Friday, March 20, 2009

Protectionism? Nah, too dangerous!

Here is Catherine Ashton, European Commissioner for Trade, making a case for keeping open markets and not resorting to protectionism despite the fallout of the current global financial crisis. She makes a case for quick passage of the Doha Round by arguing that even if tariffs were raised to the level allowed under WTO, global income could reduce by at least half a trillion dollars.

To truly deliver on those commitments made at the G-20, we need to turn the rhetoric into the reality and complete the Doha round of  world trade talks. This agreement would add hundreds of billions of dollars to the world economy every year and allow the developing world to continue to lift its citizens out of poverty through the dignity of their own labor and the genius of their own ideas. Doha is also, too, our insurance policy against protectionism. Recent studies show that if tariffs were raised to levels still allowed under the current World Trade Organization’s ceilings, global income could be reduced by at least half a trillion dollars. That’s a large chunk of the financial fiscal stimulus gone.

And if the Doha round is concluded, it’s certainly not just others that will gain, as some have already claimed. U.S. exports to key markets in Europe, Asia, Latin America will grow, in some cases at double-digit rates. The U.S. trade deficit is expected  to improve and U.S. GDP would increase. But let me make a  point about the impact on jobs. Our analysis shows that Doha will modestly improve real wages in all sectors of the United States economy for both skilled and unskilled workers and that the net effect of the round will be job creating.

The loss in welfare is on average; it has to be seen in perspective and one should not hasten to a conclusion that there will be a huge loss in welfare. Of course, there will be loss in welfare (arising from higher deadweight loss) and increasing tariffs above the existing levels would be terrible, both in terms of growth and employment. But, if we break up the dividends of the full Doha Round, it seems that the poorer countries would get the least of the benefit pie. The most going to China, Brazil and South Africa. In fact, Sandra Polaski’s general equilibrium model of global trade flows under different scenarios shows that the total gains from trade would be between $32-55 billion, with rich nations getting $30 billion; middle income countries like China, Brazil and SA getting $20 billion; and poor countries getting $5 billion (about $2 per head). So, argument for not raising tariff from existing levels makes sense. But, without looking at the spread of benefits out of the Doha round, it does not make sense to argue for its quick passage. Let the Doha Round be rewritten for what it was first perceived to be- a development round. Putting development argument first before tariff and protectionism arguments would give a clearer picture (that includes the argument for policy space, not necessarily tariffs).

Meanwhile, Becker and Murphy put inputs on the ongoing chorus (among rightists) against growing government spending (despite the desperate need for stimulus, which the markets can’t do own its own right now!). Honestly, they cherry-pick their arguments from a narrow base and make a case against government spending and try to over glorify markets.

As governments continue to determine how many restrictions to place on markets, especially financial markets, the destruction of wealth from the recession should be placed in the context of the enormous creation of wealth and improved well-being during the past three decades. Financial and other reforms must not risk destroying the source of these gains in prosperity.

Therefore, in devising reforms that aim to reduce the likelihood of future severe contractions, the accomplishments of capitalism should be appreciated. Governments should not so hamper markets that they are prevented from bringing rapid growth to the poor economies of Africa, Asia and elsewhere that have had limited participation in the global economy.

Most interventions, including random policies, by their very nature would hurt rather than help, in large part by adding to the uncertainty and risk that are already so prominent during this contraction. Government reactions have demonstrated the danger that interventions designed to help can exacerbate the problem. Even though we had well-qualified policymakers, we have gone from error to error since August 2007.

Oops, despite growth, poverty reduction remains stagnant in Africa (more people actually fell below the poverty line in SSA after the experimentation with SAPs and Washington Consensus). Inequality has also increased. Regulations succumbed to lobbyists’ petty interests (in reference to the failure to regulate investment banks and their shady securities that were priced far less than the risk they posed).That being said, the rise in global income is definitely due to the wonders of market mechanism. However, with this comes the responsibility to take care of the leftovers, those who perpetually remain at the lowest strata of income and social opportunities. Moreover, some lose and some gain by following the price signal and participating in the market. It is the government’s responsibility to take care of those who are left behind by the market, which itself is either reluctant to help or ignorant of those squeezed hard by its process. Always worth to read Krugman’s response on these sort of issues.

Also here is Jack Schwager writing in the FT:

Taken as a whole, Republicans seem to be following a new economic doctrine of deficit spending during bubble economies and deficit restraint in collapsing economies. This could be termed as “Bizarro Keynesianism” – in the Bizarro World, a creation of the Superman comic book series, everything is the opposite of what it is in our world.