Interesting books

If you want to better understand how economic development work and how to explain that in the last decades some countries succeed to develop and other remain in the poverty trap, I give you as advice to read the following two books:

• Chang Ha-Joon, Bad Samaritans. The Myth of Free Trade and the Secret History of Capitalism, New York, Bloomsbury Press, 2008

• Reinert Erik S., How Rich Countries Got Rich... and Why Poor Countries Stay Poor, New York, Carrol And Graf, 2007
  

These two books look at history to show some lesson that we can learn on development and its relationship with trade. The two authors go beyond models and provide a clear analysis rooted on reality. What is more, both have a direct experience on how economies and economic development work. In fact, Reinert worked in the private sector as entrepreneur and Chang grew up in the middle of the “Korean Miracle”. Their experience and thinking outside the box is very valuable because they support their arguments with precise examples and historical analysis.

Both authors give me some hope that economics will stop to be highly dependent on ideological assumptions and supporter by mathematical models that oversimplify the reality and have as a main function to show this king of economics as scientific.

economics books trade and development

Some thought on globalization: How to define it?

[…] Two periods, the 1840s and the 1990s, experienced the strongest faiths ever in the market as he only way to ensure harmony and development. In the 1840s this phenomenon was called “free trade”, today the same phenomenon is called “globalization".
Erik S. Reinert (Reinert, 2007, p. 56)

Many definitions try to find out the essence of the globalization. This concept is still, however, far to be clear.

One way to avoid that the concept can be used to explain everything is to give a quite narrow definition. We can define it, as Drezner do, as

the cluster of technological, economic, and political process that drastically reduces the barriers to economic exchange across borders. (Drezner D. W., 2007, p. 10).

This definition show the crucial element of the current globalization phase that many actors called neo-liberal.

What is missing in this definition is that it does not underline that globalization it comes from and is developed by political and economic decisions of some actors that are in constant struggle to define the future world. It is important to view “globalization as a dialectical process” as Birchfield did (Bichfield, 1999, p. 30). In fact, as Payne underlined (Payne, 2005, p. 30), even if globalization can be seen as a massive shake-out of societies, economies, institutions of governance and world order, “the direction of shake-out remains uncertain, since globalization is understood as a long-term historical process characterized by contradictions, shaped by conjunctures and contested by increasingly aware and hostile political forces”.

Moreover, many globalization definitions are based on technological changes that enable people to be more closely connected. The problem with such kind of definitions is that they understand technology as an external variable with a unidirectional impact on societies. Nevertheless, as Cox underlined, “it is more realistic to see technology as being shaped by social forces at least as much as it shapes these forces. Technology is the means of solving the practical problems of societies, but what problems are to be solved and which kind of solutions are acceptable are determined by those who hold social power” (Cox, 1987, p. 21).

References

Bichfield, V. (1999). Contesting the hegemony of market ideology: Gramsci's "good sense" and Polanyi's "double movement". Review of International Political Economy , 6 (1), 27-54.

Cox, R. W. (1987). Production, Power and World Order. New York: Columbia University Press.
Drezner, D. W. (2007). All Politics is Global. Explaining International Regulatory Regimes. Princeton: Princeton University Press.

Payne, A. (2005). The Global Politics of Unequal Development. Houndmills et New York: Palgrave Macmillan.

Reinert, E. S. (2007). How Rich Countries Gor Rich ... and Why Poor Countries Stay Poor. New York: Carroll & Graf Publishers.

globalization definition

Multilateralism is not a goal per se

Many scholars place at the center of their analysis the role of multilateralism. The last example that I red was a post from Richard Baldwin that considers regionalism only as a risk for multilateralism without thinking on its impacts on sustainable development.

Multilateralism should not be a goal per se but a governance tool to achieve sustainable development. It is true that, often, bilateral relations are more asymmetrical. Nevertheless, we should not forget that multilateralism is not a perfect democracy system: power asymmetries matters.

Even if the presence of a bad multilateralism is probably better than its absence, we should maintain our criticism regarding its function and how it works in the reality. In fact, as Cox underlined (1992, p. 496), in the post-World War II,

[…] economic multilateralism meant the structure of world economy most conductive to capital expansion on a world scale; and political multilateralism meant the institutionalized arrangements made at that time [after World War II] and in those conditions for inter-state cooperation on common problems. There was, for some people, an implicit compatibility, even identity between economic and political aspects of multilateralism: political multilateralism had as primary goal the security and maintenance of economic multilateralism, the underpinning of growth in the world capitalist economy.

Furthermore, the main goal of economic multilateralism was to ensure growth in developed countries even if this depended on keeping developing countries in a poverty condition. The problem is that there is not alternatives to multilateralism even if South-South regionalism can help to solve some problems. We can only try to reform it.

In fact multilateralism is still crucial because, as Cox (1992, p. 492) pointed out:

multilateralism can only be understood within the context in which it exists, and that context is the historical structure of world order. But multilateralism is not just a passive, dependent activity. It can appear in another aspect as an active force shaping world order

Multilateralism it is not good per se. It should be assessed against another normative principle: sustainable development.

Economic multilateralism, if we use this kind of assessment, does not achieve spectacular results in the last decades. In fact, it does not avoid the rising asymmetries and inequalities at the world scale. What is more, the only countries that succeed in economic development (i.e. emerging countries) did it by breaking many multilateral rules (WTO agreements, World Bank advises, etc.).

Nevertheless, now multilateralism is changing. The rise of emerging countries change the power equilibrium in global governance institutions. In another post, I will try to assess if this phenomenon is positive or negative for others developing countries.

Bibliography

Cox, R. W. (1992), Multilateralism and world order. Review of International Studies , 18 (2), 494-523

multilateralism global governance emerging countries

WTO Agricultural Negotiation Update

Yesterday, the WTO released the following news on the advances of agricultural negotiations of the Doha “Development” Round:

Intensive consultations among a group of importing and exporting countries will be allowed to continue for a few more days in an effort to achieve a breakthrough that would also allow progress in the agriculture talks as a whole. By 31 March or earlier New Zealand Ambassador Crawford Falconer, who chairs the talks, will reconvene multilateral talks so that representatives of the full membership can negotiate the outcome and continue with other major issues, leading to a revised draft blueprint of the final deal. That is what he concluded after hearing members’ comments on 14 March 2008.

For more information and to listen Mr Falconer declarations go to this WTO page.

We will see if this process will create a breakthrough in the negotiations. Personally, I am not very confident that this will happen at least for two reasons:

1. There are still a large amount of issues where Members have very far positions.
2. An important number of Members (e.g. the US) have not enough political will to agree on the necessary concessions.

Furthermore, in the last seven years I heard many times that a breaktrough was feasible and that they will respect a dedline that they agree. Almost every of these deadlines were posponed. They lose their credibility. Nevertheless, a miracle or a surprising outcome it is always possible as the Uruguy Round showed us.

WTO global governance agriculture

Why Education Development Programs tends to be useless?

Development aid community has been investing large amount of resources (even if they decreased the last decades according to Heyneman, 2006) to improve the education sector in developing countries. Education development programs often fail to improve growth and economic development. This post aim is to give some thought, based notably on Erik. S. Reinert ideas, to understand the reasons of this failure.

The Millennium Development Goal number two states:

Ensure that all boys and girls complete a full course of primary schooling

Of course, this is a very important goal from an ethical point of view. Nevertheless, when we invest resources in a goal we need to assess if it will create a sustainable development path and if it is the most effective investment, from a developing country that lack of resources, to achieve development goals.

In this case, our assessment is that primary education is not the most effective way to start a sustainable development path. In fact, as Heyneman (2006) underlines:

The source of the problem lies within the development education community itself. The development education community chose to adopt a simple ideology with respect to Basic Education-for-All at the expense of many other important education sector objectives.

According to this author, the reason is that many donors lost interest because they need to focus only on primary education. In fact, often this paradigm is translated in investing all the education resources in primary education without investing in universities.

Also in this case, a general MDGs criticism is pertinent. As Chris Blattman pointed out in a post:

These goals, while laudable, are humanitarian rather than development goals. To reach middle income status and a sustainable social safety net, the least developed countries will require manufacturing jobs, a growing services and technology sector, rising real wages, and a broadening tax base. Such transformation has been historically urban, and historically narrow and unequal, at least at first.

If we look at the reality, a country with all people with only primary education will never succeed. In fact, this is a country with only low skills workers that will continue to work in decreasing return industries (as agricultural commodities and sweatshop). Such a country will totally depends on transnational companies to create jobs. The problem is that this kind of strategy without a link with national industry development: it is a recipe for failure. A country to achieve development should have very diversified workers. What is more, a country to develop should have high-educated people with new ideas, entrepreneurship, and skills. Only these kinds of workers can start new profitable business, create jobs and increase a country wealth.

We see, for example, that India succeeds to develop in high profitable sectors because they invested in valuable high education. They had a chance to have smart decision-makers that in the 80s refused to follow the World Bank advice to renounce of their universities and focus their resources in primary education. If they followed this advice, we have never seen the "Bangalore Miracle".

This does not mean that it is enough to invest in high education (and in particle primary education) to achieve development. A country should also provide work opportunities for its graduates. If it is not the case high education will only increase migrations that will profit developed countries.

Education should be part of a broader development strategy. The problem is that, as Heyneman shows, education development community evaluate its success or failure on their sectoral objectives criteria (increase of educated people). What is needed, however, is to assess the impact of these programs on their sustainable development contribution. It is useless to have more educated people that are still poor because they have any job opportunity.

References

Heyneman S. P. (2006), The Effectiveness of Development Assistance in Education: An Organizational Analysis, Journal of International Cooperation in Education, Vol.9, No.1, pp.7 -25

Reinert Erik S. (2007), How Rich Countries Got Rich... and Why Poor Countries Stay Poor, New York, Carrol And Graf

development aid foreign international education ODA political economy heterodox

What role plays agriculture in economic development?

In 2007-2008 agriculture became once again a major issue in the global agenda. Even, the World Bank recognizes the importance of this sector for economic development in its 2008 World Development Report. Another reason is linked to rising prices of agricultural commodities caused by drought in some major exporting countries (e.g. Australia), rising global consumption and growing use of agricultural commodities for biofuels. Some actors underlined that the 21th century will be the agricultural century.

Agriculture plays for sure an important role in development. In fact, according to IFAD, 2/3 of poor in developing countries live in rural areas.

Agriculture debates at the international level are always linked with the trade dimension. In fact, even if only around 10% of the global production is traded, trade plays a crucial role in agriculture because it influences greatly prices. Trade in crucial for farmers incomes as well as for the added-value produced by the agricultural sector. For this reason, agricultural negotiations at the WTO are very difficult.

Economic history, as Reinert and other authors show us, can give us some insight on the role of agriculture in development:

• Never in the history a country succeed to achieve development through its agricultural sector. In fact, often agricultural products are subject to decreasing returns that, as we showed in a post on trade and development linkages, does not enable a country to develop successfully. Nevertheless, some products can be subject to increasing returns notably rare products (Japanese beef meat from cow daily massed with sake), transformed and typical products (e.g. Swiss cheese, wine, etc.) and likely biofuels.

• Never in the history was rural development possible without the presence in the same region/country of an industrial sector providing inputs and tehcnological innovations. Historically only industrialization allowed to raise durably productivity in agriculture.

Nevertheless, agriculture can play an important role in development event if we take into account what the history tell us:

• Agricultural exports enable countries to increase their incomes that can be used to implement a strategy of industrialization and of development of an advanced service sector. An interesting option to start industrialization is to create an industry that transforms agricultural commodities. Often, this industry is easier to set up than high-tech industry. This will increase the country income, by climbing the value chain. These additional resources will be invested again in order to improve industrialization and create new industries, jobs and incomes. In this way, a developing country can start a virtuous economic development cycle.

• Agriculture can raising incomes and help poor farmers to increase their consumption and improve their education. These two outcomes will both increase the national/regional market size essential to allow the development of a national (temporary protected against international competition with tariffs) industrial sector and increase the opportunities of farmers (when productivity rise) to have the skills required to work in the industrial sector. This process is what we observed in developed countries history.
  

You will think: “If it is so easy, why only a bunch of developing countries succeed to achieve high growth rate?” The reason is quite simple. Developing countries faced huge difficulties to export their agricultural commodities at a fair price. Historically there were at least three reasons:

• Developed countries subsidies depressed international as well as developing countries local prices. This both decreased farmers and developing countries incomes and pushes out of business many farmers. For this reason, nowadays number of developing countries, even net importers of agricultural products, cannot fully profit of their production potential. Developed countries subsidies are a partial explanation of the growth success of many developing countries between the end of WW II and the 70s (when subsidies were relatively low in developed countries) and the growth low rates in the 80s and 90s (when developed countries invest large amount of money in subsidies).

• Developed countries, for long time basically the only market for developing countries, in order to protect their farmers, adopted high tariffs and implemented non-tariff measures that restrict greatly the acess to their markets. Subsidies also played a role. In fact, they caused overproduction and reduced the need of import. What is more, developed countries tariffs policies imposed higher tariffs on transformed products (tariff escalation) in order to protect their agro-industry. This constraint developing countries to continue to export commodities without having a chance to develop their transformation industry.

• World Bank and IMF structural adjustment policies constrained many developing countries to specialize in the production of agricultural commodities. These policies create overproduction that led to low prices.

• Agro-industry is an oligopoly of developed countries industries that take advantage of their dominant position by negotiating low prices with producers. This issue can be solved if the WTO rules will include an international antitrust policy. This was never very high on the agenda because developed countries want to continue to take advantage of their dominant position in many sectors.

Today, the situation is different. In fact, agricultural prices were very high the last couple of years. The consequences are that developing countries can use agriculture more profitably to start a sustainable development path. What is needed is a WTO agreement that:

1. Pushes developed countries to decrease their subsidies and opens their market (and eliminate tariff escalation);

1. Allows developing countries to implement policies (tariff and subsidies) to modernize their agriculture (and temporarily protect poor farmers until an industrial sector is developed) and to increase their competitiveness and export capabilities.

In conclusion, agriculture can be a powerful tool to start a sustainable growth and economic development. Nevertheless, barriers that prevent to realize this potential are still large. Doha Round negotiations do not seem to be likely to remove these barriers effectively.


References

IFAD (2001), Rural Poverty Report. The Challenge of Ending Rural Poverty

Reinert Erik S. (2007), How Rich Countries Got Rich... and Why Poor Countries Stay Poor, New York, Carrol And Graf

World Bank (2008), World Development Report. Agriculture for development

agriculture Economics Trade and Development WTO

South-South Regional Integration: 11 Potential Positive Consequences for Sustainable Development

« The myriad of forces that are present in “globalization” generate uneven impacts and opportunities both within and between states. One reaction to such unevenness is to advance regionalism to both contain and exploit globalization ».
Boas, Marchand and Shaw (1)

Regional integration becomes very popular among developing countries since the second half of the 90s. This surge of regional agreements, often related to trade, revived a debate on their impact that started with the creation of the today European Union. The surge of regionalism among developing countries it is very important, notably because it contribute to change the geography of trade, growth and power at the global level.

I will focus on South-South regionalism because North-South FTA and RTA pose a number of problems that I will deepen in another post.

The general debate on regionalism was unfortunately hijacked by mainstream economist that they use their standard econometric models (that oversimplify the reality) to find out if such agreements had a positive or negative static welfare impact at the global level. More precisely, they try to understand if regionalism was a stumbling or a building block for multilateralism and to implement free trade globally. This debate was started and driven by Bhagwati (2).

This debate was really partial for the following reasons:

• It assesses the impact of regionalism only against multilateralism. Nevertheless, multilateralism and free trade are not goals per se. They are tools to improve living conditions of people around the world. We need to assess regionalism considering if it can help to reach sustainable development goals.
• It takes into consideration only economic and, more precisely, trade dimensions of regionalism. In spite of that, reality tells us that regionalism phenomenon is more complex. In fact, it includes political, social and environmental goals that we will further develop in this post.
• It uses very imprecise methods to assess regional integration processes. In fact, mainstream economists use econometric tools that can only assess static economic output. Yet, we now that dynamic outcomes are more important and, what is more, we need to take into account both economic and political process to effectively assess an issue.

Nowadays, this old style debate it is still alive. However, new studies with a more interdisciplinary assessment methods and a focus on sustainable development were published the last couple of years. You can find some references at the end of this post.

Before starting to assess regionalism impacts we need to define it in a more precise and realistic way than mainstream economists do (they define it basically as the relationships among countries that are linked by trade agreements both bilateral and plurilateral). I propose the following definition inspired by De Senarclens and Ariffin (3):

Regional integration (or regionalism) is a process in which countries, with a contiguous territory (4), understand their economic, political and social interdependencies and set up political mechanisms to achieve different goals at the national, regional and global levels.

Regionalism adds a governance level. This can be an advantage for developing countries that can negotiate to solve important issues not only at the global or national level but also regionally. The problem is that this can induce them to use less effectively their often poor human resources.

New interdisciplinary studies as well as my personal experience and thinking allow me to underline the following consequences of South-South regionalism that can be valuable to achieve sustainable development goals even if it pose some challenges and risk that should be further assessed. I will synthesize these elements in the following points (that maybe I will develop in other posts).

Political dimension

1. Reinforcing regionally pacific relationships among countries. Nevertheless, there is a risk that regional blocks by competing with each other will enter in a conflict. This risk is not demonstrated and it does not seem more likely than conflicts among countries.
2. Embed national public policies in regional rules. This will avoid sudden changes in public policies that reduce the stability of the national system and can have negative impacts on economic growth.
3. Secure and improve control on boarder regions that often (e.g. Afghanistan-Pakistan boarder) are a refuge for illegal activities.
4. Improve cooperation on many issues that require a regional action (environmental pollution, disease control, etc.) or that it is impossible to deal in global negotiations (liberalization of trade, social and environmental standards, etc.).
5. By taking collective actions with other countries, developing countries, especially LDC, can improve their sovereignty, i.e. they can have more power to manage globalization in order to reduce risks and maximize opportunities. For LDC, however, achieving a regional integration project with a more powerful country can be also negative. In fact, the country that is hegemonic in a regional agreement can reproduce the asymetrical relationships that exist between developed and developing countries.
6. Regional integration can help countries to defend more effectively, as a group, their interests in the international negotiations, both at the multilateral level and at the bilateral level. By adding their resources and their international weight, they can increase their influence in the processes that shape global governance. This could be positive also for multilateralism's effectiveness. In fact, it is more easy to negotiate between e.g. around ten regional blocks than among 190 countries.

Economic dimension

1. Increasing intra-regional trade. This could be positive because often developing countries can export products, usually more transformed (more positive for their development), that are different from those that they exported to developed countries. What is more, usually also other countries take advantage of this increase of trade flows. In fact, according to Ornelas, «trade creation has been the rule, and trade diversion the exception» (5).
2. Improving competitiveness of companies. Exporting in the regional market will increase the competition. They can adapt to this competition, less rude, before to enter in international markets. Furthermore, a bigger market can help these companies to reduce their costs (economies of scale). This was also a development path proposed by List.
3. By increasing the market size, they can become more attractive for foreign investment.

Environmental dimension

1. Improving environmental competition among countries. Cooperation will be probably more effective because governments will be less scared to lose their competitiveness against other countries. What is more, according to Cosbey, «environmental protection often requires regional cooperation, as with the problems encountered by states that share river basins, that border common seas, that co-host migratory species or that have shared air quality concerns. Regional or bilateral cooperation on trade matters, by creating the foundation of institutional cooperation, yields an opportunity to make related progress on issues of shared environmental concern» (6). Nevertheless, if regionalism succeeds to improve economic development there will be negative impacts on environment.
2. Regional agreements are also potential examples to be further scaled up at the international level. Regions are spaces to test new ways to solve environmental issues.

In conclusion, South-South regional integration can bring many positive impacts for sustainable development in developing countries. Nevertheless, there is also a number of risks and of problems that have already appeared that I have not deepen in this post. This does not mean that I am not critic on regionalism. I think only that regionalism it is not the evil that mainstream economist show us. Furthermore, regionalism is here to stay. This means that we need to analyze these processes and find solutions to materialize their opportunities and minimize their risks.


Footnotes

(1) Boas M., Marchand M.H. and Shaw T.M., The Political Economy of Region and Regionalism, New York, Palgrave Macmillan, International Political Economy Series, 2005
(2) For a recent book on this topic cf. Bhagwati, Jagdish N. and Arvind Panagariya, eds. 1996. The Economics of Preferential Trade Agreements, College Park : Center for International Economics, University of Maryland.
(3) Senarclens P. De and Ariffin Y., La politique internationale. Théories et enjeux contemporains, Armand Colin (Cursus), 2006, p. 165.
(4) This is an important element because “the imagined region is an example of an imagined community and can form the basis for a construct of the public or common good and of shared responsibility that go beyond the state. Regions can evoke a sense of belonging, which may stimulate people and policy-makers to act in concert” (Boas, Marchand and Shaw, op. cit., p. 173).
(5) Ornelas E., Trade creating free trade areas and the undermining of multilateralism, European Economic Review, 49, 2005, p. 1718.
(6) Cosbey A., Sober Reflection: Considering the Rush to Regionalism, IISD, 2004, p. 10.


Resources for this topic

Boas M., Marchand M.H. and Shaw T.M., The Political Economy of Region and Regionalism, New York, Palgrave Macmillan, International Political Economy Series, 2005

Brown O. et al., Regional Trade Agreements: Promoting Conflict or Building Peace, IISD, 2005

Fugazza M. and Vanzetti D., A South-South Survival Strategy. The potential for trade among developing countries, UNTAD, December 2005

Cosbey A., Sober Reflection: Considering the Rush to Regionalism, IISD, 2004

UNCTAD, Trade and Development Report, Regional Cooperation for Development, 2007

regionalism rta fta free trade agreements trade and development sustainable development

Is Official Development Assistance Effective to Boost Growth? Palliative vs. Development Economics

Practitioners often flaunt official Development Aid (ODA) as the panacea to fight against poverty and boost development. For these reason, many practitioners, NGOs and the United Nations pledge and claim for more aid (0,7% of the GDP of developed countries).

Even if these practitioners are driven by good intentions the results of ODA in the last fifty years are extremely disappointing. In fact, if we look at the ODA impacts on growth we see that, as Rajan and Subramanian demonstrate, “there is no robust positive relationship between aid and growth”.

I propose in this blog some reasons that can explain this failure that it is mainly caused by the last thirty years policies:

• ODA, notably multilateral, was used in the 80s and 90s to promote Washington Consensus policies. Liberalizing trade provoked in many countries the destruction of their industrial sector (1). The outcome was the slowdown of growth, unemployment and increase of poverty. These impacts were amplified by privatizations and “less-state” policies.
• There are also some external factors that reduced growth and create poverty. The more important ones were probably: debt service, oil prices, global economic crises and huge increase of developed countries agricultural subsidies. However, the last two elements are linked to policies adopted by developing countries.
• ODA, mainly provided by bilateral donors, often follow the political and economic interest of the donor. For example, ODA tends to maintain the colonial division of labour with developing countries producing only raw materials and handicraft. What is more, ODA now deals more with emergency situations than with development.
• ODA is more focused on what Erik Reinert (see the “interesting to read” section on this blog) call “palliative” economics than development economics. In fact, aid community prefers to try to solve the worst negative impacts of development failures in developing countries (as increase of disease, health care, poverty in very peripheral areas, etc). They chose to treat the symptoms of the disease instead of its causes.

Source

I could conclude that ODA is useless and we need to simply eliminate it. Nevertheless, I think that we can reform it. ODA can become a genuine instrument for development.

The following changes, some of them already discussed by the ODA community, can contribute to this objective:

• ODA should be linked by a real ownership of developing countries that should use it as a tool in broader development strategy. Donors discuss on this issue but they are very far to achieve it. For example, PRSP have been criticized because developing countries poorly choose how to spend resources.
• Donors should spend less money in “palliative” policies and more in development policies. We should invest more in industrialization and advanced services development. In fact, only by developing these sectors a country can have enough resources to invest durably in health care and education. Furthermore, as Reinert, demonstrate only the development of an industrial sector can help to durably improve farmers living conditions. Donors often continue to implement the same kind of project. What is needed is to think outside the box notably to use new technologies for development.
• Donors invest a huge amount of resources in the so-called “good governance”. This is a waste of money. In fact, if we look at the most successful former developing countries (as Korea, Singapore, etc.), they were not good examples of “good governance”: there were corruption, rent-seeking, authoritarian governments, etc. Nevertheless, they succeed and after reaching a level in their development, they choose to implement democracy, human rights, anti-corruption policies, etc. Implementing these policies in LDC is a waste of money and could be counterproductive in terms of development. In the early phases of development, there is only a good- or bad-for-business governance.
• National decision-makers are the most well placed to design a development strategy and to choose what and when policies should be implemented. International experts, with few exceptions, tends to propose (and often to impose) one-size-fit-all approaches based on econometric models. We should adopt a new approach on development. Rodrik call this approach experimental. We need to learn more form past experiences and from our (of a developing country decision-maker) mistakes. We should learn more on experiences of successful countries than form econometric unrealistic models. What is more, each country has its specificities and a one-size-fit-all strategy did not exist.
• We should use more tools that history demonstrate that they are effective. For example, it is better to improve South-South integration than North-South Free Trade Agreements. In general, we need to better understand how the successful Marshal Plan worked in Europe and replicate it in the developing worldthrough ODA. I will explain its main characteristics in another post.

In conclusion, ODA donors should assess the failure of development aid and think seriously on how to improve it. They should surpass old (and new) ideological thinking and adopt a more experimental approach that takes into consideration past experiences and assessments of development results. Development and not palliative measures should be the focus of ODA. We need better development economics scholars that can think outside the box and criticize past and current policies. We also need to think on aid and its inter-linkages with global governance and international engagements. In fact, it is useless to promote cotton industry in Benin if the US gave huge subsidies to their cotton farmers.


Foot Notes

(1)For more information on trade and development issues look at my previous post.

Economics North-South Relations ODA development aid foreign aid

Trade Preferences: Is Preference Erosion Really an Issue for Developing Countries?

One of the main issues in the current WTO Round is the problem of preference erosion. In fact, lower tariffs, caused by a Doha Round Agreement, mean that the products from developing countries, particularly those benefiting from preferences that go beyond the Generalized System of Preferences (SGP), will lose part of their competitive advantage.

A debate took place among scholars and International Organizations to assess if the preference erosion will have important impacts. It seems that a quite large number of developing countries, notably Least Developed Countries (LDC), will incur in significant losses caused by Preference Erosion.

The easiest solution will be to avoid liberalization in those products that are important in preferences as tropical products. However, we need to remember that an important number of developing countries export these products outside favorable preferences (the SGP is worse than schemes for LDC or ACP countries). We can find a solution to this issue only by acknowledging the importance of co-development. Neither interests form favorable preferences recipient nor do interests form developing countries exporters predominate.

Before trying to find a solution, we need to better understand advantages and limits of preferences.

The main positive point of preferences is to improve the competitiveness of products from poorest developing countries through more favorable tariffs. Preferences allowed a number of countries to export products (as sugar and bananas) where they were not competitive at the international level. Of course, for favorable preference recipient the end of preferences or the decrease of preference margins will have a significant impact.
Nevertheless, preferences have more negative than positive impacts. I will resume it in the following points:

• Preferences are unilateral concessions by developed countries. This is highly problematic. In fact, developed countries can use it to pressure preference recipient (notably this is what happen at the WTO, cf. Jawara and Kwa, 2004). Furthermore, often when these preferences are really utilized by developing countries they are suspended and/or restricted. I heard, for example, that Switzerland suspended and after restricted its SGP on refined sugar because developing countries (as Guatemala) started to take advantage of the preferences. It is easy to give a quota and duty free access to LDC countries that have not the productive capabilities to profit of these preferences (also because usually Rules of Origin are very strict) is less easy to give real favorable preferences to countries that have these capabilities.
• In more than forty years, preferences did not succeed to improve and diversify trade exports form poorest developing countries. In fact, preferences push recipient countries to continue to focus on a small number of commodities to export where they have a favorable market access. Preferences did not help these countries to diversify and to climbing the value chain (through industrialization and advanced services development). This system keeps alive the colonization trading system. The issue is that as we underlined in a previous post these elements are crucial to improve the positive impacts of trade on development.
• One of the most important preference schemes is disappearing. In fact, preferences between EU and ACP countries will become Free Trade Agreements called EPAs. That pose a number of problems that I will maybe analyze in another post.

If we take into consideration all these negative impacts of preferences and the interests of developing countries exporters, the solution seems to me quite clear:

We need to find a way to give up to preferences avoiding losses for recipient countries and helping them to develop both their productive capabilities and an effective use of trade in their development strategy.

I guess you will say: “That’s right but how we can achieve this?” In fact, this is the very difficult question. I think that the following measures should be implemented

1. Progressive liberalization of tropical products in 10 years. Every year tariffs should be decreased by the same amount. This will give enough time for adaptation of these sectors in preference recipient countries without causing too much damage to other developing countries. This is an option included in the WTO draft on agriculture (February 2008).
2. Implementing Aid for Trade with additional resources and by ensuring ownership by recipient countries. We are still far from this objective. This kind of aid should match with the trade strategy for development of recipient countries. This will be a key element for LDCs.
3. This in the most important point and it is not fully taken into account in the WTO draft. In order to give to recipient countries, notably the non-LDC developing countries, the possibility to implement an effective development strategy, these countries should have enough policy space to protect and support their advanced services and industrial sector. Only with these tools, they can diversify and develop their economy. Furthermore, developed countries should improve their chances to develop both sectors. They should give them temporary preferential margins (10-15 years) for recipient countries high value added exports notably by eliminating tariff escalation and by incite them to export transformed products instead of commodities. In order to avoid the creation of another useless preference schemes and help to improve the competitiveness of these sectors, developed countries should reduce progressively this preferential margin (same amount every year) after, say, 5 years. With these preferences these countries can built a “modern” economic sector that progressively will become competitive in the global markets.

In conclusion, the measures that I proposed will allow these countries to implement an effective development strategy without undermining trade opportunities for exporters. What is needed it a real commitment by developed countries to really help preference recipient countries to improve their development level.

The first two measures seem to me feasible. The problem is with the third one that requires a change of mindset by trade negotiators particularly form developed countries.

Of course, this it is only a proposition. I guess there is other innovative thinking on this issue. If you have one or if you simply want to give a critic assessment on this post simply write a comment.


References

Jawara F. and Kwa A., Behind the Scenes at the WTO. The Real World of International Trade Negotiations. The Lessons of Cancun, London and New York, Zed Books.

Picture reference

Codevelopment trade preferences WTO preferences erosion GSP

Fair Trade: a real tool for sustainable development?

Fair Trade labels proliferate the last decade. Although Fair Trade grew very fast since 2000, its market share are still small in major developed countries (excluding Switzerland, the average could be between 5 and 15%). Fair Trade focuses on some traditional developing countries tropical exports (notably coffee and cocoa).

Many scholars and stakeholders try to understand if Fair Trade labels can have positive impacts on development, the fight against poverty and succeed to render the international trading system fairer.

My assessment on Fair Trade is not clear-cut. In fact, as often happen, global issues carry both opportunities and problems in terms of sustainable development.

On the positive side, we can underline that Fair Trade increase earnings of some farmers in developing world. It seems to be a solution for low prices that usually these farmers should accept and that trap them into the poverty. Furthermore, these additional resources should be invested in basic services for the community (health, education, etc.). This element is often included in Fair Trade label Term of Reference.

All these Fair Trade effects seem to support sustainable development goals. However, Fair Trade labels bring also a number of issues that reduce their impact on sustainable development. We can summarize them in the following points:

• Fair Trade concern a minority of developing countries farmers. These labels contribute only to improve the living conditions of a minority of farmers. They create some “islands of wealth in an ocean of misery”. This is true even if Fair Trade start to be adopted also by some Trans-National-Companies. Its impact on “conventional” trade has not yet assessed. My guess is that it is very small. Big companies use Fair Trade only for marketing reasons and to profit of the growth of this market. What is more, in the last couple of years Fair Trade seems to have reached a limit in its market share in many developed countries. These labels will not succeed to change the international trading system.


• Fair Trade products are the traditional developing countries tropical products. This does not solve the overproduction of these kinds of products that is the main cause of low prices. Fair Trade labels choose not to merchandize products that are concurrent with developed countries productions for example, in Fair Trade chocolate only cocoa and sugar are form developing countries, milk is produced in developed countries). This is very damageable for both Fair Trade farmers (that continue to produce the same products with low prices and they are totally dependent of Fair Trade labels) and other developing countries farmers (that are in competition with this labels).


• Fair Trade products are usually transformed in developed countries. Only raw materials are bought in developing countries. These labels did not improve the transformation capabilities of these communities. They do not profit of this opportunity to increase the value added produced by these communities and transfer the needed know-how and technology that after can eventually transferred to the whole country. On this issue too, labels preferred not to enter in competition against developed countries productions and industries.


• Labels constrain Fair Trade farmers to invest additional earning in basic services. This poses an ethical problem. In fact, if Fair Trade is neither a development project nor charity these farmers should take alone their decision on how to spend this money. Furthermore, even if spend money in basic services can have an important living conditions impact in the short term, productive investment can bring a more sustainable communities’ welfare. These kinds of productive investments can also help to improve living conditions beyond the Fair Trade islands to the whole region/country. These investments can also decrease their dependence on Fair Trade labels.

In conclusion, Fair Trade labels are only a second best, or a partial, solution. In fact, even if they can bring come benefits their economic impact on a developing country economy is very tiny. In fact, Fair Trade does not respect the lesson learnt form history that in a previous post we underlined as crucial to increase the positive impacts of trade on sustainable development: diversification, climbing the value chain, technology and products innovations and developing the industrial and advanced services sector.

However, buying Fair Trade products could be better that buying conventional ones. For this reason, in absence of a real alternative I buy Fair Trade products.

I will be very interested to read your comments and discuss more deeply with you on this issue.

economics fair trade trade development agriculture

Why NoGlobal Movement Disappeared?

During the Seattle Ministerial Conference in 1999 a global social movement appeared. The groups that took part of this Movement where very different from development NGOS to Unions and other civil society organizations. It was the so-called No-Global Movement.

Less than a decade after Seattle NoGlobals basically disappeared. Of course, they continue to organize their World Social Forum but people participating to this event as well as demonstrating against major multilateral events as WTO ministerial meetings, G8, etc. are always less visible.

What happen? How a very big enthusiastic movement die out?

In my opinion, there are four important reasons:

1. People where demoralized because changes in the world global order are too slow. What is more, they proposed very different pattern of change among NoGlobal organizations. Many of their propositions where very far from reality. Because they were out of reach propositions, people lost faith when they did not succeed to bring these propositions in the international arena.
2. The international community accepted part of the NoGlobal claims and (partially) implemented them. For example: 1) The United Nations launched the Millennium Development Goals, 2) The International Financial Institutions (IMF and World Bank) start to implement initiatives to reduce the poorest developing countries debt and 3) The World Trade Organization dedicated its current Round to development (but only in its discourse).
3. This movement contained too different organizations that after 2001 they chose different ways. Many Union turned to be protectionist and asked for more trade barriers. Development NGOs ask for more trade opportunities for developing countries. Environmental NGOs warned against problems linked to emerging countries development. These divide become too important to allow a joint advocacy by these organizations.
4. 9/11 and the war against terrorism decreased world attention on the regulation of the world economy.

If you have other ideas on this abrupt end of this movement, share your ideas on this blog.

I am very disappointed with this disappearance not because I shared all the NoGlobal ideas but because they played an important role to push government, mainly from industrialized countries, to change their policies that arm developing countries. They contribute to change (at least for a period) perceptions of stakeholders and to improve their sensitiveness on sustainable development issues.

noglobal

How to Reform the World Trade Organization? A way to go beyond Members disagreements

For few years, some policy-makers, scholars and other stakeholders have voiced their disappointment with the World Trade Organization (WTO) and have proposed some ideas for reform this institution. The WTO has been accused to be to ineffective (slow to produce agreements) as well as to fail to produce results favorable in terms of sustainable development and of solving asymmetries in the international trading system between developed and developing countries.

Some authors pointed out that ineffectiveness derive from the institutional setting. However, as far as I know, scholars failed to propose feasible new ways of organizing the WTO institutional setting. In fact, there is some historical “path dependence” on its evolution as Wilkinson brilliantly shows (1).

Independently of potential improving on how the WTO institutionally works, it is more important to sort out how to go beyond the first issue with the WTO that I showed in the last post: conflicts among Members. There is number of divides among WTO Members: not only between developed and developing countries but also between "defensive" developing countries (that want to defend their agricultural and industrial sector) and "offensive" developing countries (that are competitive exporters and want that every country open up its market) or between “old” and “new world” (on geographical indications that want to protect food specialties). In order to succeed to find an agreement and bridge these divides, Members should change their approach and the founding principles of WTO.

The WTO is based on number of principles that normatively try to push the international trading system in the direction of always more free trade (as the Most Favorite Nation, the National Treatment, etc.). This is at least the dominant discourse. In fact, the reality is quite different because developed countries used the GATT/WTO since the 80s to eliminate developing countries trade barriers while maintaining and reinforcing the protection of their sensitive sectors (as agriculture) and introducing some additional protectionist measures to defend their interests (agricultural subsidies and the protection of intellectual property). However, the normative foundations of the WTO have a huge impact on the negotiation process, on what is feasible and on how Members can defend their interest and propose acceptable solutions.

These norms constrain Members to negotiate in a reciprocal mercantilist way. In fact, even if the goal of the Doha Round was to solve asymmetries between developed and developing countries, the path choosed is not that developed countries will eliminate measures that create these asymmetries by changing their policies and reduce the constraints for developing countries. The principle applied was the “less than full reciprocity”. This means that developing countries should negotiate and offer something in exchange of the (partial) elimination of the international trading system asymmetries. For these reasons, negotiations became (once again) very mercantilist. Developed countries ask for more concessions by developing countries. Developing countries try to maintain their policy space (crucial for their development process) and to obtain more concessions by developed countries. This means that if the developing countries want to obtain some gains in terms, for example, of market access, they will need to accept disciplines that will harmonize even more their policies and restrict their policy space.

This situation is a recipe for failure. In order to get out of this dead-end we need to rethink the principles on which the WTO is based. The starting point should be that trade is not a goal per se but a means to achieve sustainable development for all Members. In fact, this is the only norm that can reach a consensus among WTO Members. What is more, this norm is included in the introduction of the agreement that choose to create the WTO.

Few days ago, I show some elements that can improve the positive impact of the international trading system on development. I underlined that for developing countries is crucial to:

• Use the international trading system to increase incomes as well as to specialize in transformed and high value added products.
• Have the opportunity to use protectionist measures to protect and develop their industry and advanced service sector.
• Have the opportunity to use regional integration in order to increase the competitiveness of their production.
• Have enough policy space to innovate in policy and industry is crucial. Only this freedom will allow a country to find its development path by balancing: 1) temporary protection and incentives for some sectors and 2) market opening to increase their competiveness.

On the opposite, for developed countries, trade already contributes to their economic development. However, it can bring some risks in terms of environmental and social damages.

To find a middle ground to achieve a consensus between these two positions seem quite difficult. However, we need to precise the two developed countries issues and their importance. Regarding social issues caused by imports, we should remember that developed countries have enough resources to adjust and solve these problems (notably through a better education of workers). What is more, outsourcing is creating jobs in the North. The problem is to adapt workers’ skills. However, developing countries should respect some basic standards. Regarding environmental issues, the question is more complex. In fact, developing countries should make some efforts, at least to avoid most damageable practices. However, we should not forget the developed countries historical responsibility of pollution. This mean that rich countries should be more commited in solving environemental problems, carry most part of the costs, invest more in clean technologies R&D and contribute to transfer this technology on the South.

In conclusion, in order to improve the problem solving effectiveness of the WTO we need to think trade issues in terms of co-development. The international trading system should contribute to improve sustainable development in both developed and developing countries. To reach these objectives negotiators should remember this hierarchy of objectives in developing countries: economic, social and, finally environmental goals. For this reason, they should introduce the following hierarchical principles at the WTO:

1. Give back policy space to developing countries. Renounce to constrain all countries to harmonize their policies beacause they are in very different situations that need very different policy tools.
2. Developed countries policies should not arm developing countries or preclude them to follow a sustainable way of development. For this reason, for example, developed countries should eliminate all their agricultural subsidies.
3. Developed countries should give more market access (particularly for transformed products) to developing countries. This is the best opportunity for developing countries to improve their economic and social development and lift people out of poverty.
4. Improve social standards (that take in consideration the differences between developed and developing countries situations).
5. Launch environmental standards and other measures to solve environmental issues. All countries are constrained to contribute. These measures can harm development priorities of poor countries. Costs are attributed considering a country development level and its historical responsibility in terms of pollution.

This package of measure should be implemented in its integrality and following this hierarchical order. Otherwise, it will harm developing countries fight against poverty or it will simply be impossible to reach a consensus.

All comments are welcomed.


Footnotes
(1) Wilkinson Rorden (2006), Crisis and the Governance of the Global Trade, New York, Routledge.

codevelopment economics free trade trade development reform global governance

Doha « Development » Round likely to fail to meet 2008 deadlines

According to the World Trade Organization’s Director General Pascal Lamy, the negotiators can succeed to complete the negotiation Round before the end of 2008. For this reason, there is a project to organize a mini-ministerial conference around Easter.

Nevertheless, even if some negotiators tend to be relatively optimistic, an agreement in the following months is quite unlikely. In fact, there is huge divides between negotiators in agriculture and, even more, in the industrial sector negotiations (NAMA). The draft released few weeks ago by the chair of the negotiation committees fails to propose an agreement acceptable by all the Membership. What is more, they leave many points in suspense. Furthermore, the negotiations comprehend also other issues where is still difficult to reach a consensus.
Even if ministers will come to Geneva the next weeks they will probably not succeed to solve the huge amount of issues that are still unresolved.

click here to see the web site with this picture

Beyond these disagreements among negotiators, the main cause that explain the many deadlines, that were missed by negotiators on the last years, is that developed countries refuse to acknowledge by their actions that this Round is about development and, according to the negotiation agenda (2001 Doha Declaration,) it should readjust the balance of the international trading system. In fact, notably the last trade negotiation Round (the Uruguay Round) increased the inequality of the international trading system. Developing countries were forced to liberalize many sectors and make important concessions (services, Intellectual Property, Agriculture) without receive any valuable improvements in the sectors where they have offensive interests (notably agriculture).

From many years during the Doha Round negotiations, developed countries thought that, at the end of the day, they would succeed to impose an agreement to the developing countries. They did not understand that the world changed and that a coalition of developing countries driven by emerging countries will resist and show its offensive interests. Trade negotiations are any more a question of finding a deal between US and EU but they become more multilateral. To reach an agreement, developed countries should understand that this time they will be constrained to make some concessions to developing countries. This is the price to keep an institution like the WTO, that plays an important role in regulating the world economy by law, alive.

What is more, this lack of will (and of good faith) by developed countries, cause huge difficulties to reach agreement on the issues that are very important for their citizens as environmental and social standards. In fact, even if these issues are defendables in terms of their potential positive impact on sustaiable developement and, under some conditions, to what we called co-development, developing countries refused to negotiate it. They think that is simply another way for developed countries to protect their markets. This reaction is understandable considering the mercantilist way in which developed countries negotiate the issues that matte rfor developing countries (notably for the poorest) (see, for example, Special Products Issues or flexibilites on NAMA negotiations).

In conclusion, if we are optimist an agreement will be reached before the end of 2009. However, the Uruguay conclusion teach us that surprises and strong accelerations in negotiations are always possible even in the most unlikely situation.

Codevelopment doha round north-south WTO global governance trade

Trade and Development link in developing countries beyond the free trade vs protectionism debate

The link between trade and development has been discussed by centuries even before Adam Smith most famous book. What is disappointing with this debate is that it was framed as you can be only either an enlightened free trader of a short-term-looking protectionist. This debate, particularly the last two or three decades, has been very ideological. With this post, we will try to resume another way to think on trade and development linkages beyond this dichotomy.

What is needed in this highly polarized debate is to look at the historical reality with pragmatism to show, beyond oversimplifying economic theories, what we can affirm on this link. In fact, policies should be context specific. Checking theories on reality is very important. This means that neither free trade nor protectionism are always the best decision. In some case, free trade could be positive in terms of welfare and, in other cases, it can have an overall negative impact. We can say the same for protectionist policies.

Classical economic theory based on comparative advantage assumption cannot explain why many African and Latin American countries which choose free trade in the 80s have a worse development track record that, for example, South Korea that choose to be protectionist for many decades. The answer is that only experience and learning by doing strategies can tell us what the best option in a particular setting is.

Before dealing with the trade and development issue, we need to better understand what causes explain growth and development success stories of the past. There are two authors, Rodrik and Reinert, that I cite in the “interesting to read” section of this blog, that give us some interesting insight that were tested on the historical reality. The following points are very important:

1. Not all the economic sectors provide the same input to a development process. In fact, the assumption of mainstream economics that all products are the same is not proved by a reality check. As Reinert underlines, there is two different ideal types of economic activities: Schumpeterian activities, that “create welfare and development” and Malthus activities, “that keep wage-levels close to the subsistence level” (Reinert, 2007, p. 150). Reinert characterized both ideal types (Reinert, 2007, p. 151). Schumpeterian activities, which include most of manufacturing and advanced services, are characterized by the following elements: increasing returns, dynamic imperfect completion, stable prices, generally skilled labour, creates a middle class, irreversible wages, technical change leads to higher wages for the producer and create large synergies. Malthusian activities, as most of agriculture and raw material extraction, are characterized by the following elements: diminishing returns, perfect competition, extreme price fluctuations, generally unskilled labour, creates “feudalist” structure, reversible wages, technical change tends to lower price to consumer and create few synergies [i]. Three elements are important to achieve development: increasing returns, technological change and synergies. The secret to achieve development and growth is simply to succeed to shift an economy from Malthusian to Schumpeterian activities. Industrialization and development of advanced services is the key for development.
2. The role of states, notably through the building of institutions, is capital to give the right incentives to the private sector in order to start a real and sustainable development process. As Rodrik pointed out, “it is increasingly recognized that developing societies need to embed private initiative in a framework of public action that encourages restructuring, diversification, and technological dynamism beyond what market forces on their own would generate” (Rodrik, 2007, p. 100). Furthermore, Public and private sector can interact in different way and achieving the same results in terms of development. Institutional setting can vary among countries (Rodrik, 2007, p. 29). What is more, their effectiveness in terms of development depends on their fitness with the specific historic, cultural, economic and political situation.
3. The driving forces of capitalism are entrepreneurship, state policies, technological change and innovation: capital, markets and labour are just auxiliary factors (Reinert, 2007, pp. 121-3). This assumption has a big impact on how we understand development.
4. A country should use strategically the opportunities offered by the international context. What UNCTAD called policy space [ii] is crucial to adopt a successful development strategy. There is no one-size-fit-all recipe to start and sustain a development process (Rodrik, 2007).

These crucial lessons learnt from history can be translated in the following elements that help us to explain the trade and development links:

• If a country is pushed by its trade policy to specialize in the production of Malthusian products it will neither reduce its poverty nor start a successful growth and development path. A country should find trade (and other) policies that give incentives to the entrepreneurs to start and improve business linked to products that allow technological change. There is not a list of such products because they vary across periods (Reinert, 2007, p. 111). What is more a developing country should think strategically in terms of synergies and clusters between the industries that it chooses to incite.
• There is a timing on changes in trade policy. Friedrich List [iii] proposes the following useful sequence, summarized by Reinert: “1) all nations first needed a period or free trade to change the patterns of consumption and thus to create a demand for industrial goods. Then followed a period 2) when small states protected and built their own industries (i.e. activities subject to increasing returns, including advanced services). Once this was done, List suggested 3) a period where even larger geographical areas would be integrated economically. […] Subsequently, when all countries had established their own competitive industrial sector, it was 4) in everyone’s mutual interest to open for global free trade” (Reinert, 2007, p. 161). This is probably the main lesson that all the countries that achieved historically important development progresses (for example, the US, Germany, South Korea, China, etc.) teach us. This with the first point simply means that a country can take advantage from trade if it conceives its international markets integration strategically.
• Regarding exports: the main goal should be to maximize exports of diversified products with increasing returns. Diversification is a precondition for development because, notably, of increasing synergies and for selecting the best technologies, products and organizational solutions (Reinert, 2007, p. 256). Export of decreasing returns products can be useful only if is utilized for a short period in order to earn more resources to invest in the development of increasing returns sectors.
• Regarding imports: a developing country should find a balance between the protection of the immature industry and the utilization of imports in order to improve gradually competitiveness. In fact, as Reinert rightly underlines, “production systems need time to learn to adjust” , consequently sudden open of markets can have a very negative impact (Reinert, 2007, p. 58) that tends to die out the most dynamic sector of the least advanced country (because these sectors are founded on increasing returns and are not competitive against a country that produce much more quantities) (Reinert, 2007, p. 181). The infant industry protection is crucial for development but “[…] once a country had been solidly industrialized, the very same factor that required initial protection – achieving increasing returns and acquiring new technologies – now required bigger and more international markets in order to develop and prosper. Successful industrial protection thus carries the seeds of its own destruction: when successful, the protection that was initially required becomes counterproductive” (Reinert, 2007, p. 81) [iv]. What is more, as Reinert shows empirically through the case of Peru, “[…] a country with an inefficient industrial sector is far better off than one with no industrial sector at all” (Reinert, 2007, p. 163) .
• To have enough policy space to innovate in policy and industry is crucial. The problem is that often the international trading system is used to limit this freedom.
• The world production in organized around the creation of value chains across countries. It is very important how the regional/global value chains are broken up among different countries. In fact, there is a link between the place that a country have in the value chains and its competitiveness or, in other words, its welfare. In fact, “the risk with globalization is that the value chains of production are broken up in such a way that the rich countries take all the high-skill jobs […] while activities [which rich countries can no longer mechanize or innovate further] are farmed out to poor countries” (Reinert, 2007, p. 39).
  

In conclusion, the comparative advantage assumption is not supported by a serious historical analysis. Free trade could be theoretically the best option in every case but in the reality is better for a developing country to be pragmatic and integrate strategically in the world markets by following the lesson learnt that we presented in this post. Thinking on this way at the economic issues (test theories against reality and historical experiences) will more probably allow us to have a better understanding than to use models that should oversimplify the reality. What is more, a mathematical model tends to become an ideology (as free trade shows us). On the opposite looking at the reality move us away from ideology and bring us to pragmatism and a more scientific approach.

Footnotes

[i] Reinert give even more detail on the difference between products through its “quality index of economic activities” (Reinert, 2007, p. 317).
[ii] Policy space can be defined as the opportunity that a country has to use heterodox and context specific policies that can be very different from what international expert think to be the best option.
[iii] List is often showed as a protectionist. Nevertheless, “list was both a protectionist and a free trader, depending on the stage of development of a nation” (Reinert, 2007, p. 161).
[iv] Reinert shows the key elements of “good” and “bad” protectionism (Reinert, 2007, pp. 311-2). Rodrik too acknowledged this assumption. In fact, he underlines that “import substitution, planning, and state ownership did produce some successes, but where they where entrenched and ossified over time, they led to colossal failures and crises” (Rodrik, 2007, p. 100).

economics free trade trade development