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International trade and domestic experimentation

The stated purpose of the World Trade Organization (WTO), which may come as a surprise, is to raise living standards all around the world. The opening of the Agreement establishing the world trade regime lists the following goals:

raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development.

It is clear that the framers of the WTO were committed to promoting equitable development, but let’s note right away that the means for achieving this aspiration, expanding market access and deepening integration of the global economy, has been confounded with the end of the WTO agenda. In other words, sustainable development is viewed today as synonymous with maximizing trade. This post presents an alternative bent of economic development, following Dani Rodrik’s ‘The Global Governance of Trade as if Development Really Mattered’ in this regard, one which displaces the enshrinement of trade liberalization and emphasizes instead country-specific institutional innovations, based on local knowledge and experimentation.

The debate of whether to prioritize poverty alleviation or economic development is largely a misguided one. As Rodrik emphasizes, higher growth rates correlate very closely with greater income equality and, at the same time, policies that increase the incomes of the poor tends to be good for growth. The choice between economic growth and income redistribution then is of little interest.

More important to consider, in Rodrik’s view, is whether economic growth strategies should have an explicit poverty focus. He says yes, for at least three reasons. First, that rewards of growth are not equally distributed is well-learned by economists. From this perspective, it may make more sense to choose among competing growth strategies one that ensures the welfare of the poor. Second, given the social costs of poverty, based on a strict economic computation, policies that have greater potential payoff for the poor may actually be the most effective growth strategy to raise average incomes. Third, interventions aimed at helping the poor will ensure the development of human capabilities, echoing Amartya Sen, for those who face the greatest hurdles to lead the kind of lives they value.

The view that wholesale privatization, liberalization, and openness is the best orientation for growth performance has been refashioned since the late 1990s by an augmented ‘enlightened’ approach that emphasizes the need for institutional reforms to supervise and regulate economic activity. It remains the case nonetheless that these institutions reflect strong Anglo-American biases, tending to emphasize the integration of the world economy and the harmonization of practices, codes, standards, etc. This “kitchen-sink approach to development” erroneously presents a unified economic growth recipe to be replicated across various economies, despite substantial differences therein, rather than recognizing the full range of potential institutional possibilities (2001: 16).

Not covered under the received wisdom of the enlightened standard view, three unorthodox growth strategies are of important note. First, import-substituting industrialization (ISI), which promotes home producers by protecting the domestic market against foreign imports, has been historically documented to boost productivity performance in economies where implemented. Second, governments that have taken active roles in implementing credit subsidies, tax incentives, educational policies, export inducements, duty-free access to inputs, and so on to establish competitive enterprises before undertaking trade liberalization enhanced the diversification and profitability of their home markets greater than states that have consistently pursued export-led growth. Third, a two-track strategy that combines certain highly protected domestic sectors with other zones operating under free-trade principles in the same, albeit segmented, economy has also been proven economically successful, particularly in China and Mauritius. All of this suggests that “there is no single model of a successful transition to a high-growth path” (ibid.: 21). The critical factor is instead a peculiar combination of unconventional local innovations and orthodox strategies.

According to neoclassical visionaries trade liberalization, that is, trade openness, promotes growth, ergo countries should slash import tariffs and remove trade barriers to achieve high growth and reduced poverty. This position is often supported by influential studies that suggest there is a strong correlation between liberal trade policies and economic growth. Upon closer look, however, trade liberalization tends to follow growth, not the other way around.

Rodrik is correct to recall that “practically all of today’s advanced countries embarked on their growth behind tariff barriers, and reduced protection only subsequently” (ibid.: 23). Although no country has developed by closing itself off to foreign trade and investment entirely, it is equally true that growth depends on policies that push the economy towards activities that generate growth in the long-haul, usually involving partial protection. As one would now expect, there is no single blueprint-style sequence of policies that assures successful development. Trade reform ought to instead emphasize the critical role of country-specific innovation and experimentation “with some elements from the orthodox recipe” (ibid.: 4).

Countries that pursue economic global integration through the WTO today are required to implement an endless list of institutional reforms to minimize the risks and maximize the gains from openness. The majority of these requisite conditions are perfectly sensible but, at the same time, these institutional priorities are outside the fiscal resources and administrative capabilities of many of the least-developed countries. Just three of the WTO’s institutional requirements, customs valuation, sanitary measures, and intellectual property rights (TRIPS), cost an estimated $150 million per country.

Moreover, Rodrik points out that rather than reflecting an awareness of development priorities, these economic principles largely serve the “mercantilist interests of a narrow set of powerful groups in the advanced industrial countries” (ibid.: 27). By minimizing government interference, these trade agreements provide free market access for larger trading partners to take advantage of unregulated economies. And, as already suggested, if select government intervention plays a crucial role in economic transformation then getting the state out of the way only crowds out more serious development-friendly strategies at home.

Trade, as the WTO’s preamble suggests, is a useful means for achieving sustainable development, higher standards of living, resource efficiency, and full employment. But in fact the international trade regime has been obsessed with trade as an end in itself and, as a result, has overlooked other developmental objectives around the world that reflect domestic-specific conditions. For this reason trade rules should allow for diverse institutional forms and varying preferences as an alternative to harmonized national practices.

Indeed it is possible under existing agreements, Rodrik explains, for countries to legitimately restrict trade or suspend WTO obligations if necessary. Such ‘opt-outs’, as Rodrik describes them, are justified under a broad range of circumstances, such as competitive threats, distributional concerns, conflicts with domestic norms, or developmental priorities. The abuse of opt-outs is a significant concern to be sure, but an investigative body to deliberate among competing interests in a transparent manner would, Rodrik argues, increase its chance of success.

If governments were to take advantage of this right to protect their own economies more consistently, concludes Rodrik, it is conceivable that the traditional agenda of the WTO as a multilateral institution would fundamentally shift away from a market access perspective, the chief beneficiaries of which are multinational corporations in the advanced industrial countries. In its place would appear a very different type of WTO, one who’s role would be to manage institutional diversity rather than harmonize practices across different national systems.

An earlier version of this post was published @ Indigenous Ink