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May 25, 2005

Hardline Free Trader.

John Band asks if any hardline free traders would like to comment, rebutt or argue about a post at Our Word is Our Weapon post which:

utterly skewers some ignorant bollocks from Stephen Pollard on 'free trade', aid and third-world debt.

OK, I’ll bite.

The part of Jim’s argument that addresses trade is this:

Finally, if he is right that trade liberalisation is the road to riches, wouldn't we expect the Third World region with the most liberalised trade policy to be the richest? But which one is the most liberalised? According to the World Bank, that would be Sub-Saharan Africa.

Looking at that link we get this table:

worldbankotri.gif

And that certainly does seem to bolster his argument, does it not? If free trade were indeed the road to riches, then those places which put the least barriers in the way would be the richest. Let’s leave aside quibbles about whether they were such free traders in earlier days, what happened in the past being perhaps the indicator we are looking for for current wealth, and actually think about this a little.

Can we start from one basic fact? Or at least I regard it as a fact. That it is trade, with the associated playing out of comparative advantage and the division of labour, that makes places rich? Whether we mean by an individual, group, region or country? That’s not too controversial a supposition is it?

I’ll also take a step further and, for this particular post, accept Jim’s seeming contention that there is an optimal amount of protection for a poor country (or a rich one for that matter). That full bore red in tooth and claw free trade is not the best method, that there should be some amelioration, some protection for infant and nascent companies and producers.

Everyone OK with those two postulates?

Now I’m unable to look at how OTRI is calculated as the .pdf keeps crashing my machine. My assumption is that it is looking at tariff barriers and a limited subset of non-tariff barriers such as quotas etc. Is that in fact the complete picture? I think not. As Jim himself notes:

the geographical and historical legacy which has left Africa with higher transport costs than any other region of the world.

Certainly transport costs would be a barrier to trade. As the World Bank notes:

Many of Africa’s agricultural exporters are landlocked or far from the coast. Typically, a land-locked country in Africa has 50% higher transport costs and 60% lower trade volumes than a typical coastal economy. Customs delays, roadblocks, arbitrary costs at the borders all tax trade within Africa.

There are also other things such as, not the level of protectionism by tariff, but simply by the costs and delays which the infrastructure of applying them imposes as shown here:

In Africa, the broad definition of trade facilitation is the most appropriate. A plethora of factors hampers the movement of goods and services across borders. These include inadequate road and rail networks; the poor state of infrastructure; too many official and unofficial roadblocks; and inordinate border delays because of cumbersome procedures.

There would be little sense in improving border efficiency only to leave goods stranded outside the customs post. Such issues should be tackled at the continental, regional, and national levels, with support from funding agencies.

Delays at African customs are on average longer than in the rest of the world: 12 days in sub-Saharan Africa, compared with seven and five-and-a-half days in Latin America and in central and east Asia respectively.

We might add odd little facts from elsewhere, like Hernando de Soto’s contention that registering a business in Denamrk takes two days while doing so in Congo takes 278, or that trade of any sort, whether within or across the borders of an economy depends upon property rights, not something notably present in Zimbabwe currently.

One small anecdote from personal experience, not to do with Africa but illustrative all the same. We import materials from Kazakhstan into Russia, process them and then re-export them. On the imports we pay VAT (20%, called NDS). Just as with other VAT systems, if we have paid out more VAT than we have received, we should get a refund. We don’t, the tax authorities never cough it up. So on paper we have a decent looking tax system. In reality we don’t. I’m guessing, yes, but those OTRI numbers above I think are calculated on what is said to happen, not what actually happens.

So can we accept that there are many more barriers to trade, transport costs, geographic location, infrastructure (legal and physical) and so on as above, over and above the pure figures for tariffs and quotas? If we do accept that might we also accept that sub-Saharan Africa has more of these other barriers than does other parts of the world? It does, after all, contain some of the most corrupt countries, the least transport infrastructure, the least functional states, from reputation the most venal customs officers?

Looking back up top, I accepted Jim’s postulate that there is some optimal level of protection. Might we actually look at all of the things that gum up trade in this area and then conclude that, in total, the barriers to trade are above this optimal level?  Some of these barriers are very difficult to change, entire legal systems, cultures, need to change, billions be invested in infrastructure. There is one part that is a great deal easier, reducing the tariff barriers, to compensate for the much higher non-tariff barriers in the area. We could even put forward the idea that Jim’s very figures show that tariffs are still too high, given the other barriers to trade.

Another way to put it might be that given our better transport, better legal systems, property rights, easier trade within our economies, we rich countries can afford, without too much damage (Patrick Minford puts the benefit of complete free trade to the UK and about 3% of GDP), those tariffs as measured by the OTRI, but that the sub-Saharan countries cannot?

I don’t insist on any of the above, rather (and Jim is much better at digging out such numbers than I am. It seems he stayed awake more than I did during those years at the LSE) that if we want to look at the effect of trade barriers on growth, that we look at all trade barriers, not just those expressed as tariffs? And that looking at all of those, we might find that sub-Saharan Africa is not as liberal a trading area as Jim puts forward?

May 25, 2005 in Trade | Permalink

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Tracked on May 26, 2005 12:22:10 PM

Comments

Good effort. I don't think anyone would dispute that the rule of law and effective property rights are the most vital components for stopping being poor.

However, it's rather harder for us as The Developed World to impose those (even, it would appear, if we attempt to do so by force) than it is for us to end crippling debts incurred by mad dictators and give money to be used on genuinely useful projects (like addressing Africa's woeful infrastructure).

In the past, we gave "aid" as bribes to evil bastards to stop them from becoming evil communist bastards; unsurprisingly, this had little impact on the lives of the people concerned. The record of *actual* aid is far better, even in extremely corrupt places (eg the impact of oil-for-food on Iraqi child malnourishment and mortality rates.)

Tim adds: Quite. As I’ve said innumerable times before my problem with the Make Poverty History Crowd is solely over their views on trade, privatisation, etc. I support the general goal and have no problems with debt relief etc.

Posted by: john b | May 25, 2005 12:38:06 PM

"there is an optimal amount of protection for a poor country (or a rich one for that matter)."
Whatever that optimum is, it surely can't correspond to the Agricultural regimes of the EU, US and Japan. If we want a modern equivalent of Wilberforce, he will have to campaign against these evils. Fannying about boasting that your heart's on your sleeve is no substitute for what's required.

Posted by: dearieme | May 25, 2005 1:10:53 PM

It's disingenuous to point out the coincidence of SSA's poverty with its liberal trade régimes. Coincidence does not always indicate correlation or cause and to assume it does is sloppy thinking.
I'm not an LSE graduate but it seems to me that an economy, however liberal, cannot reap the benefits of that liberalisation on its own. It has to benefit from liberalisation on the part of its trading partners. So far, it's been in the developed world's interests to keep the price of third-world-sourced raw materials low while ensuring that domestic products bring home a protected income. The ball is in our court. We Europeans do, in particular, need to forgo the Guarantee aspect of the Common Agricultural Policy (the Guidance bit isn't so bad). However it might not take a Wilberforce or Kiwi courage; perhaps the 1/5/2004 accession has done more to kick it out than anything else so far - hopefully it will be just too expensive to extend in its current form to the new member states.

Posted by: Auntymarianne | May 25, 2005 1:27:27 PM

"""Can we start from one basic fact? Or at least I regard it as a fact. That it is trade, with the associated playing out of comparative advantage and the division of labour, that makes places rich?"""

Why is Britain richer today than it was 100 years ago? It might be trade, but we traded a lot then, as well as now. No, we are richer because our technology is now more advanced, so the amount of labour and resources required to produce a particular result are now less.

Posted by: Phil Hunt | May 25, 2005 4:47:22 PM

Phil, technology doesn't advance because of good magic or government fiat. It advances because people stand to make money out of new inventions and improvements to old ones.

Posted by: Natalie Solent | May 25, 2005 6:31:55 PM

Tim, you're wasting your breath (or bandwidth). This is like having an argument with an Intelligent Design advocate, or a Scientologist. There comes a time when arguing the merits of free trade becomes otiose. If, in this day and age, someone is attempting to argue, using a purportedly well-reasoned canon of evidence, that free trade is harmful to the Third World, you can be sure that their entire Weltanschauung is so flawed as to make a rebuttal pointless. They will be found not to be inhabiting the real world. Unpack the chain of reasoning they use to arrive at their viewpoints, and you will find one or more elements which simply are not true.

Arguing against free market capitalism as a means of wealth creation is like mounting a defence of the phlogiston hypothesis, or the geocentric model of the Solar System. It isn't necessary to engage such people in debate. They can cheerfully be sidelined without any danger to the normal progression of science.


Tim adds: Well, yes, I rather agree with you. It’s just that thevery large campaign going on at the moment, Make Poverty History, which looks like it will succeed in getting $80 billion a year in aid sent to Africa, thinks that way. Worth shouting about I think.

Posted by: David Gillies | May 26, 2005 6:15:38 AM

It's not just 80Billion USD a year sent to Africa, it's the fact that the 80 Billion USD was extorted from taxpayers, and thus harms the countries concerned.

Countries should
A) Put their own citizens first.
B) Rely on REAL charity.

I have come to the conclusion that the modern state exists only to harm the interests of citizens, for the benefit of the "politburo" classes.

Posted by: Rob Read | May 26, 2005 10:42:34 AM

I remember a paper by Alexander Yeats of the World bank coming to the conclusion that Africa's marginalization in world trade is the result of Africa's transport policies and trade barriers; incorpating a subtantial anti-export bias.

Posted by: ivan | May 26, 2005 10:59:14 AM

David, I don't think there are that many arguing against free trade per se. The problem is that it is demonstrably not free trade because the developed world keeps so many kickbacks and subsidies around to support its own industry. Whilst those still exist, they will forever be giving an unfair trade advantage to the West, and whilst they still exist, it seems only right and fair that the best thing the developing world can do is attempt to protect its own industries, surely?

Tim adds: So let me see if I’ve got your logic right here. We agree that free trade is the good thing. That rich countries make their citizens poorer by denying it to them. Your solution is that poor countries should also make their citizens poorer to compensate?

Posted by: lth | May 26, 2005 11:54:29 AM

Joan Robinson, i believe, once said that because France has a rocky coast it doesn't make sense to throw rocks on your own. Subsidies tend to be a waste of taxpayers money. It doesn't make sense for developing countries to use these wastefull rocks because the developed world does.

Posted by: ivan | May 26, 2005 1:16:00 PM

Indeed. The most economically rational thing to do in the face of another country levying tariffs and duties on your exports is to scrap yours. Cutting off your nose to spite your face is no more sensible in economics than in any other sphere.

Posted by: David Gillies | May 26, 2005 9:16:00 PM

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