SUNS  4338 Friday 4 December 1998



WTO SECRETARIAT PUSHES LIBERALIZATION MYTHS AND DOGMAS


Geneva, 3 Dec (Chakravarthi Raghavan) -- World merchandise trade is expected to decline in dollar value terms in 1998, but on expectation of recovery of commodity prices and no strengthening of the dollar, trade in value terms in 1999 will exceed volume growth, the WTO economists said Thursday.

Mr. Patrick Low, the WTO's chief economist and Mr. Karl-Michael Finger of the economic research and analysis division, admitted that they had been over-optimistic in predicting in March that the crisis in South-east Asia would only make a small dent in world trade, but that  this was on the basis that the crisis in these countries could be contained.

Low also blamed the not anticipated depth of the recession in Japan (which had been repeatedly projected and prognosticated by other institutions) as responsible for the changed outlook.

Low and Finger, at a press conference to release the World Trade Organization's annual report, said world trade growth in 1998 could be in the range of 4-5 percent (volume terms), but  underscored the many uncertainties in making any projections.

Projections for next year were even more difficult and precarious, they said, and much would depend on what happened in Asia, its stabilisation and recovery, and what will happen in North America and Europe. There were too many downside risks. These included questions like what
happens in the US where household savings are very low and whether consumption is sustainable, and on consumer and investor confidence, particularly in the event of strong correction in values on the stock market, and what happens to Japanese recovery. Other imponderables included behaviour of international capital markets, and whether they continue to be very cautious on flows to emerging markets, and how the services trade will perform this year and in the next.

Finger expected commercial services trade to register a deceleration this year, but of a smaller order than merchandise trade.

And while the WTO economists just a few weeks ago had spoken about the strong growth in export volumes of some of the worst hit Asian countries, they said that while their volume growths had been exceptionally strong, the unit values had been much lower, thus registering lower growth in value terms. And recent figures showed that in the third quarter the performance had decelerated. And economies which had not been originally affected, like China and the Taiwan, now show export and import performance had been affected.

In what Low himself described as a "political statement" of the WTO secretariat in an overview, the report argues that most of the problems facing the trading system arise outside, in the financial system, but that governments have so far resisted protectionist pressures - though there has been some use of instruments like anti-dumping. The WTO expects stronger protectionist pressures next year, and these call for determined resistance from government.

In the overview chapter, the WTO secretariat, in its political statement, (as in the past) has stepped into the arena of issues where the membership is divided, and has pushed for a comprehensive agenda of negotiations and with new issues.

And in a further chapter, special study on 'globalization and trade', with little empirical evidence of its own but citing some studies, including a couple from the World Bank that the Bank no longer
promotes, and others that have been challenged and discredited even by mainstream economists, promotes the view that "open economies" grow better than those not so open, and protectionist measures are bad in all circumstances and for all levels of development.

One of the problems of neo-liberal economists, and even more their advocates, has been that (as for the transnational media owned by major economic interests) they function on the basis that facts are free, but ideologies behind theories are sacred. And citations are often selective, to buttress an ideological view, ignoring others.

The WTO's political statements hue to this line.

For example, in the chapter on globalization and trade, and in promoting financial services liberalization, with prudential regulations and supervision but minimal political interference, the
report in a footnote cites the IMF and the Asian Development Bank views that while capital flows seem to have played a role in recent financial crisis in magnifying problems, "most observers agree that these flows are not the main cause of crisis."

The WTO may, ideologically, be precluded from taking note of the analysis (accepted and acclaimed now by many mainstream economists) by UNCTAD's Trade and Development Report.

But with its much proclaimed cooperation and coordination agreements with the secretariats of the Bretton Woods institutions, the WTO surely cannot ignore the World Bank's assessments both of the crisis and the consequences.

In the latest report of the Bank, published Thursday, and in a column  contributed in the Financial Times, the Bank's chief economist and Senior Vice-President, Joseph Stiglitz has said that while there is no single culprit for the problems that beset east Asia, and the situation in each country differed, "the origins of the crisis lay fundamentally in the interaction between two things: the difficulties of domestic financial liberalisation and the problems associated with volatile international capital markets."

Arguing that resisting protectionism is vital, but not enough, and that pressing on with trade liberalisation is essential, the report's overview notes that fortunately, the WTO already has an impressive agenda -- implementation, further negotiations and preparation of key decisions about future development of the system to be taken at the 3^rd Ministerial Conference in 1999.

A top priority, as they prepare for the 3rd ministerial, will be to consider whether to expand this negotiating agenda and in what direction - whether, for example, to launch negotiations on trade and investment, trade and competition and transparency in government procurement. A number of members, it notes, want to see industrial goods included as well, and other issues such as interface between trade and environment.

The chapter on globalization, stresses the trade growth as a primary instrument. Globalization, it claims, is driven by technological change, increasing number of governments pursuing liberalization
policies and removing regulatory obstacles, and the combination of new technologies and freer markets enabling enterprises to internationalize their activities.

The report speaks of trade liberalization promoting economic welfare, and cites the GATT secretariat's 1994 estimates about the 500 billion dollar welfare gains from the Uruguay Round agreements.

This ignores subsequent World Bank and other studies in 1995 and others since then, which have shown that the welfare gains have been much exaggerated, and many as in Africa have actually suffered welfare losses and face continued marginalization.

Citing some simplistic views of benefits of free trade through comparative advantage, and purporting to review empirical evidence in studies providing cross-country evidence of link between trade and growth to support the view that trade liberalization and economic integration promote growth.

The report concedes that such empirical literature has to deal with a number of conceptual and data problems, including difficulties of translating the myriad trade barriers across thousands of tariff lines into an "overall openness" index of trade regime,  but nevertheless relies on these studies listed in an appendix.

Two of them, the World Bank's World Development Report 1987 and a subsequent one by Sachs and Warner (1995) have probably received the most attention and scrutiny, not only from heterodox economists, but more recently even mainstream economists.

The World Bank, finding its WDR 1987 under considerable criticism even from within its executive, organized a subsequent study 'Liberalizing Foreign Trade in Developing Countries' (1990), but this met with even stronger challenges - about its data, and the conclusions in a final volume not borne out by the individual country studies. The Sachs and Warner study figured in the Brookings Papers, where its methodology and conclusions, were questioned by the IMF's Deputy Managing Director,
among others.

In the comments on the Sachs and Warner study, in the Brookings Papers, after noting (and questioning) the "Olympian" view of the world economic history over the last century, Fisher refers to the "quite extraordinary" conclusion of Sachs and Warner that "countries with open economies will converge to the same level of income, although it will take a long time."

This provides so much comfort to international agencies, says Fisher, that in his institutional capacity he should accept it and move on, but it was necessary to check details of the argument.

While it is impossible to categorise countries perfectly, says Fischer, the groupings used by Sachs and Warner do raise difficulties.

"I feel about them as much as I feel about newspapers, that they are very accurate on matters about which I know little," says Fischer and goes to comment on some of the classifications: he knew for sure that Zimbabwe (described as a 'never open' country in the study) was not a socialist country in 1970. He did not also believe Jordan had been consistently open since 1970; Israel's trade reforms began in 1963, and not in 1985, and suffered macroeconomic consequences by opening; and it was odd to find India and Hong Kong both classified as open since 1995, and difficult to understand why Lesotho and Swaziland are considered open and South Africa closed, when all three are in a customs union.

And by starting in 1970, notes Fischer, the authors stack the deck against the import substitution strategy. "Whatever happened later, Latin American and African countries did quite well in the 1950s and 1960s, despite their perverse regimes."

Fischer also says that the strength of the Sachs-Warner results are surprising, given that the question being looked at, that of influence of openness on growth has been extensively studied before. While the early results that openness contributes to growth finds increasing support from recent work, adds Fischer, "no one has found such extraordinarily categorical results.... It is particularly surprising that this paper reaches stronger conclusions than the World Bank's famous 1987 World Development Report, which was so roundly criticised for over-reaching (emphasis added)."

The Brookings papers also says that "whether the correlation between openness and growth can be largely attributed to the beneficial effects of trade received a range of comments."

It then cites the views of T.N.Srinivasan, who like Bhagwati is well known free-market, free-trade advocate in US acadamia. Srinivasan noted that trade policy and growth are both endogenous variables, making it hard to establish causality. He criticized trade regressions (used by trade economists to make projections and estimations of liberalising tariff and non-tariff barriers) in general because of such endogeneity and because of measurement errors, cited some unpublished papers of Marcel Dagaenais at the Montreal University showing serious biases in such regressions due to measurement errors. And Srinivasan further pointed out that the simplest versions of neo-classical trade theory suggest that openness should have only a level effect, not a long-run growth effect, and making trade into an engine for growth required a resort to vague externalities (emphasis added).

And economic historian Paul Bairoch ['Economics and World History: Myths and Paradoxes', (1993) Chicago University Press] challenges the general view that among measures to be taken to avoid a depression, protectionist measures should be avoided, since this was what caused the 1929 crash and the following depression.

Bairoch says that this assumption is based on three myths: the first relates to the view that the 1920s were years of increasing protection; the second about the magnitude of the Great Depression of the 1930s, which Bairoch says, was much less severe and general than thought; and
third that the performance of the fascist economies during that period, which he says, was not as exceptional as generally thought.

The weighted average of customs duties on manufactures in Continental Europe, he notes, was 24.6% in 1913 and 24.9% in 1927... The period preceding the Great Depression in Europe was one where a tendency to more open policies prevailed - even if it was not free trade.

The US, on the eve of the 1929 stock market crash, began changing its tariff policy to increase protection, with the final vote in Congress on the Smoot-Hawley Tariff Act taken in June 1929. But the economic crisis could not be said to have started before the Wall street crash in October 1929, while industrial production in Nov 1929 was seven percent higher than in Nov 1928. And while President Hoover signing into law the Smoot-Hawley in Jan 1930 put a slightly different complexion on events, even without the crisis he would not have vetoed the law. And while as a result US protectionism reached unprecedented height, and before the end of the year 25 countries raised their own duties on US products as a reprisal, by then the world was in depression and the protectionist measures were the result, and not the cause of the depression as too often claimed.

And while the 1930-39 period was a negative one for many countries, specially for the USA, this general picture must be qualified says Bairoch. There was a major slowing of economic growth, but not declining GNP per capita, and for the developed countries per capita GNP grew by an annual 1.1 percent. And atleast for 8 countries, the 1930s were a better decade than the 1920s. And this includes Britain and Germany, the two major economic powers of Europe.
And while international trade collapsed, in terms of price and volume, due largely to the extreme protectionist measures of most countries in the first years of the depression, as far as economic growth was concerned, at the world level, and in many countries, the 1930s were not such poor years as generally described.

Bairoch also notes that the dogma of neo-classical economists that "Free Trade is the rule, protection the exception" is a myth.

"The fact that I spent almost three years with GATT, 'the temple of free trade', has made me more sensitive to this myth," says Bairoch, who is now a professor at the University of Geneva.

Surveying the economic history in Europe in the 19th century, that the UK moved towards liberalism in 1842, but not in the rest of Europe. Between 1846-60, there was the theoretical influence of British liberalism on the continent, but the breakthrough to free trade came only in 1860 with the Anglo-French trade treaty, followed by further treaties between France and many others, under which the MFN clause led to "tariff disarmament".

But from 1879 there was a gradual return in Europe to protectionism, and the liberal period in Europe ended in 1892. And while Britain, which continued with liberalism, underwent the consequences of the Long Depression (1870-2 to 1891-3), most of the continental Europe escaped
and grew.

Purely in terms of changes in commercial policy, that provide paradoxes for supporters of free trade, the facts show that not only did the period of reinforcement of protectionism coincide with a more rapid expansion of trade, even more paradoxically the highly protectionist European countries experienced the most rapid trade expansion.

"Even if this cannot be taken as proof that protectionism generates international trade, it does indicate that protectionism does not always necessarily hinder it."

As for non-European developed countries, in the entire 19th century, and till 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.

But the compulsory liberalism enforced on the Third World led tode-industrialization and inability to industrialize. Citing the history of India and the imports of textiles and yarn from Britain and its
effect on the Indian industry and economy, Bairoch adds: "India was only the first major casualty in a very long list... even politically independent Third World countries were forced to open their markets to Western products, and this led to an influx of manufactured goods. Annual exports of cotton goods from Britain, France and the USA to Latin america represented the equivalent of 10.6 sq metres for each inhabitant, and for the Middle East it was 7.9 sq metres. These statistics explain the total disappearance of textile industries in those regions. And the case of iron industries was even more striking, in this sector the deindustrialization was most pronounced."

The WTO study has a footnote that perhaps illustrates its ideological hang-ups.

In support of arguments about damaging effects of trade protection under all circumstances, in a footnote the report cites Sir Robert Giffen. According to John Cunningham Wood's book, "British Economists and the Empire", Giffen was a 19th century English journalist, statistician, and strongly pro-Empire civil servant who was a strong believer in free trade but supported imperial preferences on political grounds, focusing in discussions on imperial questions on "aggregate aspects of the British and colonial economies."

Giffen's views about free trade and against restrictions were at a time when the British as exporters found Europe going back on "liberalism" and "free trade" - and as pointed out by Bairoch, escaped the Long Depression, but in fact saw growth in trade and per capita incomes.

But for the ideologically motivated globalists, whether at the IMF or the WTO, the post-war Keynesian economics is an aberration, and the 19th century liberalism and the post-1989 era of neo-liberalism is a resumption of the golden age of capitalism, NATO and WTO etc are important landmarks, while decolonization is not even mentioned in public statements and speeches.