Globalization and the Myths of Free Trade

Anwar Shaikh

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781135986940
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The world has become a human laboratory for the momentous social experiment called neoliberalism. Its proclaimed purpose is to reduce global poverty, its protocols are derived from the orthodox theory of competitive free markets and its policies are enforced by the full weight of the rich countries and global institutions such as the World Trade Organization (WTO), the WorldBank and the International Monetary Fund (IMF). This book is a critical examination of this ongoing enterprise, of its history, theory, practice, and most of all, of its outcomes.

An international team of contributors has been assembled including Lance Taylor, Ha-Joon Chang and Ajit Singh.

1 Introduction

Anwar Shaikh

1 Globalization and the effects of neoliberalism

The world has become a human laboratory for the momentous social experiment called neoliberalism. Its proclaimed purpose is to reduce global poverty. Its protocols are derived from the orthodox theory of competitive free markets. And its policies are enforced by the full weight of the rich countries and global institutions such as the World Trade Organization (WTO), the World Bank (WB), and the International Monetary Fund (IMF). This book is a critical examination of this ongoing enterprise, of its history, theory, practise and most of all, of its outcomes.

The annual Gross National Income per capita of the richest countries was about $27,000 in 2001, whereas that of the poorest countries was about $430 (World Bank 2003: 235, Table 1). But even the latter sum is misleading, because the distribution of income in poorer countries is appallingly skewed. Even according to World Bank estimates, some 1.2 billion people, one in every five people on Earth, are forced to live on less than $370 per year, that is, on less than $1 a day. Almost half the world’s population lives on less than $2 a day (World Bank 2001: 3).

Neoliberalism insists that unrestricted international trade and capital flows provide the best way to overcome such problems. It sees markets as self-regulating social structures that optimally serve all economic needs, efficiently utilize all economic resources, and automatically generate full employment for all persons who truly wish to work. Poverty, unemployment, and periodic economic crises in the world are thought to exist because markets have been constrained by labor unions, the state, and a host of social practices rooted in culture and history. Overcoming poverty therefore requires creating “market friendly” social structures in the poorer countries and strengthening existing ones in the richer countries. This involves curtailing union strength so that employers could hire and fire whom they choose, privatizing state enterprises so that their workers would fall under the purview of domestic capital, and opening up domestic markets to foreign capital and foreign goods (Friedman 2002, Stiglitz 2002). The job of international institutions is to oversee this task, for the good of the world, and particularly for the good of the poor. To quote Mike Moore, former Director General of the WTO, “the surest way to do more to help the [world’s] poor is to continue to open markets” (cited in Agosin and Tussie 1993: 9).

Neoliberal globalization began to be implemented in the 1980s, and gathered great force in the 1990s. Yet in most countries, this latter period has been associated with increased poverty and hunger. Over this interval, more than 13 million children died from diarrhoeal disease. Even today, over half a million women die each year in pregnancy and childbirth, one for each minute of the day. More than 800 million suffer from malnutrition (UNDP 2003: 5–8, 40). Of the 50 countries with the lowest per capita GDP in 1990, 23 suffered declines, whereas the other 27 grew so modestly that it would take them almost 80 years just to achieve the level attained by Greece, which in 2002 was the poorest member of the EU (Friedman 2002: 1). In Latin America and the Caribbean, GDP per capita grew by a total of 75 percent in the two decades from 1960 to 1980, and only 7 percent in the subsequent two decades under neoliberalism. In Africa, the first period yielded a total growth of 34 percent, whereas in the second per capita GDP fell by 15 percent (Weisbrot 2002: 1). Only certain Asian countries escaped this pattern, and they did so by channeling the market mechanism rather than by following its dictates (see Chapter 2 of this book). Finally, international inequality also rose in the two decades of neoliberalism: in 1980, the richest countries had median incomes 77 times as great as the poorest but by 1999 this tremendous inequality had increased to 122:1 (Weller and Hersh 2002: 1).

The current debate is not about the need to utilize international resources in the effort to reduce global poverty. It is about the manner in which resources should be brought to bear. Neoliberalism provides one possible answer. Because it is also the dominant practise, the debate has focused on neoliberalism. Defenders of neoliberalism make a variety of points. They point to history, to the indisputable fact that the rich countries are market-based economies that developed in-andthrough the world market (Norberg 2004: 1). They point to standard economic theory, to “the virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading countries and of the world” (Friedman and Friedman 2004: 1; see also Bhagwati 2002: 3–4; Winters et al. 2004: 72, 78, 106). They point to empirical evidence indicating that global poverty has been reduced since the 1990s, and that trade liberalization reduces poverty by fostering growth (Winters et al. 2004: 106–7).¹ And they argue that if developing countries have not done as well as they should, it is because they have themselves failed to implement social and economic policies that are sufficiently market-friendly (Norberg 2004: 2).

Critics of neoliberalism dispute all of these points. They note that rich countries, from the old rich of the West to the new rich of Asia, relied heavily on trade protectionism and state intervention as they themselves developed, and that they continue to do so even now (Agosin and Tussie 1993: 25; Rodrik 2001: 11; Chang 2002; Stiglitz 2002). They claim that free trade theory is irrelevant because it is based on premises that do not hold even in the rich countries, let alone the poor ones. They argue that in the poor countries, trade liberalization has actually led to slower growth, greater inequality, a rise in global poverty, and recurrent financial and economic crises. And they fault the WTO, IMF, and World Bank for their cruel and inept actions in the face of such miseries (McCartney 2004; Friedman 2002: 3–4; Stiglitz 2002: 1; Weller and Hersh 2002; Weisbrot 2002).

2 Structure of this book

This book examines the preceding themes in greater detail. In addition to this introductory chapter, it is organized in four parts, each dedicated to one of the four major issues that cleave the debate.

• Part I: Globalization and free trade
• Part II: Globalization and economic development
• Part III: Globalization, gender, and inequality
• Part IV: Globalization, capital mobility and competition

2.1 Part I: Globalization and free trade

The first part of the book analyzes the theory and practice of free trade. Ha-Joon Chang (Chapter 2) examines the notion that the rich countries of the world climbed to the top of the economic ladder through neoliberal policies. This “official history of capitalism” maintains that it was eighteenth century Britain’s adherence to free trade and market policies that enabled it to beat interventionist France, its main competitor. A new liberal world order followed, ushering in a period of unprecedented prosperity in the Western countries that lasted until the 1930s, when the Great Depression sparked a round of trade-destroying tariffs. From this point of view, the reign of free trade was not restored until the 1980s, when neoliberalism took the stage.

Chang shows that the real history is very different. He traces in some detail how Britain, the US, Germany, France, Sweden, the Netherlands, Switzerland, Japan, South Korea, and the most recent Asian Tigers used interventionist trade and industrial policies to promote and protect their own industries. He also shows how these very same countries took up the cudgel of free trade only after they were internationally competitive. For instance, Britain had high tariffs even two generations after the industrial revolution, and its repeal of the Corn Laws in 1846 came at a time when its manufacturers became confident that they would dominate world trade. The US, whom Bairoch has called “the mother country and bastion of modern protectionism” (Chang, Chapter 2 of this book, see p.), openly rejected Britain’s ideology of free trade as a threat to its own infant industries, and relied instead on high tariffs and extensive state intervention during its own process of industrialization. As in the case of Britain, the US substantially liberalized its international trade only after it had achieved industrial supremacy. Japan’s entry onto the world stage follows a similar pattern of extensive state intervention, beginning with the Meiji Restoration of 1868. Its tariffs were low because punitive treaties prevented it from raising them. State-supported industrialization was therefore its main channel to success until these treaties ended in 1911, after which tariffs and quotas also became a part of its industrialization policy. This long period of steady development set the stage for its explosive growth after the Second World War. South Korea and the other successful East Asian countries (except for Hong Kong) followed this same path, relying heavily on interventionist trade and industrial policies.

For Chang, real history teaches us that successful development requires today’s developing countries to fashion similar policies, possibly with even higher tariff barriers given that the playing field is vastly more unequal than it was in the past. The rules of the WTO should be rewritten to facilitate this, and international financial assistance should be redirected away from neoliberal policies toward real social and industrial development.

Some defenders of neoliberalism concede that the rich countries relied heavily on trade intervention and state supported industrialization. Nonetheless, they argue that economic theory proves that competitive international markets provide the best option for today’s developing countries. They conclude that it is therefore essential to eliminate restrictions on markets, particularly in the developing world, so as to spread competition throughout the globe and allow free trade to work as promised (Bhagwati 2002: 9–12). But if the theory is itself wrong, such a prescription could be disastrous. So it becomes crucial to examine the theory of free trade itself. This is the task taken up by Shaikh and Nayyar in this book.

Anwar Shaikh (Chapter 3) focuses on the logic of free trade theory. He maintains that the basic theory is wrong even on its own grounds. It is not the absence of competition that produces underdevelopment alongside development but rather its existence. He argues that “real competition” between nations operates in much the same manner as competition within a nation: it favors the (competitively) strong over the weak. Thus, the collateral damage arising from globalization is exactly what one would expect to find. From this point of view, the rich countries were correct to recognize, when they were themselves on the way up, that unrestricted international competition was a threat to their own plans for development.

Shaikh argues that the fundamental error in the standard theory of free trade lies in its treatment of international competition. When economists discuss competition within a nation, they recognize that firms and regions with lower costs will tend to beat out those with higher costs. Thus, a region with low cost producers will be able to sell many of its products in the high cost region, without buying much from it. It will therefore enjoy a regional trade surplus, whereas the high cost region will suffer a regional trade deficit. Even when it comes to competition between nations, economists agree that when international trade is opened up a similar outcome obtains at first: The country with the initially lower costs of production will tend to enjoy a national trade surplus, and the other a trade deficit.

It is after this point that a critical divergence arises between standard trade theory and the theory of real competition. Standard trade theory says that in the country with an initial trade deficit, the terms of trade (the relative price of its exports to imports) will automatically fall. This would make its imports more expensive to domestic purchasers and its exports less expensive to foreign producers, so that if conditions (i.e. elasticities) are right, trade will automatically move toward balance. In this way, trade imbalances will be eliminated through automatic movements of a country’s terms of trade. This is the essence of the theory of comparative costs, which is the foundation of standard trade theory. It is important to note, as David Ricardo did long ago, that such a movement implies a fundamental change in the determination of relative prices. Within a country, and even when trade first opens up between countries, relative prices are regulated by relative costs. But according to the theory of comparative costs, once trade has been established these same relative prices have to move away from their initial cost-determined values to new levels determined by the requirements of trade balance.

Shaikh argues that the theory of real competition comes to the very opposite conclusion. Competition forces prices, and hence terms of trade, to be regulated by relative real costs at all times. In a country that enjoys an initial trade surplus, the resulting inflow of funds would enhance the availability of credit, which would lower interest rates. Conversely, in the country with the initial trade deficit, the fund outflow would tighten the credit market, and raise interest rates. With interest rates lower in the surplus country and higher in the deficit country, profitseeking capital would flow from the former to the latter. Thus the surplus country would become a net lender on the world market, and the deficit country a net borrower. Instead of eliminating the trade imbalances, free trade would cover them with capital flows. Trade imbalances would be persistent, and deficit countries in particular would be forced to run down their reserves and to depend on foreign borrowing (foreign capital inflows) to cover such deficits. In free trade, it is the profit-motive that regulates trade, and the (competitive) advantage goes to the firms with the real lowest costs. Nothing in this process ensures that the resulting outcomes will necessarily serve the needs of the developing world, however much it might serve those of the advanced firms of the rich countries.

Deepak Nayyar (Chapter 4) focuses on the history of the doctrine of free trade, with a particular focus on the interplay between economic theory and politics. He argues that Smith and Ricardo’s emphasis on free trade was motivated by the desire to challenge mercantilist ideas. Mercantilism emphasized that trade should be managed to enhance national economic power. The classical economists countered with the claim that free trade would provide gains for all parties involved, and would enhance growth, employment, and incomes. This allowed them to associate free trade with a moral stance in favor of the general good and to cast the mercantilist doctrine as an outmoded fixation on domestic national power. The association between free trade and the general good has been a fixture orthodox theory of free trade ever since. As neoclassical economics emerged, it placed particular emphasis on the universal gains that free trade was said to provide. Inserted into the model of perfect competition, free trade also became optimal. And with the advent of the Heckscher–Ohlin model (which assumes away any technological differences among nations), it also led to the claim that wage rates and profit rates (factor prices) would be equalized across nations without any need for international movements of labor and capital. Hence the holy trinity of modern free trade theory: universal good through universal gains, efficiency through optimality, and equity through international factor price equalization.

Of course, the development of the doctrine of free trade was not without challenge. In the early nineteenth century, late industrializers such as the United States and Germany saw free trade theory as a thinly veiled expression of the selfinterest of leading industrial producers such as England (see Chapter 2 of this book). Their opposition was manifested in a critique of the theory itself, with particular emphasis on the failure of market prices to incorporate all relevant social costs, and on the absence of perfect competition in the real world. Both market failure and imperfect competition have been standard elements of the critique of free trade theory ever since.

Nayyar points further that while economic theorizing abstracts from political power, the latter plays a decisive role in the real world. From this point of view, the flexible history of free trade policy signals that this doctrine is as much about the pursuit of political power as was the mercantilism it replaced. The classic case is Britain’s varying stance on its textile trade: Britain protected its textile industry when it was inferior to the Indian one, then forcibly imposed “free” trade on India when British textiles became competitive. As Britain rose to industrial dominance, it sought to impose free trade on the rest of the world but the US was strong enough to resist. In the Great Depression all sides shelved free trade in the sake of national interest. And then in the postwar period, when the US was economically hegemonic, it revived the doctrine. Given this history, it is utterly predictable that the developed world and its international institutions would try to force free trade...