Do As The Americans Did

Friday, August 1, 2008

Developing countries are right in protecting their interests

The Doha Development Round of the WTO has failed. US negotiators have blamed India, along with China, for the failure. They have accused India of being the roadblock by asking developed countries to further open their markets while insisting that India and other developing countries be protected from any market opening. Since India has been accused, it is time to ask: What was the US’s position regarding free trade when its own economy was developing? At the turn of the 18th century, when the British economy was very strong, Adam Smith and David Ricardo propounded their theories of free trade between nations. These theories did not go down well in the US as Erik Reinert recalls in his book, ‘How Rich Countries Got Rich and Why Poor Countries Stay Poor’. He says the American maxim of the 1820s was: “Don’t do as the English tell you to do, do as the English did”, which, Reinert says, may be updated now to: “Don’t do as the Americans tell you to do, do as the Americans did!” Paul Bairoch examines the historical record of trade and growth of the US and Europe in his book ‘Economics and World History — Myths and Paradoxes’. He points out that in the 19th century, the most highly protectionist European countries experienced the most rapid trade expansion and economic growth. In continental Europe, the rate of growth reached its peak at the time all countries strengthened their protection. He further says “The best 20 years of American growth took place in the 20 years (1890-1910) when its trade policy was protectionist and Europe’s liberal. During the entire 19th century and in fact until the end of the 1920s, the USA, the ‘mother country and bastion of protectionism’ experienced one of the fastest rates of economic growth in the world.” Theoretically, free trade is an excellent idea. The world’s resources would be most productively used if each nation concentrated on doing what it could do most productively and bought from others what they could do more efficiently. The problem is in getting to this ideal state. Harvard political economist Dani Rodrik points out that to get an extra dollar of output from the world’s resources, by compelling nations to give up what others can do better than them, as many as seven dollars worth of incomes must be shuffled around within and across countries. For example, French farmers may have to stop producing grain, US workers stop producing cars etc, and these activities must be transferred to other countries. Such transitions are not easy. Democratic governments, in the US, India and elsewhere have to face their electorates, who complain of their pain here and now, during these transitions towards an economist’s pie-in-the-sky in the future. In a static world, advantages are derived from fixed resources such as raw materials, land and geographical location, or on the false notion that some people have inherent advantages in some vocations that others can never acquire. Whereas most competitive advantages arise from capabilities and institutions that any nation can and should develop. Indeed, this is the thrust of ‘development’. Therefore, conditions of trade must be created under which less developed nations can develop the capabilities that the richer nations have. Presumably this was the objective of the Doha Round, which India is being accused of sabotaging by taking up the cause of developing nations. Development of any biological or social organism proceeds through stages. An infant experiments, learns and grows. Every species protects its young learners. They are not thrown into competition with adults until they have acquired sufficient strength because that would risk injuring them. Therefore, it is no surprise that in the history of nations that have become strong, like the USA and Japan, there are long periods during which they shielded their infant capabilities until they were strong enough to take on the world. On the other hand, some nations have been injured in recent times by a ‘big bang’ opening up of markets imposed on them by evangelists of free trade. Healthy free trade must emerge from an evolutionary process in which the interests of all nations are considered equitably. It cannot be imposed. In the Doha Round the needs of developing nations were expected to be given special consideration. Therefore, some fundamental questions underlying the WTO negotiations are: How are the rules of trade being determined, and who is determining them? Are they determined only by the rich and powerful? Or are the needs of the less privileged being heard too? In other words, is the process democratic? At stake in the Doha Round was not only the concept of free trade, but also the concept of democracy — another ideal that the US is keen to spread across the world. When India speaks up for the interests of developing countries in the Doha Round, it is asking for a new democratic global order, which the US should also want. Across the divide of developed and developing nations of the world, the US and India, one the oldest democracy, the other the largest, must be strong partners. Because both would know that free trade without democracy in global affairs will not create a better world for all.


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