentator, has now revealed that individual Nigerians are currently lodg-ing far more than Nigeria owes in foreign banks. With an estimate he putat $170 billion ít beeomes immediately elear why the quesl for debt for-giveness would remain a far-fetched dream.?

In August 2004, an African Union report claimed that Africa loses an esti-

mated $148 biUion annually to corrupt praetices-a figure that represents 25percent of the continent's Gross Domestic Produet (GDP). "Mr. Babatunde

Olugboji, Chairman, Independent Advocacy Project, made this revelation inLagos wbile addressing the press on the survey schednled to be embarked upon

by the body to determine the leve! of corruption in the country even thoughTransparency International has rated Nígeria as the second most corruptnation in lhe world." 10 The pillage in Nigeria has been massive.

Mallarn Nuhu Ribadu, the chairrnan of the Economic and Financial CrimesCommission, set up three years ago, said that f220 billion ($412 billion) was"squandered" between independence fr0111 Britain in 1960 and the return ofcivilian rule in 1999. "We cannot be accurate down to the last figure but that isOUI' projcction," said Osita Nwajah, a commission spokesman.! The stolenfor:une tallies almost exactly with the f220 billion of Western aid given toAfrica between 1960 and 1997-a sum that amounted to six times the U.S. helpgiven to postwar Europe under the Marshall Plano

,\

Poveny

To be fair, upon assuming office, former President Obasanjo vowed torecover the funding Iooted by forrner head of state, General Sani Abacha.Obasanjo established the Corruption Praetices and Other Related OffencesCornrnission, and much publie fanfare aeeompanied the announcement thatthe sum of about $709 million and another $144 million had been reeoveredfrom the late Abacha's fami.lyand his henehmen. But, apparently, this recoveredloot was itself quiekly relooted, for the Senate Publie Accounts Committeefound only $6.8 million and $2.8 million of the recovered booty in the CentralBank of Nigeria (CBN).12 Uti Akpan, a textiles trader in Lagos was notimpressed: "What baffles me is that even the money recovered from Abacha hasbeen stolen. If you recover money frorn a thief and you go baek and steal themoney, it means you are worse than the thief." 13

Baek in the late 1980s, Sammy Kurn Buo, director of the UN Center forPeace and Disarmament,lamented that "Afriea spends about $12 billion a yearon the purchase of arrns and the maintenance of the arrned forces, an amountwhieh is equal to what Afriea was requesting in financial aid over the next 5years," 14Sinee then, this amount has inereased for alI of Afriea: "ExcludingSouth Africa, spending on arms in sub-Saharan Africa totaled nearly $1I bil-lion in 1998, if military assistanee and funding of opposition groups and mer-eenaries are taken into aeeount. This was an annual inerease of about 14 per-eent at a time when the region's economie growth rose by less than 1 percentin real terms .."IS Total expenditures on arms and militaries exeeed $15 billionannually.

Civil wars continue to wreak devastation on Afriean economies. They costAfriea at least $15 billion annually in lost output, wreekage of infrastructure,and refugee crises. The crisis in Zimbabwe, for example, has cost Afriea dearly.Foreign investors have fled the region and the South African rand has lost 25pereent of its value sinee 2000. More than 4 million Zinlbabwean refugees havetled to settle in South Africa and the neighboring countries, and the SouthAfriean government is preparing a military base at Messina to house as manyas 70,000 refugees. Sinee 2000, almost 60,000 physicians and other profession-ais have left Zimbabwe.l" Aecording to the London Observer, Zimbabwe's eeo-nomic collapse eaused $37 billion worth of damage to South Afriea and otherneighboring countries.'? South Afriea has been worst affected, whi.leBotswana,Malawi, Mozambique, and Zambia have also suffered severely,

Finally, the neglect of peasant agriculture, the uprooting of farmers by civilwars, devastated infrastructure, and misguided agricultura! policies have made itdifficult for Afriea to feed irself Therefore, Afriea must resort to food imports,spending $15 bi.llion in 1998. By 2000, food imports had reaehed $18.7 billion,slightly more than donor assistanee of $18.6 billion to Afriea in 2000.18

NO: GEORGE B. N. AYITTEY 93

Table 1 offers a breakdown of how Afriea loses money (and how much). Asthe table shows, the amount of leakage grossly overshadows the $64 billionNEPAD sought in investrnents from the West. It is apparent that if Afriea eouldfeed itself if the senseless wars raging on lhe continent would cease, if the eliteswould invest their wealth=-legitimate or ill-gotten-in Africa, and if expendi-tures on arrns and the military were reduced, Afriea could find within itself theresources it needs for investment. In fact, more resourees could be found if cor-rupt leaders would disgorge the loot they have stashed abroad. This dual per-spective suggests a new way to approaeh the investment issue: plug lhe leakagesand repatriate the booty that has been boarded abroad.

MONUMENTAL LEADERSHIP FAILUREThe enti.re foreign aid business has become a massive fraud, a huge scandal,and a eharade. The donors are being duped-and, in rnany instances, theyknow it. As Patricia Adams of Probe International, a Toronto-based environ-mental group, charged, "In most cases, Western governrnents knew that sllb-stantial portions of their 10a115,up to 30 percent, says the World Bank, wentdireetly into the pockets of eorrupt officials for their personal lIse."19Donorspretend that they are helping Af.riea in order to atone for the sins of colonial-ism and soothe their own conscience, and Afriean leaders pretend that they arehelping the people.

Monumental leadership failure remains the primary obstacle to Africa'sdevelopment. After independenee in the 1960s, the íeadership, with few excep-tions, established defective economic and polítical systems that set the stage forthe ruination of postcolonial Africa. The econornie system of statism (ordirigisme), with its plethora of state controls, created cbronie commo.dityshortages and blaek markets and spawned a culture of bribery and corruption,

Table 1

Causes of Alrica's loss of Money

:1(Cã-use :r-.:]'" i.

..CD;ruPtid~...~, Capita' fllijht...Fondimports·.,Expendlturesonarrns and the

CivilwardamageTotal 0ther leakages

source: Gcorge B. N. Ayittey, Africa Unchained (New Vork: Palgrave/Macmillan, 2005), 326.

1\,

96

no teeth and then sack the commissioner if he gets too elose to the fat cats(Kenya). Ask thern to establish democracy, and they will irnpanel a coterie offawning sycophants to write the electoral rules, hold fraudulent elections whileopposition leadeis are either disqualified or in jail, and returu themselves topower (Ivory Coast, Rwanda).

Ask them to privatize inefficient state-owned enterprises, and they will sellthem off at fire-sale prices to their cronies. In 1992, in accordance with WorldBank loan conditions, tbe Government of Uganda began a privatization effortto sell off 142 of its state-owned enterprises.In 1998, however, the process washalted twice by Uganda's own parliament because, according to the chair of aparliamentary select committee, Tom Omongole, it had been "derailed by cor-ruption," implicating three senior ministers who had "political responsibility." 21

The sale of these 142 enterprises was initially projected to generate 900 billionUgandan shillings or $500 million. However, by the autumn of 1999, the rev-enue balance was only 3.7 billion Ushs. ,

The reform process has stalled through vexatious chicanery, willful decep-tion, and vaunted acrobaties-all sound and fury but no action. Only sixteenof the fifty-four African countries are democratic; fewer than eight are "eco-nomic success stories"; and only eight have free and independent media.Without genuine political reform, more African countries will implode. Thecontinent is stuck in a political eul-de-sac.

BETTER WAYS DF HELPING AFRICASmart aid would be that which empowers African civil society and com-munity-based groups to monitor aid money and to instigate reform fromwithin. Empowerment requires arming these entities with information andwith the freedom and the institutional means to unchain themselves from thevicious grip of repression, corruption, and poverty. The true agents of reformare found outside government, not in "reforrnisr partnerships" with crookedgovernments.

Africa aljeady has its own Charter of Human and Peoples' Rights (the 1981Banjul Charter), which recognizes each individual's right to liberty and to thesecurity of his person (Artiele 6); to receive information, to express and dis-seminate bis opinions (Artiele 9); to free assoeiation (Artiele 10); and to assem-ble freely with others (Artiele l l ]. Though the Charter enjoins African govern-ments to recognize these rights, few do.

The institutional tools the African people need are these: free and independ-ent media (to ensure free flow of information); an independent judiciary (forthe rule oflaw); an independent electoral cornrnission; an independent central

Poverty

bank (to assure monetary stability and staneh capital flight); an efficienr, pro-fessional civil service; and a neutral, professional arrned security force. Eventsin Ukraine, Ghana, Zimbabwe, Lebanon, and Togo in 2004 and 2005 unerr-ingly underscore the critical importance of these institutions. Elections alonedo not make a country democratic; nor are democracies nurtured in a vacuum.What is needed is a "political space" in which the people can air .their opinions,petition their government without being fired on by security forces, andchoose who should rule themin elections that are not rigged by electoral com-missions packed with government cronies. This "space" does not exist in muchof Africa.

The institutions just listed could help to create this political space, and theirestablishment would solve the majority of Africa's woes, For example, the twoeffective antidotes to corruption are independent media and an independentjudiciary. But only eight African countries have free media in 2003, accordingto Freedom House. These institutions cannot be established by the leaders orthe ruling elites (because of conflict of interest); they must be established bythe civil society. Each professional body has a "cede of ethies," which shouJd berewritten by the members themselves to eschew politics and uphold profes-sionalism. Start with the "rnilitary code," and then the legal code," the "civilservice code," and $0 on. The military code shouJd debar soldiers from inter-vening in politics, mandating that they be court-marshaled for doing $0. Thelegal code should decertify corrupt judges who do not uphold the rule of law,and the civil service code should sack public servants who do not uphold pro-fessionalism. Assistance to the Bar Association or the Civil Service Associationto enforce their respective codes would be useful.

On May 13, 2006, thousands of Egyptian judges, frustrated by governmentcontrol over the jndiciary, threatened to thwart their country's September pres-idential elections by refusing to oversee polling unless they were granted fullindependence from the executive in their oversight of the processo "The insti-tutions are presenting Mr. Mubarak with an unexpected challenge from within,one that will be difficult to dismiss. The fact is, major changes in this countryare going to come out of those institutions, not from the streets," said AbdelMonem Said, director of the Aluam Center for Strategic Studies, a govern-ment-backed research and policy organízation.P Government-backed news-papers, long the officiai mouthpiece, have lately published articles deemedunfavorable to the government, says Hussein Amin, professor of journalismand mass communications at the American University in Cairo.

The seeming mutiny by the Egyptian judges presents an altogether different. ~nd, in many ways, more seríous challenge to a corrupt status quo than doesthe opposition movement. This is where smart aid would put its money. The

NO: GEORGE B. N. AYIITEY 97

Poverty

emerging technologyand politicalinstitutions

situation is dicey, however, as direct assistanee to Egyptian judges may consti-tute an "interferenee in the internal affairs of a sovereign nation." Fnnneling aidthrough Western-based NGOs is an option-about 36 pereent of C.nadian aidis so channeled-but those organizations can be expelled if they incur the dis-pleasure of an African government. They can be aecused of "spying" 01' engag-ing in subversive activities-eharges that were leveled by Russia againstFreedom House, a human rights group, in Ukraine and Kyrgyzstan.

But if, alas, direct assistance to Egyptian judges proves impossible, both thirdand fourth alternatives exist: the Bar Association in Egypt can be a conduit, or,if that is not feasible, Egyptians or Africans residing abroad could be the nextbest alternative. Many Africans in the diaspora are professionals, human rightsactivists, and reformers in exile. They understand conditions in their homecountries better than do the Western-based NGOs. Funneling covert aidthrough their organizations may yield great results. After ali, such was the case

with Soviet dissidents during the Cold War.The distinction between African governments and the people is important.

Narve EU officials think handing aid money to governments in Africa necessar-ily helps the people-a mode! they did not follow when dealing with the for-mer Soviet Union. There the West did not hand over money to communistregimes, nor simply cajole them to reformo Instead, assistanee to sueh groupsas Solidarity in Poland and the estabJishment of Radio Free Europe accelerated"the demise of the former Soviet Union. Why treat Africa differently? And how

about Radio Free Africa?The entire Western foreign aid program needs to be criticaUy evaluated-

not by Western or African government officials, but by people outside govern-

ment-before more money is wasted.

Is the Precautionary Principie an Effectivefool f~r Policymakers to Use in RegulatingEmergmg Technologies?

YES: Indur M Goklan U Si'NO' . Y" .. Department ot the ttitettot«, John D. Graham, Indiana University, and

Sarah Olmstead, Pardee RAND Graduate Schoo!

Globalization has brought not onl tec '.cal and electronic connecti Y hnoloqical mnovanon but closer physi-. ons as well Such lorces I d t hmatíon 01 knowledge a d . ea o t e rapid dissem-. n new technologies but m I

dlstribution 01 potentially harmlul and ' ay a so result in the globalgerms, and so on. The challen e lor ma catastrophic technologies, products,Ing how societies should 9 naglng new technologies is determin-ise and lear lor thei manage ernerqmq technologies that hold both prom-. .jor rneu own use and lor trade ab dIStolerable lor ne d roa ,as well as how much risk

Th w an untested technologies.e so-called precautionary pr: . I .ate a broad Iramework r mcip e ISone approach that attempts to stíp-

or considertno how soci t hnew technological risks O. e y s ould handle the onset

. ne version of the p t'ething 01 a . recau ronary principle-it ismrsnorner because there are ..

. nS:-essentially stipulates that in the cornpetinq .vleV'is on what it1Catlngthat a absence of solid scíentific information

new product or technology i I .e ot Caution a d . . s sa e, socrety should err on then prevent ItStntroductíon. The burden of prool, in short, is on

eXpressed h dere o not necessarily reflect those of the U.S. Department of the 'Interior.

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