Poverty and trade revisited

The anniversary of this blog passed by without me realising it. In belated celebration, I’m re-printing the post that started the whole thing below the fold. It’s my attempt to persuade left-wingers that they should support free trade if they are serious about their principles.

I used to think of myself as left-wing. I despised the Liberals, hated Reagan, supported public education and public hospitals, opposed the GST and supported the Tobin tax, believed profits were tantamount to social waste, protested privatisation, and thought ‘right-wing’ was just a step away from fascist.

I do so no longer. My core values have not changed one iota. Human rights, the greatest good for the greatest number, equality – these are still the pillars of my ethical framework. It is just that I have been slowly become convinced that pursuing those goals means I must reject the standard left-wing prescriptions. I should also mention that a closer and more thoughtful examination of my three pillars has led me to conclude that my previous conceptions of them were not good enough, but that is a topic for another post.

The adjective ‘left-wing’ is about as broad a term as you can get when categorising political and economic philosophies. It covers a wide range of beliefs about the world and how human affairs should be managed. Its meaning has also changed over the years, varies from place to place, and even from person to person. People have told me that Hugo Chavez is left-wing, but so is Barack Obama. That Green Left Weekly is left-wing, but so is The Economist. However, despite the breadth of the category, there are some aspects that are common to all those with a left-wing viewpoint.

One of the traditional self-defining features of left-wing thinking is a concern for the poor and disadvantaged. In fact, it could be described as the core principle from which the majority of their social prescriptions are derived. It is used as a justification for all sorts of government action, from unemployment benefits to restrictions on how we trade with other nations, which is the area I want to touch on this time.

Poverty comes in two flavours – relative, and absolute. Both are fuzzy sets, meaning there is no hard and fast rule about whether someone is relatively poor or absolutely poor. By convention, and for the purposes of this post, relative poverty is what we get in developed nations – falling beneath a certain standard of living. This is often expressed as a large fraction of average income, such as the Henderson Poverty Line. Absolute poverty, on the other hand, is the kind found in developing countries – people with little or no access to the basics, struggling just to survive.

Ask an Australian who identifies as left-wing about which kind of poverty is more important to alleviate, and they will respond with the obvious – the poorest should take priority. Yet if you then ask how they feel about trading with these absolutely poor people, most likely they will give the standard left-wing answer that there should be restrictions on how that is done, that free trade is not acceptable.

If they are worried about local unemployment, then they have put themselves at odds with their stated objective by prioritising the relatively poor in Australia over the absolutely poor overseas. That sort of argument is made all the time, and I don’t know how they deal with the cognitive dissonance in doing so, but we can leave that one to the side because another argument supersedes that one – that free trade doesn’t actually help the absolutely poor. This is also a claim that can be examined empirically, so is more amenable to discussion than the ethical question of whose problems are more important.

I won’t keep you in suspense – free trade does help the poor. More specifically, and of greater relevance to discussion about Australia’s economic policy, dropping import tariffs (and subsidies to local producers) is of tremendous benefit to poor countries. It also provides a net benefit to the relatively poor within the country, despite any adjustments in affected industries. Let’s look at the basis for these conclusions.

The simplified theory goes like this – reducing the tax on an imported good will reduce the price to the consumer, who will then prefer to buy that good. Countries with a comparative advantage in supplying that good will expand their output, thus increasing their companies’ profits. Increasing profits means more investment, more jobs, and more capital. It raises the overall level of productivity in an economy and hence its ability to support a higher standard of living. How does this happen? Trade liberalisation shifts labour and capital to those activities with the highest potential for productivity growth while drawing resources away from those with the least potential. Through competition and access to new markets, and the related spill-overs in terms of technology and knowledge, countries are able to specialise more and raise output, driven by the prospect of larger markets. The upshot is a higher overall level of productivity: instead of producing 100 goods the old way for smaller markets, firms produce 1,000 goods with lower unit costs and improved quality. Labour is more skilled, technology is better, management techniques are sharper, and markets are more accessible. This dynamic creates more wealth. It also means more revenue for government through taxation, so more and better services can be provided to those missing out on the above gains.

The real world is more complicated than that, but many studies have been carried out over the decades that support the theory. The World Bank has a large database of such research, for example. Time and again, the conclusions are that trade liberalisation helps the poor. They estimate welfare gains to developing countries from full liberalisation of merchandise trade would be $200 billion per annum and about 127 million people – more than 10% of the world’s very poor – would be lifted out of extreme poverty. For those readers who think that the World Bank is biased in this respect, you don’t have to take their word for it. Just ask the developing countries themselves – they unanimously want rich countries to drop the tariffs on poor countries’ products. The G-20, a trade negotiations bloc of developing nations, in their 2007 Communique said they are “committed to working with our trade authorities to reach a rapid and successful conclusion to Doha, to promote open and rules-based trade and investment regimes, improve productivity, create jobs, alleviate poverty and spur competition. We noted the critical importance of trade liberalisation and Aid for Trade for global poverty reduction.” [Emphasis mine]

Or consult the NGOs, not generally known for their support of “neo-liberalism”, “imperialist economics”, or whatever derogatory term is currently fashionable to describe globalisation and trade liberalisation. Referring to the recent failure of the WTO Doha Development Round of negotiations for liberalising global trade, Oxfam said that “Rich countries should have shown the political leadership to deliver trade reform that reduced poverty.” A previous hiatus in the Doha round they called “a catastrophe for the millions of poor people round the world who stood a chance to trade their way out of poverty”.

The ideal of eliminating absolute poverty is a worthy and noble goal, one that should be among our highest priorities as a species. There are some people who say the left-wing care the most about poverty and poor people. That may or may not be true, but for anyone who really wants to do something about it – left-wing or otherwise – logic and evidence say you should support free trade. So write a letter to the editor of your favourite newspaper and spread the good word. Go along to the next Socialist Alliance “day of action” and this time protest against tariffs and subsidies. Contact your local MP and demand they drop Australia’s import tariffs as a matter of social justice. Or better yet, support the only Australian political party that has unilateral free trade as part of its platform – the Liberal Democratic Party.

This entry was posted in economics and tagged , , , , , , , , , , . Bookmark the permalink.

12 Responses to Poverty and trade revisited

  1. philip travers says:

    Don’t think so Jarrah! Like your sense of matters,but, I think the World Bank is a bit devious to be kind.On Rense.com tonight ooops ,last night, there isa American going on about trading with China.Some pretty strong language is used to as an example, show the difference between the buy patterns of U.S.A. versus China…on toys as one issue.And well,if stuff isn’t recycled then it ends up in land fill.I volunteered alone working in this place name ,where I live tip.Although beer bottles were the major problem,I saw many overseas dangerous items end up in the transfer station.Before that,we had a large hole,and access to other large holes.This electorate has seen the curse of asbestos come to newsworthiness again.What would happen if this stuff and endless number of insectovora snakes,cane toads and others jumped ship more aggressively to their new ports,across sea ways with eco-problems etc.I am sure you are not blind to this,but who will pay for all the sea going stuff ups that have already caused problems,and there doesn’t seem to be a fail safe response industrially with this.The ancient flag of convenience coal ships to China hanging around until serviced and loaded is a very costly exercise in management within many limitations.These problems cannot be ignored,and what ever the priority should be in overcoming such problems,there are equal and intelligent critics of those practical and real problems.May not be back.Thanks.Good Morning.

  2. THR says:

    Jarrah, I think there are several grave problems in what you’ve said above, but if we restrict the discussion to ‘free trade’, I would argue (as a lefty) that you’ve swallowed a whole lot of bullshit hook, line and sinker. The wealthy and powerful nations of the world did not become wealthy and powerful through this mythical ‘free trade’. Not a single one. The US was radically opposed to free trade for at least a hundred years (roughly), which is what got it into the twentieth century as the world’s pre-eminent superpower.

    Do you seriously think the third-world is mired in poverty because of ‘tariffs and subsidies’? You’re really not trying very hard if you do. South Korea was an undeveloped country a few decades ago. The government there poured money into relatively high-tech subsidies, and used tariffs to build up and protect fledgeling industries. Japan did something roughly similar – the government propped up Toyota, running at a loss for 17 years straight. Compare this to the ‘free trade’ developing countries stuck with IMF ‘structural adjustments’ and trying to get rich off ‘comparative advantage’ – they’re growing coffee and mung beans, with no hope of anything better in the forseeable future.

    That’s basically what free trade is. It’s only ever for the poor. Note the bipartisan support for massive bailouts in the US last year. It’s Keynes for the rich, and Friedman for the poor. Free trade means structual adjustments whereby poor nations fire sale their assets and cut public programs. It means Indian farmers having to pay US firms a tribute for using turmeric for medicinal purposes, thanks to intellectual property rights. It’s the erosion of social solidarity to a cheap, commodified individualism. It has nothing to do with ‘compassion’ or ‘casre’ or some other bullshit. ‘Free trade’ doesn’t even exist, except in theory, and what passes for free trade in practice fucks the majority of the world’s citizenry in the ear. It doesn’t keep it’s most basic promises, and those who support it are not lacking pity but brains.

  3. Jarrah says:

    “The wealthy and powerful nations of the world did not become wealthy and powerful through this mythical ‘free trade’.”

    Whoah there. I think you saw ‘free trade’ and let loose with all boilerplate blazing. I explicitly made this post about Australia’s trade policy today, not anything else. I would also dispute your characterisation of economic history – see below.

    “Do you seriously think the third-world is mired in poverty because of ‘tariffs and subsidies’?”

    No. Obviously there are many factors. Trade doesn’t even have to be the most important one, depending on the country. Freer trade is never enough by itself to bring about economic development.

    However, in the context of Australia’s trade policy, those countries are asking for us to drop tariffs and subsidies. Do you think they are wrong to do so?

    “South Korea…Japan”

    They traded their way out of poverty. As every country must do. The freer the trade, certeris paribus, the faster this occurs. Dollar and Kraay (2004) show that for developing countries, greater openess is strongly correlated with greater growth. In addition, there is very little evidence that the East Asian Tigers’ economic miracles was helped by their interventions. They had all the ingredients for success otherwise – no war, stable politics, good educational system, high literacy, high savings, stable macroeconomic policies, etc – so it’s quite possible that their interventions weren’t beneficial, but weren’t enough to prevent development in the face of so many positive factors.

    In fact, Beason and Weinstein (1996) found in a statistical study of MITI industrial targeting that a disproportionate amount of support went to low-growth sectors and ones with decreasing returns to scale, and found that there was no evidence productivity was enhanced due to industrial policy. McKinsey found only one MITI action that had a significant benefit out of all their interventions – standardising tolerances in machine tools.

    South Korea directed credit to capital-intensive industry, but made them face full competition. Even then, industrial policy was not correlated with productivity growth at the industry level. Interestingly, it was the sectors that were given lower priority from government that increased their productivity the most! It should also be noted that South Korea’s industrial policy was predicated on free market institutions – no nationalised firms or government micromanagement – and was insulated from rent-seeking politics because it was a dictatorship.

    And that’s not mentioning the two most compelling examples of how more open trade policies facilitate economic growth – China and India.

    “they’re growing coffee and mung beans, with no hope of anything better in the forseeable future.”

    Try reading Krueger on this, because you’re wrong.

    “Free trade means structual adjustments whereby poor nations fire sale their assets and cut public programs.”

    No, it doesn’t. Free trade is voluntary exchange, based on the truism of differing opportunity costs. Do you deny opportunity costs differ? Because that’s like denying gravity exists. There’s lots in economics that is fluffy or debatable or context-specific, but opportunity costs are an unassailable bedrock.

    “It means Indian farmers having to pay US firms a tribute for using turmeric for medicinal purposes, thanks to intellectual property rights.”

    You’re obviously misinformed, or stupid – intellectual property laws are explicitly anti-free-market!

    “‘Free trade’ doesn’t even exist, except in theory, and what passes for free trade in practice fucks the majority of the world’s citizenry in the ear. It doesn’t keep it’s most basic promises, and those who support it are not lacking pity but brains.”

    Free trade is an ideal, granted. What passes for free trade in practice, however, has a proven track record of improving people’s lives. This is inescapable. I deliberately held back on the vast amount of evidence for that here because I didn’t want to write a book-length comment.

    I don’t really think you lack brains, I just think you are like I was – ignorant, raised on a diet of Galeano and Pilger, confused about the difference between economic imperialism and true free trade.

  4. THR says:

    I don’t really think you lack brains, I just think you are like I was – ignorant, raised on a diet of Galeano and Pilger, confused about the difference between economic imperialism and true free trade.

    This is rather patronising. The facts simply don’t support your schtick that the poorest nations benefit from ‘free trade’.

    However, in the context of Australia’s trade policy, those countries are asking for us to drop tariffs and subsidies. Do you think they are wrong to do so?

    Which countries, which tariffs, and which subsidies? You’ve been entirely non-specific here.

    Your comments on Asia are almost totally incorrect. South Korea never implemented ‘free trade’. From the 60s onwards, it used tariffs and subsidies for selected industries. All banks were government owned. Public projects were divided up between private firms and SOEs, and the government was not afriad to nationalise private enterprises where appropriate. The government also had complete control over foreign exchange, and largely ignored intellectual property law when it came to widespread pirating.

    At a more macro level, as world trade has become ‘freer’, there’s been a huge increase in banking and currency crises, and poverty has actually increased. This is fact, not ‘boilerplate blazing’.

  5. Jarrah says:

    “This is rather patronising.”

    As patronising as “those who support [free trade] are not lacking pity but brains”? I wasn’t trying to be patronising, it’s what I inferred from your comment – the confusion between IMF and free trade, for example. It’s a common confusion, one I admit to falling prey to when younger.

    “Which countries, which tariffs, and which subsidies? You’ve been entirely non-specific here.”

    The G-20 (not the G20, a more recent but more well-known bloc) is the one quoted in my post. According to their various proposals, they want to
    1. “substantial reduction in domestic support and elimination of all forms of export subsidies by developed countries”
    2. “ensure the parallel elimination of all forms of export subsidies and disciplines on all export measures”
    3. “the tariff reduction formula is the main component of the market access
    pillar”
    4. “Developed country Members should provide duty- and quota free access to all products originating from LDCs.”

    “Your comments on Asia are almost totally incorrect. South Korea never implemented ‘free trade’.”

    I never said it did. I said it traded its way out of poverty. This is indisputable. I also offered solid evidence that its interventionism was not as crucial to its development as you insist. I can provide more, if you want, but you’ll have to address the original arguments first, otherwise you’re taking a free pass.

    “At a more macro level, as world trade has become ‘freer’, there’s been a huge increase in banking and currency crises, and poverty has actually increased.”

    This is a complete falsehood, based on more confusion on your part. Banking crises are not related to trade. Currency crises are largely the result of government intervention. In fact, South Korea’s crises of 1979-81 and 1997-98 were largely related to distortions in the economy (like non-performing loans, banking and financial sector weakness) due to the over-investment and mal-investment driven by government.

    As for poverty, I can’t believe you’re actually claiming it has increased due to freer trade. If I could convey speechlessness through a written medium, I would.

    Not only has poverty decreased worldwide, the greatest decreases have tended to be in countries that have opened themselves the most!

    Here for boring numbers.

    Here for a couple of crude graphs.

    Here for an animated graph.

  6. Jarrah says:

    That last link is to Gapminder, which I discovered through this video that is highly watchable, highly informative, and highly exciting for people like you and me who are interested in the world.

    http://www.youtube.com/watch?v=hVimVzgtD6w

    The most relevant bits for this conversation is from ~6:23 to 15:00, but I really recommend watching the whole thing.

  7. THR says:

    So what the developing nations are striving for, then, is not free trade for themselves (which would lead them even further into poverty) but freer trade on the part of wealthy, developed nations? I can understand why they would ask for this. It’s still not clear how this relates to Australia specifically, since the EU and US tend to be more protectionist re: agriculture, for instance.

    I said it traded its way out of poverty. This is indisputable.

    Okay. It traded its way out of poverty – using significant government intervention, not ‘free’ trade. This is indisputable.

    This is a complete falsehood, based on more confusion on your part. Banking crises are not related to trade. Currency crises are largely the result of government intervention.

    See Ha-Joon Chang:

    [I]t is no coincidence that developing countries have experienced more frequent financial crises since many of them opened their capital markets at the urge of the Bad Samaritans in the 1980s and the 1990s. According to a study by two leading economic historians, between 1945 and 1971, when global finance was not liberalized, developing countries suffered no banking crisis, 16 currency crises and one ‘twin crisis’ (simultaneous currency and banking crises). Between 1973 and 1997, however, there were 17 banking crises, 57 currency crises and 21 twin crises in the developing world. This is not even counting some of the biggest financial crises that occurred after 1998 (Brazil, Russia and Argentia being the most prominent cases).

    Not only has poverty decreased worldwide, the greatest decreases have tended to be in countries that have opened themselves the most!

    No. Have a look at Russia – most Russians were actually materially better off under Sovietism.

  8. Jarrah says:

    “which would lead them even further into poverty”

    And your evidence for this is…?

    “but freer trade on the part of wealthy, developed nations?”

    Yes. Which is what I argue for in the original post! You must have skim-read it to not have noticed, in a hurry to let fly with irrelevancies.

    “using significant government intervention, not ‘free’ trade. This is indisputable.”

    Their policies are a matter of record. Their effect can only be surmised. As I have repeatedly pointed out, the evidence that their effect was positive is scanty. You are yet to address this point.

    Ha-Joon Chang backs me up – he blames capital market liberalisation, not free trade. This is a key point – you’re confusing the Washington Consensus for free trade (which of course is just a subset).

    As for your (debatable) claim about Russia, I did say “tended to be”. A few outliers aside, the trend is clear. Sachs and Warner analysed the correlation for the 1970s and 1980s, with ‘closed’ industrial countries with average annual growth of 0.74%, ‘open’ industrialised countries getting 2.29%, closed developing countries 0.69%, and open developing countries 4.49%! It continued in the 1990s – closed developing was -1.1%, open developing was 5%!

    Think about it. Compare Vietnam and Burma, Bangladesh and Pakistan, Costa Rica and Honduras, Uganda and Kenya. The trend is unmistakeable.

  9. THR says:

    Their policies are a matter of record. Their effect can only be surmised. As I have repeatedly pointed out, the evidence that their effect was positive is scanty.

    Not true. If the Japanese government had not supported Toyota through 17 years worth of loss, they would not exist today. If the South Korean government had not used a mixture or tariffs and subsidies, it’s very difficult to believe that they could have developed a high-technology export industry. To say it again, there isn’t a single nation that became wealthy and powerful using ‘free trade’.

    I’m not sure why you insist on siding with the IMF – there is a substantial critique of the IMF that has been developed in recent years, which basically aligns it with trade liberalisation, slashing of government spending, and all the other niceties of the neoliberal playbook.

    Compare Vietnam and Burma, Bangladesh and Pakistan, Costa Rica and Honduras, Uganda and Kenya. The trend is unmistakeable.

    These examples are dubious in the extreme. I’ll leave aside the African comparison, as I’m not up to speed with it. Pakistan and Costa Rica receive massive aid from the US, and are integrated into trade networks via the US. I’d suggest that this is a rather powerful confounding factor. Arguably, Vietnam’s advantages over Burma have little to do with ‘free trade’, since firstly, it doesn’t exist in Vietnam, and secondly, Vietnam has a rudimentary welfare state that has improved the lot of citizens compared to many nearby countries.

  10. Jarrah says:

    “If the Japanese government had not supported Toyota through 17 years worth of loss, they would not exist today.”

    Even if true, so what?

    “If the South Korean government had not used a mixture or tariffs and subsidies, it’s very difficult to believe that they could have developed a high-technology export industry.”

    Even if true, so what? And remember, South Korean companies were NOT protected from international competition.

    “I’m not sure why you insist on siding with the IMF”

    When have I even mentioned them?

    “and are integrated into trade networks via the US”

    So it is becoming clear to you. Phew! And Vietnam’s open economy is the obvious difference between them and Burma. Furthermore, the contrast between the Five Year Plans and Doi Moi could not be more stark.

  11. THR says:

    Even if true, so what?

    So what? It means that, as I’ve been saying all along, countries don’t get rich through free trade. The most that we can say in favour of free trade is that it would benefit developing nations if the West actually practiced it.

  12. Jarrah says:

    “It means that, as I’ve been saying all along, countries don’t get rich through free trade.”

    No, it doesn’t. It means that Japan might – might – not have had a Toyota.

    “it would benefit developing nations if the West actually practiced [free trade].”

    I’m glad you agree with the point of the original post! I’m not sure why we had to go the long way round, though :-) I look forward to your support next time I push for unilateral free trade on Australia’s part.

Leave a Reply

Your email address will not be published. Required fields are marked *