What to read to understand causes and action needed in the current food crise

Many newspaper articles, papers, etc. are disseminated in these days to inform the issue of rising food prices and their causes, impacts on developing countries. However, I found only an article that is comprehensive and that explain well the issue, impacts and the way out. If you are interested on this issue you should read this article of Bridges (ICTSD).

agriculture trade and development food prices

Greenhouse Gas Emissions of Air Transportation: A Wrong Reason to Reduce Developing Countries Exports of Counter-Season Vegetables and Fruits

In many developed countries, particularly in Europe, there is growing concerns on our consumption habits impact on Green House Gas (GHG) emissions and climate change. Many environmental NGO are underlining that importing vegetables and fruits via air transportation is damageable for the environment because of "useless" GHG emissions. This position is becoming largely shared by citizens. Some organizations propose simply to eliminate these imports.

The problem is that these kinds of products are very important for many developing countries. In facts, vegetables and fruits are very dynamic and allow developing countries to specialize on rising prices products.

What is more, these NGOs forget that air transportation account for only 3% of GHG emissions. Probably, they must spend their efforts in other sectors. For example, it will be more useful in Europe to increase public transportation, to increase taxes and costs linked to cars, to decrease useless intra-EU trade (for example, statistics tell us that half of trucks around Europe are empty), increase incentives for ecological houses, etc.

Furthermore, the problem of GHG emissions can be easily solved by adding to the price some cents for sustainable development projects in developing countries that reduce GHG emissions. There is not a need to ban or reduce counter-season imports from developing countries.


trade development agriculture GHG climate change

The Missing Element To Understand High Food Prices: Past Developed Countries Policies Matter

These days there is a lot of media coverage on high rising food prices and their impacts on developing countries. Media, scholars, NGOs and International Organization underline 3 causes that explain the rising of food prices:

• Emerging Markets growing demand of food (notably milk and meat).
• Growing Biofuels production.
• Market speculation.
  

All these elements played a crucial role in increasing food prices. Nevertheless, there is another explanation that it is never mentioned: the long-term impact of developed countries subsidies and protectionism.

In fact, developed countries dumping reduced and reduce the incentive for developing countries farmers to produce more food. What is more, dumping on international and local markets in the last couple of decades pushed out of business an important number of developing countries. The consequence was a reduction of the (growth of) developing countries food production. In fact, for example, the number of ha used for cereals production in developing countries decreased of more than 13% (FAO stats) since 1975.

Developed countries are in large part responsible of the current situation (also because of the negative impact on developing countries agriculture of the liberalization promoted by developed countries in the 80s and the 90s). They should pay for their responsibilities.

food prices agriculture trade and development

Rise of food prices: the two sides of the coin

IHT Blog, "Managing Globalization", synthesizes two interesting articles that shows the two aspects of food price rise: danger for consumers and gains for producers in developing countries.

Particularly interesting is the second article that give some insight on how developing exporter countries should manage and use these additional resources in order to create a long run sustainable growth.

A proposal for a co-development contribution index: for an effective assessment on developed and emerging countries role in sustainable development

The Center for Global Development developed an interesting index to measure the developed countries commitment to development. It is based not only on aid but also on trade, investment, migration, environment, security and technology transfer contributions: it is truly comprehensive. This tool is very useful and innovative. It contributes to raising the pressure on developed countries and to advocate for an increasing contribution to development.

Nevertheless, I have some key elements that a development contribution ranking should imperatively include:

1. Considering their increasing role in the international economy and politics, such a ranking could take into consideration also the impact of emerging markets (including in their own development).
2. In order to improve the ranking, building index for every dimension is not very transparent and effective. I think it will be better to transform all contributions in monetary terms. The index will be based on monetary contribution on development calculated in percent of GDP.
3. Both positive and negative contributions will be taken into account.
   

This index will be very useful to understand the real impact of every developed and emerging country on development. It will pose number of methodological problems but it will be more effective for advocacy and more transparent.

To calculate this raking I propose the following elements (it is only a raw thought that need to be further developed) to be taken into account in the calculations:

• Aid Contribution = Aid flows – food aid negative impacts – debt interests – aid that does not contribute to development.
• Trade contribution = Trade opportunities used (notably for manufactured goods and advanced services) – losses due to protectionism – losses due to subsidies (both on world and developing countries markets) – negative externalities of liberalization measures promoted by developed countries (also through WTO, World Bank, IMF and other institutions).
• Investment contribution = Investment flows – negative impacts of Transnational Companies – developing countries money in foreign banks
• Migration contribution = remittances – losses due to emigration of skilled workers – losses due to death of emigrants (caused by developed countries restrictions) + gains of temporary workers + gains in term of skilled workers that return in their developing country.
• Environment contribution = aid for environmental goals (e.g. GEF) – cost of environmental degradations caused by rich countries and their transnational companies (e.g. pollution of companies and climate change) – cost of policies to protect the environment imposed by developed countries.
• Security contribution = aid to conflict resolution and prevention (included cost of military intervenction that contributed to avoid or stop a civil war) – exports of arms to developing countries – cost of wars against developing countries (included embargos).
• Technology transfer contribution = value of technology transferred – copyrights and licenses cost – cost of property right imposed to developing countries (including cost of implementaing IPR policies)– cost caused by developed countries policies that limit access to technology.
  

By adding up these elements, we can find the value of a country contribution to development. I guess that many countries will have a negative score. This index will be difficult to calculate but it will be very useful to better understand both why asymmetries exist and how we can reduce them.

Sustainable Development Index ODA trade and development

Explaining the rush to regionalism to mainstream economists

Mainstream economists simply do not understand why so many developing countries participated to regional integration processes.

In fact, according to neo-classic economists, Regional and Free Trade Agreements are only a second best solution compared with global free trade. Moreover, often they create trade diversion and they decrease overall welfare.

To understand the reasons and potential opportunities that regional integration we should remember two important elements:

• Economic development works not as mainstream economists tell us. I explain more broadly the real connection between trade and development in another post.

• Regionalism it is mainly about politics and regulating more effectively the global economy.
  

Regarding the political dimension, there are two quotations that help us to understand why developing countries pursue a regional agenda:

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 (2005, p. 168)

In a globalized economy, where countries individually have reduces options for national economic policy-making and where the multilateral institutions framework is insufficient or lacks a strong development dimension, the creation of regional institutions may very well be a pragmatic response, and its success would extend the principle of “adaptative efficiency” (1) to cross-border relations. UNCTAD (2007, p. 40)

In conclusion, mainstream economists should remember that in order to understand the reality we should adopt and interdisciplinary model based more on empirical evidence than on mathematical models. The consequence is that mainstream economists fail to aknowledge the large number of potential positive impacts of regionalism for sustainable development.

Footnotes

(1) According to UNCTAD “adaptative efficiency” is the strategy that was adopted by successful economies that means: “the capacity to develop institutions that offer a stable framework for economic activity, but at the same time are flexible enough to provide the maximum leeway for policy choices, at any given time and in any given situation, in response to specific challenges” (idem)

References

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

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

regionalism trade and developmant globalization

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

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

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

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

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