Covid-19 Straw Breaks Free Trade Camel’s Back
By Jomo Kwame Sundaram, a former economics professor, who was Assistant Director-General for Economic and Social Development, Food and Agriculture Organization, and who received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007. Originally published by Inter Press Service
Economic growth is supposed to be the tide that lifts all boats. According to the conventional wisdom until recently, growth in China, India and East Asian countries took off thanks to opening up to international trade and investment.
Such growth is said to have greatly reduced poverty despite growing inequality in both sub-continental economies and many other countries. Other developing countries have been urged to do the same, i.e., liberalize trade and attract foreign investments.
Doha Round ‘Dead in Water’
However, multilateral trade negotiations under World Trade Organization (WTO) auspices have gone nowhere since the late 1990s, even with the so-called Doha Development Round begun in 2001 as developing countries rallied to support the US after 9/11.
After the North continued to push their interests despite their ostensible commitment to a developmental outcome, the Obama administration was never interested in completing the Round, and undermined the WTO’s functioning, e.g., its dispute settlement arrangements, even before Trump was elected.
To be sure, the Doha Round proposals were hardly ‘developmental’ by any standards, with most developing countries barely benefitting, if not actually worse off following the measures envisaged, even according to World Bank and other studies.
According to the World Bank’s annual flagship World Development Report (WDR) 2020 on Trading for Development in the Age of Global Value Chains, GVCs have been mainly responsible for the growth of international trade for two decades from the 1990s.
GVCs now account for almost half of all cross-border commerce due to ‘multiple counting’, as products cross more borders than ever. Firms’ creative book-keeping may also overstate actual value added in some tax jurisdictions to minimize overall tax liability.
WDR 2020 claims that GVCs have thus accelerated economic development and even convergence between North and South as fast-growing poor countries have grown more rapidly, closing the economic gap with rich countries.
Automation, innovative management, e.g., ‘just-in-time’ (JIT), outsourcing, offshoring and logistics have dramatically transformed production. Labour processes are subject to greater surveillance, while piecework at home means self-policing and use of unpaid household labour.
WDR 2020 Out of Touch
WDR 2020 presumes trends that no longer exist. Trade expansion has been sluggish for more than a decade, at least since the 2008 global financial crisis when the G20 of the world’s largest economies and others adopted protective measures in response.
GVC growth has slowed since, as economies of the North insisted on trade liberalization for the South, while abandoning their own earlier commitments as the varied consequences of economic globalization fostered reactionary jingoist populist backlashes.
Meanwhile, new technologies involving mechanization, automation and other digital applications have further reduced overall demand for labour even as jobs were ‘off-shored’. Trump-initiated trade policies and conflicts have pressured US and other transnational corporations to ‘on-shore’ jobs after decades of ‘off-shoring’.
Nonetheless, WDR 2020 urges developing countries to bank on GVCs for growth and better jobs. Success of this strategy depends crucially on developed countries encouraging ‘offshoring’, a policy hardly evident for well over a decade!
As the last World Bank chief economist, albeit for barely 15 months, Yale Professor Pinelopi Koujianou Goldberg recently agreed, “the world is … retreating from globalization”. “Protectionism is on the rise — industrialized countries are less open to imports from developing countries. In addition, there is by now a lot of competition”.
The Covid-19 crisis has further encouraged ‘on-shoring’ and ‘chain shortening’, especially for food, medical products and energy. Although the Japanese and other governments have announced such policies, ostensibly for ‘national security’ and other such reasons, Goldberg has nonetheless reiterated the case for GVCs in Covid-19’s wake.
Trade Does Not Lift All Boats
After claiming that “economists have argued for centuries that trade is good for the economy as a whole”, Goldberg has also noted that “trade generates winners and losers”, with many losing out, and urges acknowledging “the evidence rather than trying to discredit it, as some do.”
Following Samuelson and others, she recommends compensating those negatively effected by trade liberalization, claiming “sufficient gains generated by open trade that the winners can compensate the losers and still be better off” without indicating how this is to be done fairly.
Compensation and redistribution require transfers which are typically difficult to negotiate and deliver at low cost. Tellingly, like others, she makes no mention of international transfers, especially for fairly redistributing the unequal gains from trade among trading partners.
Interestingly, she also observes, “There are plenty of examples, especially in African countries, where wealth is concentrated in the hands of a few… even when the tide rises, only very few boats rise. Growth doesn’t trickle down and doesn’t improve the lot of the poor.”
After decades of World Bank promotion of the ‘East Asian miracle’ for emulation by other developing countries, especially in Africa, Greek-born American Goldberg insists that what worked for growth and poverty reduction in China will not work in Africa today.
Echoing long time Bank critics, she argues, “If trade with rich countries is no longer the engine of growth, it will be more important than ever to rely on domestic resources…to generate growth that does trickle down and translates to poverty reduction.”
Instead, as if supporting some contemporary pan-Africanists, she argues, “Africa needs to rely on itself more than ever. The idea that export-led industrialization as it happened in China or East Asia is going to lead growth in Africa becomes less and less plausible”.
She argues that “the African market is a very large market with incredible potential. It has not been developed yet. So, regional integration might be one path forward. Rather than opting for global integration, which may be very hard to achieve these days when countries are retreating from multilateralism, it might be more feasible to push for regional trade agreements and create bigger regional markets for countries’ goods and services”.
Acknowledging “We are still a very long way from there because most countries are averse to this idea — they see their neighbors as competitors rather than countries they can cooperate with”, not seeming to recognize the historical role of the Bank and mainstream trade economists in promoting the ‘free trade illusion’ and discrediting pan-Africanism.