10:22 AM Oct 29, 1993

FREE TRADE, 'FAITH' AND A FEW ZEROES

Geneva 28 Oct (Chakravarthi Raghavan) -- In September this year, a Canadian Conservative party candidate in the general elections (which ended Monday with a humiliating defeat for the party), while defending himself over NAFTA, was reported as having said that 'free trade' was a question of belief.

Around that time, a friendly GATT official -- responding to the scepticism over the claims about the Round (job creation and growth) being promoted in the media by the GATT chief, Peter Sutherland, and some of his advisors -- asked: "But don't you believe in free trade".

He was genuinely non-plussed by the response that 'belief' is something best left to churches, mosques and temples and that in secular matters of politics and economics, while the same exactitude of proof as in hard sciences may not be possible, one has to function on the basis of rationality, reason and logic and an element of cause-and-effect proof from past experience.

As the days tick on towards the 15 December deadline (set by the US, but virtually endorsed by most of the principal participants) of the Uruguay Round, with no signs of narrowing of differences but rather of new ones cropping up every day, politicians and the public are being increasingly asked to leave rationality behind and go by faith and beliefs.

Nothing has been demanding 'faith and belief', and straining credulity and rationality, more than the claims being made and promoted in the media, about the benefits of concluding the Round successfully and the ill-effects of a stalemate and failure.

These predictions -- of the 'Kingdom of God on this Earth' (in ten years!) for believers, and brimstone and fire for the agnostics -- have been sedulously promoted by the Fund and the World Bank, who having lost their legitimacy since 1972 are struggling to find a new role for themselves but are being challenged over their macro-economic policy advices and prescriptions that have overwhelmingly failed, in the North and the South. The GATT which is trying to equate itself with the Fund and the Bank as the new 'trinity' has joined in spreading these predictions.

With 45 days left to conclude the Uruguay Round negotiations, pressures have been sought to be mounted on the negotiators by projections of the benefits of success and dangers of failure.

Few, whatever their economic school of thought, seriously quarrel with the proposition that trade liberalization, subject to some caveats, could help economic growth and general well-being or that a failure of the Uruguay Round negotiations could have some negative consequences, particularly because of the deliberately promoted media perception that a failure to reach agreements on 15 December would be a major failure for governments and the world economy.

The two important caveats that would weigh with any government are that trade and 'market', however successful in promoting efficiency of resource allocation, are 'failures' in securing 'equity' and ignore 'social' factors that impinge on the essence of politics. And efficiency without equity will not endure over the medium- to long-term, and need government interventions against market failures.

But in this debate, problems of faith and belief and irrationality have crept in because of figures bruited about on the benefits of the Round and disasters of a failure.

Before the launching of the Round, and thereafter too, the Fund and the Bank, and their officials and consultants, pushing the interests of their major share-holders, have been promoting the objectives of the North in the Round (coining terms like 'free riders' to discredit the developing world), even as they were pushing unilateral trade and economic liberalization on Third World countries.

But since 1990, as the evidence about the failures of their structural adjustment policies and programmes in the South have begun to mount, compounded by the macro-economic policy failures of the North, these institutions have increasingly turned to 'trade' as a solution for ills.

The GATT which in the 48-year old post-war history of the UN system was never even recognized as an institution and trying to promote itself, has jumped into the fray, raising the stakes, so that any success would enable it to share global economic decision-making roles with the Fund and Bank.

In 1992, the OECD Development Centre in Paris (which technically is separate from the OECD itself and is financed separately), came out with a thin pamphlet which said it was a briefing note based on a research programme of the Centre and the World Bank and due to be published shortly, putting concrete figures and numbers about the benefits of concluding a Round.

Similar points though had been made even before by the World Bank which in several of its reports had argued about the benefits of trade liberalization and the less costs for the rich North in trade liberalization as opposed to transfer of resources through taxation and otherwise.

Despite the numbers about benefits in the OECD centre's "policy brief" (a mouth watering annual income gain of $195 billion, "greater than the income of sub-Saharan Africa and half the income of China' was projected in the 40-publication), it attracted little notice and attention.

But soon, in an even more summarised way, it got the eye of speech-writers, and thus into the speeches of John Major and a few others, and injected into the Uruguay Round controversies.

With the US and EC stalemated in 1992 on trade issues, Prime Minister Major and the like began citing the $195 billion benefits (the figures acquired a legitimacy independent of the study and its caveats or the briefing notes). The study was also being promoted by its authors (Ian Goldin and Dominique ven der Mensbrugghe), and a new dynamics was injected -- particularly at a time of high tension within the Community and between the Community and US, over their negotiations for modifying the Dunkel text on agriculture.

When the issue became more political in October and November of 1992 (before and after the US elections), the Wall Street Journal published a story casting doubts on these numbers game or the purported benefits of a Round. It did so after talking to the two authors.

Writing in the WSJ of 8 November (when after George's Bush's defeat the US and the EC talked about agriculture and ultimately produced the Blair House accord), Bushan Bahree quoted the authors of the study as saying that "they've been misunderstood and that people are hoping for the moon". Bahree quoted the authors as saying that while the $195 billion benefit would accrue to the world economy, the predictions won't apply now but ten years into the future.

Bahree wrote, basing himself on Goldin and Mensbrugghe's talks with him, that any US-EC trade truce and initialling of an agreement wouldn't produce a boost to the world economy (which was in recession or stagnation) and that according to Mensbrugghe while trade reforms would provide long term shifts (it) "wouldn't pull an economy out of a cycle".

Bahree recalls the authors as saying that the gains were more trends than absolutes and that it would take three or four years before a successful Uruguay Round would give the world economy a boost and that for a year or more after the successful conclusion of the Round, it would provide no more than a psychological boost and that real benefits would take years.

But the coup d'grace was given by the OECD Secretary-General, Jean Claude-Paye, who dismissed the projections as a "pretty theoretical exercise" and accused the media of missing its real thrust, namely that many developing countries would lose and would need offsetting compensation.

But with the publication of the full study, the numbers game of the benefits of a successful round and failures have received a new momentum.

In July, immediately after his taking over, Sutherland was cautious about the gains.

But, on the eve of the Tokyo G7 summit, the GATT chief (based on these estimates of gains) promoted the idea of jobs that would be created in the G-7 countries.

However, the Financial Times columnist, Samuel Brittan (brother of EC trade commissioner, Sir Leon Brittan), called it a 'cheat', stressing that trade did not create new jobs but shifts jobs.

In September this year, the 'study', on which the briefing note was based, was published as a joint World Bank-OECD Development Centre study (with a third author, Odin Knudsen thrown in), the 213 billion dollars of gains (increase in world GDP) in year 2002, a new numbers game began.

It was avidly picked up and promoted by the GATT and Sutherland.

Even as econometrists and economists in other international organizations were puzzled by this messianic way the 'numbers' were being promoted, the US Trade Representative, Mickey Kantor has come up with some numbers of his own - a 'nearly six trillion dollar' figure!

According to the US Mission's Daily Bulletin (No 199 of 22 October), speaking at a State Department conference for American Business Executives on 20 October, Kantor said: "A successful Uruguay Round, by lowering tariff barriers all around the world, opening up financial services, opening up audio-visual services, making sure we protect our trade laws, and having a better dispute resolution system will add, get this, in the next 10 years (emphasis in original)...six trillion dollars to the world economy, almost...One-point-two trillion of that will be the United States'. Seventeen hundred dollars a year will be added to the median income of every family in the United States per year, for 10 years, if we have a successful Uruguay Round".

US officials in Geneva could not provide any basis or backing for the Kantor claim, with one of them, not wishing to be identified, adding "it is a hyperbole, like many surrounding the Round".

The World Bank/OECD publication, with its econometric models and assumptions, said the gains of a partial liberalisation in agriculture (envisaged in the 1991 December Dunkel Text of the Draft Final Act, but reduced down by the Blair House accord which France and the EC want to modify further) and a 30 percent tariff reduction in manufactures would produce in year 2002 a $213 billion gain to world output and that this would be "half of China's GDP". It does not say what proportion it would be of world GDP, and what the world GDP would otherwise be in 2002.

FT columnist Samuel Brittan, who in July had poured cold war on such projections, came out in October in support, and wrote that the 213 billion dollar gain is all out of 'efficiency' as a result of competition and would be 3/4 of one percent of world GDP -- which gives a world gdp (in 1992 dollars) of $28,400 billions.

Few eonometrists make long-term projections excepting in generalities. GDP projections in terms of values could easily involve a plus or minus 10 percent for statistical error, one statistician explained.

The statistician, who is in one of the UN organizations said that in best of times this is a hazardous game, since far too many variables are involved and anything could go wrong over a 10-year horizon. Even more, he said, even in terms of short-term projections, all the institutions in the game have acknowledged that their projections have been wrong because they have not been able to anticipate accurately the responses of people to economic situations -- whether they would use incomes to spend and consume, build up assets or what.

If this is the situation in the very short-term of 6 months to a year, how can anyone project over 10 years, the statistician asked.

To put various figures in some perspective, the World Bank, in its "Global Economic Prospects for Developing Countries", said in 1992 that any "Long term projections of the growth prospects of developing countries during the 1990s need to be interpreted with considerable caution", and gave some ideas of its view of likely growth rates.

For the industrialized countries it projected over 1991-1995 a 2.5 percent growth -- based on consensus projections of institutions. In fact, in 1991 there was a 0.7 percent growth, in 1992 an 1.4 percent and for 1993 an estimated 0.8 percent.

The 1990 world gdp, the latest actuals available and published by the UN, is 22339 billion dollars -- 16347 billion the gdp of the OECD countries, 3721 billion that of the developing world, 1893 billion that of former Soviet Union and Eastern Europe and 400 billion that of China.

The World Bank 1992 report, with some considerable caution and caveats, projected a 2.5 percent growth over 1991-1995 for the OECD countries and a 2.8 percent over 1996-2001. For the developing world, it projected a 4.9 percent growth rate over 1990-2000.

Projecting these rates over the 1990 GDP, in year 2003, the GDP of the OECD countries would be 23110 billion, that of the developing world 7200 billion and of China 1103 billion or a world GDP (ignoring the uncertainties of eastern Europe) would be 31413 billion (1990) dollars.

The statistician noted that when it comes to estimations of world gdp (as against actuals recorded afterwards), in his world he normally assumes a ten percent margin of error either way. In projections there can at best be guesstimates of the informal sector -- the black economy in the North and the demonetized economy in the South.

While some vague positive and negative effects of the Round could be accepted, going beyond them in terms of figures and billions of dollars, one would need to be sceptic, he said.

Some long-term projections of the World Bank, on commodity front and other such projections, country and regional, on which policy advices are based, have invariably proved to be over-optimistic. Whatever the improvements on them in the RUNS model used in the Uruguay Round study, the overall perspective is still the same.

There are far too many variables and assumptions. The Goldin-Knudsen-Mensbrugghe study stated exogenous elements are population and labour force growth rates, agricultural and non-agricultural productivity trends, net foreign resource transfers, energy price trends and policy instruments.

The RUNS neo-classical model implies that the supply/demand responses to price variations would be the same across the world. There are other such assumptions that may be rational for a look into future general trends, but would be irrational to use the 'figures' for policy options.

But, when policies are based on 'faith', 'belief' and free trade theories, a few zeros here and there don't matter as the Kantor projections and assumptions suggest.