Trade and International Development

A few weeks back the folks at the Victoria University International Development Society very kindly asked me to speak at a debate/panel discussion which they had organised on international trade agreements. My fellow panellists were Lindsay Mitchell (ACT), Roger Kerr (Business Round Table) and Russell Norman (the Greens, I think he still posts on Frog Blog). Both Lindsay and Roger deserve credit for coming to speak on what could hardly be described as home turf. And Roger, in particular, made some good points (albeit ones I disagreed with for the most part). He also made my night by calling me a mercantilist. I've been called a few names over the years but that one is definitely a keeper. I wonder if I could get it on my business cards?

The star of the show though was Russell, who was funny and well-informed. He was also convincing: I was surprised to find myself agreeing with so much of what he said. At least until afterwards when I decided that there were things we disagreed on - he was just so polished though I didn't realise it at the time. This, I think, is the mark of a a good politician.

As for my own performance, I've certainly done better. My speech was as much musings for myself as something designed to win anyone over. And while some of my comments in the ensuing debate were clear and concise, at times I felt like I was confusing even myself. The audience I imagine must have been even more baffled.

My speech is pasted in below. One thing I want to do before hand was deal with a good point that both Roger and Lindsay made, and which I don't think I responded to at all well on the night.

Their point was that much economic theory suggests that reducing trade barriers unilaterally will be beneficial to a country regardless of what other countries do. And that given this fact, even if the EU and US maintain subsidies, the developing world should lower tariffs.

The problem with this argument is that basic trade theory is posits gains from tariff reductions in terms of relative prices. And getting prices right is important but not so much to countries where most people earn less than a dollar a day. Their problem is growth. And most trade theory (at least as I understand it) doesn't deal with this directly. One can still make a case for trade liberalistion as being growth-enhancing but it's not as tight. And by that point the interesting questions become empirical - and most recent empirical research provides no evidence that countries with lower tariffs grow faster.

Ok, enough from me - here's the speech.

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Tricks of the Trade Deals – Trade and International Development

Thanks. Over the next few minutes I hope to give you a brief outline of an NGO staffer perspective on trade, trade deals and development. Obviously, I’m not claiming to speak for all NGOs or all NGO staff but hopefully I can give you some sort of very general development perspective.

Starting with what development workers care about. Central to development, obviously, is a concern with poor parts of the world and, usually, the poorest people in these regions. This isn’t exclusive – I’m also concerned about the fate of poorer sectors of our own society too – but it is important; much development work focuses on people who live on next to nothing. And this, in turn, leads to a set of values which may differ from those of my fellow panellists.

The first of these is a strong belief in something that economists refer to as ‘diminishing marginal utility’. This is simply the idea that money matters more to people who have less of it. If you give someone who earns a dollar a day a pay rise of one dollar this will contribute to a significantly larger improvement in their welfare than if you were to give the same pay rise to me. That extra dollar to them may mean the difference between receiving or not receiving medical care, or shelter, or food for their children. For me, it’s pocket change. This seems like common sense. But you’d be surprised how often it is absent from economic analysis and particular types of political discourse.

What does it mean in terms of trade agreements? It means that the first thing I want to know about any such agreements is: what will their impact be on the least well off?

Another reason why I want to know this is because, like most development workers, I’m aware of the vulnerability that comes with extreme poverty. For people living in extreme poverty, shocks, even if they are only temporary, can be disastrous. The English economist John Maynard Keynes once wrote that, “in the long run we’re all dead”. But if you have no savings and live in country with no social safety net, and you loose your job, you’ll die just as easily in the short run too.

So when we think about trade agreements we are also concerned about even temporary setbacks that they may inflict on the very poor.

With my biases thus declared I now want to offer a basic statement about trade that is both simple and uncontroversial. And then unpack it a bit.

The statement: Increased international trade benefits countries as a whole.

I agree with this but it does not follow that I necessarily support what is called free trade or all trade agreements. Why?

Very quickly:
1. “Countries as a whole” is not the same as everyone within the country. Change almost inevitably brings winners and losers. And, what I want to know first, is who the losers are and whether they need to be, or indeed can be, compensated.
2. Carte blanch trade liberalisation does not necessarily lead to increased trade. Almost every developed country as well as recent developing country trade success stories used strategic barriers to protect their infant industries. Trade agreements shouldn’t deny developing countries this option.
3. What we call free trade really isn’t that free but tends to reflect the respective political power of the bargaining partners. Powerful countries get to keep protections they don’t need – weaker nations are asked to remove those that they do.
4. Trade has a role to play in economic development but it isn’t everything. Domestic policy is equally, if not more, important and trade liberalisation if taken to far can remove key domestic policy options – some balance is needed.

Having said all this I want to emphasise again that I am not opposed to international trade. For many people in developing countries it is perhaps the only route out of poverty. But this fact alone means that it is crucial that we approach trade in a pragmatic fashion which helps rather than harms the least well off.