Inefficient markets

Peas in a Pod™
Fears that Apple aims to become the Microsoft of the music download business by using proprietary technology to lock in the dominance of iTunes have already attracted the scrutiny of Nordic competition watchdogs. So it is a worrying indication of Apple's monopolistic intentions that it is laying legal claim to the word "Pod," threatening to sue companies that use the word as part of their product names for infringing its iPod trademark. It is already taking action against the small start-up that makes the Profit Pod, an infrared scanner used to record activity on video-arcade machines.

But lest Steve Jobs forget, Apple did not invent the word "pod." By trying to appropriate it, he risks alienating millions of people who were once attracted to Apple's apparently upstart brand, as well as fanning the fears of European trustbusters. After all, even Microsoft has not dared to lay claim to the word "Word."

Sony stumbles
The company that became famous for its iconic Walkman continues to stumble in the era of the iPod. It was bad enough that Sony failed to anticipate the appeal of MP3 players and was usurped by Apple in the music-player market; now it may fall behind in games consoles too.

Howard Stringer, the Welsh-American who took charge of the Japanese consumer electronics and entertainment giant last year, has so far ducked the challenge of shaking up Sony's sprawling empire, opting instead to muddle along in the hope that its PlayStation 3 (PS3) games console and its Blu-ray standard for next-generation DVD players will restore its fortunes. But now Sony has had to delay the launch of the PS3 for the second time—until next March in Europe, leaving Microsoft's Xbox 360 and Nintendo's Wii a free run at the important Christmas market. Since the PS3 doubles up as a Blu-ray player—indeed, the delay is the result of problems in producing the blue lasers at the core of the Blu-ray technology—the setback is also a blow in Sony's DVD-standard war with Toshiba's HD-DVD.

This risks becoming a rerun of the VHS-Betamax battle, where Sony's technologically more sophisticated format ended up losing out. Stringer's gamble—that thanks to its superior technology, Sony's PS3 would beat its much cheaper rivals, and that this would propel its pricier Blu-ray format to victory in the DVD war—was always risky, but now it looks foolhardy. Sony's once-vaunted technological prowess looks increasingly dodgy: witness the embarrassing recall by Dell and Apple of over 5m faulty Sony laptop batteries, after videos of them bursting into flames circulated widely on the internet.

As concerns grow that the Blu-ray technology is also not quite up to scratch, Sony cannot afford to pin its recovery hopes on products that are late, expensive and potentially flawed. Unless Stringer embraces root-and-branch reform soon, Sony risks becoming an also-ran.

Can Europe keep growing?
When the US economy sneezes, the rest of the world catches a cold. Or so it used to be said. But not this time, we are told. With Germany, France and Britain all growing faster than America in the second quarter of 2006, Europeans are feeling in fine fettle.

Jean-Claude Trichet, the head of the European Central Bank, seems unperturbed by the mounting evidence of a US slowdown and the increasing risk of a recession next year. He is worried instead that Europe's resurgent growth will spark inflation, and has signalled that he plans to press on with interest rate rises. Officially, Gordon Brown also remains bullish that Britain's economy is hardy enough to shake off a foreign incubus.

But the chances that Europe's economies can escape unscathed from an American recession are slim. For a start, many of the factors that are dragging the US down also weigh on European countries, such as high oil prices driving up inflation and interest rates, thereby threatening to prick many countries' house-price bubbles.

What's more, a US recession would soon knock Asia's export-led economies and thus deal a double blow to Germany and other European countries that remain dependent on export growth. Although Britain may initially appear more robust, it would surely suffer from a simultaneous slowdown in the US, Asia and the eurozone.

Worse, the ECB's complacency about the risk of contagion from America suggests that it will continue to raise interest rates—thereby also heightening the risk of a dollar collapse, and hence a growth-choking surge of the euro—until it is too late to prevent a eurozone recession.

And with deficits in Germany, France and Britain already around 3 per cent of GDP, there would appear to be little scope for fiscal stimulus either.

Despite this gloomy outlook, the Dow is back near its record high, while European and Asian markets have also rebounded strongly. Optimistic investors appear to be betting that if US interest rates have peaked, this is positive for corporate profits and doubly so for share prices.

But this is only part of the picture. If the reason interest rates are now expected to be lower than was previously thought is that the economy is slowing, the prospect of recession will hit companies' earnings far more than lower interest rates will boost them. That can hardly be positive for share prices.

Inefficient markets

Doha derailed — who to blame?
So much for the lofty rhetoric about freeing trade and aiding development; when it came to the crunch, governments instead bowed to corporate protectionism. Thus the Doha round — launched after 9/11 as WTO members rallied around America in a show of unity — has collapsed in acrimony, with most blaming the US for its demise. This is not fair. America was guilty mainly of being too ambitious: it offered to prune its agricultural subsidies if others sheared their farm tariffs, but India and the EU refused.

Officially the round is indefinitely suspended, but there are already hopes of reviving it early next year. Besides, optimists point out that while 12 years have elapsed since the previous round was completed, globalisation continues apace and the world economy is booming. Such complacency is misplaced. If a deal can’t be done when the going is good, perhaps it can’t be done at all. After all, the only break in the WTO’s run of failure — Seattle, Cancún, Hong Kong and now Geneva — was the Doha launch, when circumstances were truly exceptional.

Next year hardly looks promising: President Bush is set to lose his power to push through trade deals without congress unpicking them, precluding US negotiators from striking a credible bargain with other WTO members; a new farm bill that could entrench America’s contentious subsidies is in the offing; and an economic downturn could sharpen fears about trade-related job losses.

But if the round remains on ice for too long, the WTO risks being sidelined, with the benefits of global competition, multilateral rules and impartial adjudication giving way to tit-for-tat protectionism and a web of bilateral arrangements that privilege rich-country companies at the expense of the poor.

BP’s biggest blunders
If petrol costs over £1 a litre next time you fill up, blame BP. Oil prices spiked to nearly $80 a barrel when it announced it was shutting down America’s biggest oil field — possibly until 2007 — to repair leaky pipes. The lost production from Alaska’s Prudhoe Bay is only a tiny fraction of global output, but oil supplies are so tight — and speculators so frenzied — that the slightest disruption sends prices rocketing. (The terrorist threat to air travel and the fragile ceasefire in Lebanon have since pushed prices down somewhat — at least for now.)

But in any case, the damage to BP could be great. The issue is not so much the financial cost of lower output and higher repair bills; it’s the stain on the company’s carefully polished eco-friendly reputation and, above all, the growing doubts about its competence. Last year, an explosion at its largest refinery, Texas City, killed 15 workers and injured over 100. In March, a corroded BP pipeline caused the biggest ever oil spill on Alaskan soil. In June, regulators charged it with rigging the US propane market.

And the timing of the latest mishap could hardly be worse. The US Congress, which is desperate to deflect some of the fire from voters fuming at soaring petrol prices, is planning a probe into BP’s Prudhoe Bay operations, and angry shareholders are suing BP for compensation. And with Venezuela, Russia and other oil-rich countries feeling flush and questioning why they need foreign help to extract their oil, BP’s bungling is hardly a persuasive sales pitch.

The World Bank and corruption
The World Bank’s controversial new boss, Paul Wolfowitz, has stirred up a huge fuss by making battling graft his top priority. His anti-corruption drivewill be the most hotly debated topic at September’s IMF/World Bank annual meetings in Singapore. He has frozen loans to India, Kenya, Bangladesh and Chad because of concerns about fraud, tightened the strings attached to debt relief for the notoriously kleptocratic Republic of Congo, beefed up the Bank’s anti-graft department, and pledged to spend more on promoting good governance. Wolfowitz is adamant: the Bank will not tolerate corruption.

A crackdown is certainly desirable: it is scandalous if bank funds destined to help the poor are siphoned off by crooked contractors or funnelled into politicians’ Swiss bank accounts. It also erodes rich-country voters’ support for debt relief and aid. More  broadly, corruption impedes development: it stifles business, cuts into spending on public goods such as health and education, and hampers poor people’s efforts to improve their lot. So the Bank should try to ensure its money is well spent, monitor countries’ corruption levels and help them root it out.

But there is only so much the Bank can do, and Wolfowitz appears to be going about it in the wrong way. His actions so far — a cancelled loan here and there—appear arbitrary, when they ought to be transparent and systematic. Nor is the Bank meant to meddle in politics, and although the line is fuzzy, his bolder ambitions — such as fostering freedom of speech — overstep that fuzzy line. The Bank’s mandate is to promote development, not democracy. And while waging war on graft may sound good in Washington, in practice the bank must tolerate some, or stop lending altogether, since no country is whiter than white. Indeed, the bank itself is hardly above reproach. Its boss is appointed not through an open and fair selection process but by the US president — and Wolfowitz, who happens to be one of Bush’s close chums, has since recruited a coterie of neocon cronies with few development credentials.

Inefficient markets

Stagflation lite
US interest rates are already 5.25 per cent, euro rates are set to rise again on 3rd August, the next move in British rates looks likely to be up, and as deflation recedes, even Japan has finally raised rates. After years of borrowing cheap to take ever more exotic speculative gambles, investors are rediscovering risk and retrenching. This is not yet a bear market. The Dow, the FTSE and Morgan Stanley's international stock market index remain up so far this year—just. But markets may tumble once people realise that even in a more flexible and globalised economy, higher energy prices eventually feed through into higher inflation and lower growth. To keep a lid on rising prices, interest rates may have to rise much further than previously expected, pricking bubbly house prices and hurting heavily indebted consumers. Though the prospect of higher inflation and slower growth sounds like a rerun of the 1970s, it is unlikely to be that bad—rather what US economist Nouriel Roubini calls "stagflation lite."

20:20:20 vision to save Doha
The leaders of the world's most powerful economies—the US, the EU, Canada, China, India, Brazil and Mexico—have tried to break the deadlock in the Doha round of world trade talks by setting a mid-August deadline for reaching an ambitious and balanced framework agreement. Trade negotiators have been instructed to stop stonewalling and seek compromises instead, while Pascal Lamy, the WTO's boss, has received a mandate to bang heads together in the marathon negotiating sessions that doubtless lie ahead.

The main bones of contention remain the EU's high farm tariffs, the US's hefty agricultural subsidies and the steep industrial import duties of Brazil, India and other developing countries. In June, Lamy floated a 20:20:20 formula for a possible agreement, whereby the US would cap its farm subsidies at $20bn a year, developing countries would limit their industrial goods tariffs to 20 per cent and the EU would accept a proposal by the Group of 20 poor countries to cut its agricultural tariffs by an average of 54 per cent. But now that he has the public backing of all the big players, Lamy should aim higher.

An ambitious deal would not only bring bigger benefits, especially for developing countries; it may also be easier to sell politically. A modest deal would still be tough, since EU and US farmers will fight tooth and nail against any cut in agricultural support, but it would offer little for exporters to get excited about. They might prefer to spend their political capital on more rewarding bilateral trade deals instead. But a more ambitious deal would not only make cuts in US farm subsidies easier to swallow, by giving US farmers new export opportunities in Europe and elsewhere. It would also give US and EU exporters of manufactures and services eyeing up new markets in India and China something to fight for.

EU populism 1: mobile operators
Seldom does the Daily Mail say something positive about Europe, let alone an EU commissioner from Luxembourg who proposes to impose on British business new regulations described by one executive as "close to socialism." Yet the Mail has been singing the praises of Viviane Reding, the EU's telecoms commissioner, for her plans to slash the cost of using mobile phones abroad. It's a pity that Reding's proposals are half-baked. Mobile operators certainly make a packet from the "roaming" fees levied on phone calls made and received abroad, but Britain's mobile telecoms market is generally highly competitive. Prices continue to fall, and new operators, such as Tesco and easymobile, keep established players such as Orange and T-Mobile on their toes. Since most of their customers primarily use their phones within Britain, it is normal, and perfectly legitimate, that operators have until now focused their price-cutting on domestic charges. Besides, even before Reding first announced her plans, Vodafone had started to target customers who use their phone abroad a lot with cheaper prices through its Passport scheme. But despite the evidence that competition is working well, Reding felt compelled to intervene—in a potentially very damaging way. She proposes to set arbitrary caps on both wholesale and retail roaming prices, in effect gumming up the rapidly evolving mobile market by making it a regulated utility. Her plans, which still need the approval of the European parliament and the EU's 25 countries, should be roundly rejected. Where's the Mail when you need it to attack barmy Brussels initiatives?

EU populism 2: Microsoft
Reding is not the only EU commissioner who has succumbed to misguided populism. Neelie Kroes, the formidable competition commissioner, has made a mockery of due process by fining Microsoft €280.5m (£193m) for failing to comply with an antitrust judgement against it, the first such financial penalty the EU has imposed. She is promising even stiffer fines in the future. Kroes may be right that Microsoft has exploited the quasi-monopoly of its Windows operating system to crush competitors in related markets, but she is jumping the gun by fining it. The European court of justice, which has already struck down several high-profile EU antitrust decisions, is still considering Microsoft's appeal. Besides, Microsoft has stuck to the timetable agreed with the commission for handing over the technical information about Windows that rival firms need to write software that works well with it.

Globalisation is working

Globalisation isn’t working, according to Robert Wade (July). If you exclude China—a mere 1.3bn people—it has not made much of a dent in global poverty or inequality, he claims. And if you ignore the boom years since 2000—why bother using up-to-date statistics?—it hasn’t delivered faster growth either. This is a weak argument, which appears to stand up only by excluding evidence that contradicts it—but even on its own terms it isn’t correct. In fact, developing countries that have embraced globalisation are growing faster than before; so fast that they are closing the gap with rich countries, slashing poverty and reducing global inequality for the first time since the industrial revolution catapulted Europe forward. Globalisation is working.

Wade claims that, “If the liberal argument holds, we would expect the global shift towards free markets in the past 25 years to have raised the rate of world economic growth. Instead, there has been a slowdown in developed and developing countries. Between the era of managed capitalism (roughly 1960-78) and the era of globalisation (roughly 1979-2000), the growth rate of world output fell by almost half, from 2.7 per cent to 1.5 per cent.”

Not so. According to the latest IMF figures, the world economy grew by 3.3 per cent a year from 1986-95 and by 3.9 per cent a year from 1996-2005. Better still, while in 1986-95 emerging economies grew only fractionally faster than advanced economies (3.7 per cent a year compared with 3 per cent), in 1996-2005 they grew over twice as fast (5.5 per cent a year compared with 2.7 per cent). Far from stagnating, the world economy is booming—and developing countries are outpacing developed ones.

But in any case, Wade’s methodology is shoddy. Even if global growth had slowed since 1979, one could not deduce from such aggregate figures that globalisation wasn’t working. Contrary to what he asserts, there has not been a global shift towards free markets, let alone one that can be dated to 1979. Countries have opened their markets to varying degrees and at different times; some have failed to liberalise at all or have even become more protectionist. What’s more, globalisation is not the only economic change of the past 40 years, and so cannot necessarily be considered responsible for any particular change in economic performance. The right way to judge whether globalisation is working is to look at individual economies’ performance before and after they liberalised, controlling for other changes that might affect the picture—and one finds a mountain of evidence that it is indeed delivering the goods.

For instance, World Bank studies of 19 countries over four decades conducted in the early 1990s showed that liberalisation boosts economic growth. More recently, Romain Wacziarg and Karen Welch of Stanford University have found that between 1950 and 1998, “countries that have liberalised their trade regimes have experienced, on average, increases in their annual rates of growth on the order of 1.5 percentage points compared to pre-liberalisation times.”

Consider China. Since 1978, it has gone from a system where trade was determined by the central government’s five-year plan to one where a huge number of private companies engage in foreign trade, import licences have largely been abolished, industrial tariffs have fallen to single figures and service sectors are being opened up too. The volume of China’s trade has risen seventy-fold, trade’s share in the economy fivefold and the country’s share in world trade has jumped from 0.8 per cent to 7.7 per cent. Over the same period, Chinese living standards, as measured by GDP per person at purchasing power parity, have risen fivefold—and the country has witnessed the fastest fall in poverty ever recorded.

China’s great leap forward has certainly helped reduce global inequality since 1980, as Wade now concedes: “the Gini coefficient has indeed fallen since 1980, meaning that international income distribution has become more equal.” (Four years ago, in his Prospect debate with Martin Wolf on global poverty and inequality, Wade hotly disputed this.) Yet Wade dismisses this fall in inequality by claiming it is solely due to China. Even if this were true, it would surely still be very welcome: it is no small matter if the Chinese, who account for one in four of the developing world’s population, are catching up with Americans and Europeans. But the fall in inequality is not just due to China. India, home to more than a fifth of the developing world’s population, is also catching up with the west. Indeed, the income share of the poorest 70 per cent of the world’s population has increased significantly since 1980. The countries that are continuing to fall behind are mostly in sub-Saharan Africa. It is a tragedy that some very poor countries are doing very badly. But it is not an indictment of globalisation—by and large, the poorest countries are victims not of globalisation, but of a lack of it—nor does it alter the fact that global inequality is falling overall. 

Wade points out that absolute income gaps are widening and argues that this is a matter for concern. Really? Consider again his example of economy A, where the average income is $10,000, and economy B, where it is $1,000. Their relative income is 10:1 and the absolute gap between them is $9,000. Suppose B grows at a racy 10 per cent a year. Its income will rise by $100 to $1,100. If the absolute gap between A and B is not to widen, A can add at most $100 to its income of $10,000, which means growth cannot exceed 1 per cent. In short, because A starts off so much richer than B, even if B booms the absolute gap between them will initially widen unless A stagnates—and if A stagnates, B is unlikely to boom, since A’s demand for its exports will also stagnate. Perhaps Wade wants the gap between rich and poor to shrink through economic stagnation in rich countries—if so, he should say so explicitly. But surely what is happening now is preferable: rich countries are growing steadily, but poor countries are growing faster, and thus catching up in relative terms. If this continues, they will eventually narrow the absolute gap too. For example, if B grows at 10 per cent a year for 30 years, its income will rise to $17,449; while if A grows at 2 per cent a year over the same period, its income will rise to $18,114.

Wade also dismisses the huge fall in global poverty since 1980, by saying its scale “depends entirely on China.” In fact, while the proportion of people in developing countries living in extreme poverty almost halved between 1981 and 2001, from 39.5 per cent to 21.3 per cent—a huge achievement, regardless of whether those who escaped poverty were Chinese or Congolese—even (arbitrarily) excluding China, the poverty rate fell from 31.5 percent to 22.8 per cent. Wade calls this “only 9 per cent”: in fact, this 9 percentage-point fall means the poverty rate fell by over a quarter. Extreme poverty edged down in Latin America and the Caribbean, fell by two fifths in south Asia and more than halved in north Africa and the middle east.

There’s no doubt about it: globalisation is working. We need to do more to help everyone reap its benefits, not misguidedly try to protect the poor from trade-led development.

Inefficient markets

A high-stake reform

A decade ago, a fresh-faced Tony Blair briefly touted “stakeholder capitalism” as New Labour’s big economic idea. But he soon recoiled: the notion, made fashionable by Will Hutton’s The State We’re In, that companies should be accountable not just to the short-term demands of their shareholders but also to the long-term interests of their wider stakeholders, such as their employees, was dismissed as dangerously radical. Yet in the dying days of the Blair era, the government is quietly pushing through parliament a bill to reform company law that could have dramatic consequences for British businesses. The bill will for the first time put company directors’ duties into statute. They will be required to ensure that the business is run in the financial interests of its shareholders, but also to “have regard to” its impact on employees, customers, suppliers, communities and the environment. The bill will also make it easier for shareholders to sue directors for failing in their statutory duties.

Predictably, the coalition of unions and NGOs campaigning for greater corporate social responsibility complain that the reforms do not go far enough — they would rather directors had a “duty of care” to communities and the environment. But even in its current form, the bill is a big victory for them. It would, for instance, allow NGOs to sue directors for failing to give due regard to their company’s environmental impact. Friends of the Earth (FoE) could buy a few Tesco shares and then sue the directors of the supermarket chain for, say, failing to do enough to encourage recycling, squeezing its suppliers too hard or sourcing fruit from developing countries where environmental rules do not live up to FoE’s expectations. The mere threat of legal action would have directors scrambling to cover themselves.

That is bad for business—and a shoddy way of advancing green goals. Soundly based, transparent and predictable environmental regulation is surely preferable to expecting company directors to second-guess what courts might deem appropriate.

A flawed charter

NGOs have long demanded that governments, businesses and international organisations be open and accountable for their actions—and rightly so—but what about NGOs themselves? The self-appointed guardians of global rectitude ask us to rely on their word that they are beyond reproach. But in a belated response to closer scrutiny, this is finally starting to change: 11 leading international NGOs have just signed up to a new “accountability charter”.

The new charter’s signatories make much of their commitment to accountability and transparency, as well as to principles such as good governance, independence and ethical fundraising. But they still ask us to take too much on trust. For instance, saying “we are accountable to our stakeholders”—including future generations and ecosystems—sounds great, but how? Declaring that: “We will listen to stakeholders’ suggestions on how we can improve our work and will encourage inputs by people whose interests may be directly affected” is scarcely robust accountability.

Nor does the charter do enough to guarantee NGOs’ independence. It does not, for instance, force directors to reveal their political and business links. Its ethical-fundraising pledge commits NGOs to reveal their donors’ names only “in cases where the size of their donation is such that it might be relevant to our independence,” which is worryingly vague.

Above all, there are no guarantees that this voluntary charter will actually be enforced. Pledging to apply it “progressively” and promising to produce an annual report are not enough; NGOs must also agree to independent monitoring. In short, the charter falls far short of what is needed.

A plague of populism

To show off their intellectual superiority, certain very clever people love arguing outrageously contrarian things. No matter how misguided the anti-globalisation brigade’s positions may be, the former chief economist of the World Bank makes a habit of defending them. In the latest edition of New Perspectives Quarterly, he goes out of his way to deflect criticism of the new breed of Latin American populists such as Venezuela’s Hugo Chávez: “Now, if by populism one means worrying about how the bottom two-thirds of the population fares, then populism is not a bad thing,” the Nobel laureate argues—even though the distinguishing feature of Chávez’s populism is clearly not his apparent concern for the poor, which is more than matched by Brazil’s Lula, but his penchant for quick-fix remedies and anti-American grandstanding.

“Obviously, it is of concern if these new leaders of the left in Latin America pretend there are no laws of economics,” Stiglitz astutely adds. “But the question is whether the IMF strictures are the only ones consistent with good economics,” he continues, changing the subject and setting up a straw man—“The answer to that is a resounding no.” But the real issue—whether Chávez’s profligacy is bringing a lasting improvement to poor people’s lives or whether Venezuela’s oil windfall is being squandered—has been dodged. Stiglitz is no stranger to populism himself.

Inefficient markets

Bashing Tesco

It’s fashionable to have a go at Tesco, so it’s no surprise that David Cameron has joined in. Keen to show that he’s not in the pocket of big business, the Tory leader recently warned Britain’s biggest supermarket chain to “behave responsibly.” Worse, on the same day, the Office of Fair Trading (OFT) announced that it would refer the supermarket sector to the Competition Commission—less than a year after ruling that Britain’s £125-bn-a-year groceries market was sufficiently competitive.

The OFT claims its about-turn has come out since more evidence came to light. More likely its new boss John Fingleton is bowing to pressure from lobby groups which hate supermarkets. But while bashing Tesco may be clever politics, it is not sound economics. And it makes a mockery of government competition-policy reforms, which were meant to take politics out of antitrust decisions. Although farmers, environmentalists and small shopkeepers may not like it, shoppers use Tesco because it gives them what they want: an ever wider range of ever more affordable food. Judging by the performance of its overseas ventures, Tesco is also an international success story. Cameron may regret his opportunism; the OFT’s boss certainly should.

The IMF proves a good spinner

Rarely have the IMF’s spring meetings enjoyed such coverage. A “breakthrough in the governance of the global economy,” splashed the FT; the IMF, said the Guardian, is becoming a “world economic watchdog.” Gordon Brown, who chairs the fund’s key policymaking committee, knows how to spin.

The IMF has been rather idle lately: there haven’t been any big financial crises recently and Asian governments, notably China’s, have been piling up vast reserves of foreign currencies to insure themselves against such a calamity—doing away with the need to borrow from the fund, and all the conditions it entails. But the Asian countries have achieved this by holding down their currencies, thus propping up the US dollar and swelling America’s already vast trade deficit. With exchange rates out of kilter and trade imbalances growing perilously large, many have suggested that the IMF should rediscover its original Keynesian vocation as global economic policeman.

Cue finance ministers’ much-hyped decision to ask the IMF to examine how various countries’ policies contribute to these global imbalances and suggest how they might act together to resolve them. The fund already reviews individual countries’ economic policies periodically; by monitoring several collectively, it will now be able to make suggestions in a more joined-up fashion. Big deal. While the IMF has huge power over developing countries to which it has lent money, it has little sway over the US, China or Britain. Just ask the chancellor: for years, he has roundly ignored the Fund’s advice to raise taxes to plug the government’s budget deficit. The global imbalances will only be corrected when governments choose to mend their ways—or when markets force their hand.

Rich-country governments also put off a decision to give rising economic powers such as Brazil, China and India more say at the IMF. Although its economy is over ten times bigger, India currently has fewer votes than Belgium.

Energy politics I

Not since Che Guevara died fighting there nearly 40 years ago has Bolivia been on the frontline of the global struggle against capitalism. So the anti-globalisation brigade cheered on May Day as new president Evo Morales marched his troops into the country’s foreign-owned gasfields carrying banners declaring them “Nationalised: property of the Bolivians.” Among the victims of the expropriation were Britain’s BP and BG, France’s Total, Spain’s Repsol and Brazil’s Petrobras. The seizure of foreign assets by the government of Bolivia—GDP $22.3bn—should nail once and for all the myth that big global companies such as BP, with an operating income of $32.7bn last year, run the world. But Bolivia was unwise to flex its muscles in this way. It will be in a pickle if foreign gas companies refuse to stay on as contractors, taking their know-how with them. International investors will think twice about investing in the small Andean country, and Brazil, the main customer for Bolivia’s gas, will doubtless seek more reliable suppliers in future.

Energy politics II

Governments are rarely right to block foreign takeovers. But European governments would do well to limit Russia’s stranglehold over their gas supplies—by blocking state-owned Gazprom from snapping up Centrica, Britain’s main gas distributor. Gazprom demonstrated it was the pawn of a Kremlin potentially hostile to Europe when it cut off supplies to Ukraine earlier this year. And its boss has warned European governments not to block its expansion ambitions on the continent, lest it pipe its gas east to China instead. It is bad enough that Gazprom could exploit Europe’s dependence on its gas supplies to pump up prices; far worse that it is threatening to abuse its power for political purposes. Far from allowing the Russian monopolist to tighten its grip over European gas supplies, EU countries should be building pipelines that bypass Russia to alternative producers in the Caspian and seeking supplies of liquefied natural gas from further afield.

Inefficient markets

It’s up to Lamy

Prospects for the Doha round look grim. Over five years in, and the World Trade Organisation’s 149 members still seem as far apart as they were during the 2003 Cancún debacle. Only the massaging down of expectations by WTO boss Pascal Lamy ahead of the Hong Kong summit last December rescued it from disaster. Now another deadline looms: 30th April, by when an outline deal must be reached if a final agreement is to be struck by the end of the year, ahead of the expiry of Bush’s fast-track authority in 2007. 

But while progress has been painfully slow so far, all hope is not lost. Negotiators have a much clearer idea of each other’s true bottom lines. So if the political will is there on all sides, a framework deal could rapidly fall into place. The grand bargain involves the EU and the US opening their agriculture markets—the EU cutting its farm tariffs, the US its subsidies—in return for greater access to industrial and services markets in developing countries, notably India and Brazil. The poorest countries also need to be bought off with duty-free access to EU and US markets; in particular, the US has to hack down its cotton subsidies, while the EU has to compensate its ex-colonies for eroding the margin of their preferential access to EU markets. 

 The key to success does not lie solely in Brussels and Washington. New Delhi and Brasilia must also step up to the mark. They showed in Cancún that they were a force to be reckoned with; now they need to use their power responsibly by making the concessions that will unlock further moves from the EU and the US. India and Brazil have a new-found confidence; if they can overcome their lingering doubts about liberalisation, they have much to gain from a successful Doha round.

Lamy too is vital—not just as an honest broker, but also as a deal-maker. If the talks remain logjammed, he should break the deadlock by publishing his own draft agreement. That will take guts, for sure, but Lamy has plenty of those—and the alternative is failure. 

Gas connections

That unglamorous gas pipeline known as the “interconnector”, which runs between Bacton in Norfolk and Zeebrugge in Belgium, has suddenly become the centre of political attention. Britain has little spare gas capacity, especially since a fire damaged the country’s main gas storage facility, and imports from continental Europe should have flowed down the interconnector in the recent cold snap when British demand surged. But this did not happen because Europe’s monopolistic energy producers had little incentive to compete for British business since their protected home markets are so profitable. The result was that prices soared and Britain paid perhaps £1 billion more for gas than it might have done.

Higher gas prices are not just painful for consumers. They push up inflation, dampening consumers’ spending power and delaying a potential cut in interest rates. And they are also prompting power companies to switch back to dirtier coal—one reason, according to the government, why it will miss its climate-change target of cutting carbon-dioxide emissions by a fifth by 2010. A reminder that competition matters—and that EU governments’ energy protectionism cannot be ignored.

Britain’s productivity puzzle

Despite Gordon Brown’s budget boasts about Britain’s economic performance under his watch, productivity growth has ground to a halt. It was a mere 0.6 per cent in 2005, according to new ONS figures. That did not stop Brown asserting in his budget speech that matters had improved—a statistical sleight of hand achieved by ignoring events since 2001. “After decades behind, Britain has caught up with Germany in productivity… and has halved the gap with France,” the chancellor said. In fact, whereas Britain narrowed the gap with the other G7 rich economies from 19 per cent in 1992 to 6 per cent in 2002, it has since risen to 8 per cent in 2004. The gap with the US and Germany, although lower than in 1992, is 16 per cent, and that with France a whopping 29 per cent. And whereas productivity growth averaged 2.5 per cent a year in the first four years of Brown’s stewardship, it has slumped to just 1.6 per cent a year since then. 

One reason for the recent fall in productivity growth is cyclical: the economy has slowed since the dotcom bubble burst in 2001. But another is the huge expansion of the public sector. It is harder to boost productivity in labour-intensive services like health and education than in manufacturing—and harder still to measure it: does reducing class sizes cut productivity (because more teachers are needed to educate a given number of pupils) or potentially raise it (because skills are increasingly valuable and children learn much more with more personal attention)? The ONS recently had a stab at estimating productivity growth in the NHS since 1999—and came up with six answers ranging from a fall of 1.5 per cent a year to a rise of 1.6 per cent a year.

The failure to reform sufficiently in the public services has not helped: the NHS has improved, but not as much as the extra money warranted. Ironically, this may now be changing. All the noise about job cuts caused by local NHS deficits is politically awkward, but if the government does not bail out underperforming NHS trusts, the cuts will boost productivity since most trusts plan to provide the same service with lower spending.

 

© Prospect

 

French myth-making

Many French people rejected the constitution because they regard Brussels as the handmaiden of "ultra-liberal" Anglo-Saxon capitalism, intent on deregulating markets and opening up the French economy to competition. Just look, they say, at the EU's proposed services directive, which would tear down barriers to trade in services, or at the eastward enlargement of the EU, which has exposed French workers to competition from low-wage, low-tax economies such as Poland. The upshot, they claim, is that the EU is driving social standards down and pushing unemployment up.

This is mostly nonsense. Start with the blindingly obvious: an organisation whose biggest budget item is the common agricultural policy, which shovels vast subsidies to European farmers (many of them French) and imposes swingeing taxes on foreign food, is not "ultra-liberal" by any stretch of the imagination. Europe is not even a free trade zone. Although most barriers to trade in manufactured goods have been abolished, vast swathes of the European economy remain segmented along national lines. Europe's single market does not encompass its many service sectors—such as finance, media, law, construction, health, education and energy—which account for 70 per cent of the European economy and a similar proportion of its jobs. Far from being ultra-liberal, the EU is only semi-liberal.

But the French were right that Europe was edging in a liberal direction. The admission last year of ten new member states, most of which are less interventionist than France, has boosted competition somewhat, although since they account for less than 5 per cent of the total EU economy their impact on France has not been huge. And had Jacques Chirac not blocked it back in March, the EU's services directive would have exposed the French economy to more competition. Workers in uncompetitive sectors would have suffered, but consumers, exporters and the economy as a whole would have gained.

Yet even the completion of a true single European market stretching from Lisbon to Latvia would not imply a "race to the bottom" of taxes and standards. It is simply not true that factories and jobs are inevitably lured to countries with the lowest taxes and regulations, pressing down on standards in France. For a start, many services—such as haircuts, childcare and nursing—can only be provided locally. Moreover, taxes and regulations are only one factor among many that determine where people work and companies establish themselves. Although France's high taxes and regulations may deter some, its well-educated workforce, excellent infrastructure, geographical position, quality of life and membership of the euro will attract others.

International competition does not necessarily drive taxes and standards down. France's tax revenue accounts for around half of its economy—just as it did ten years ago. Indeed, in some European countries, taxes are rising. Over the past three years in supposedly ultra-liberal Britain the government's tax take as a share of the economy has risen by two percentage points—and is set to rise by a further point over the next two years.

Nor can Europe, still less EU enlargement, be blamed for France's high unemployment. France's jobless rate has been high for over 20 years, long before even the creation of the single market in 1993, much less last year's EU enlargement. Moreover, within that European single market, jobless rates vary from 4.6 per cent in Austria to 12.3 per cent in Belgium, so there is nothing inherent in the single market that prevents France from creating jobs.

The truth is that the main fault for France's enduring high unemployment lies at home: its outdated product and labour market regulations discourage companies from hiring workers and make it costly for them to adjust to changing tastes and technologies. Does this mean that France has to deregulate its economy, and embrace ultra-liberal Anglo-Saxon ways, in order to get unemployment down? No. Far from blaming Europe for its travails, France ought to be looking to successful European social democracies, such as Denmark and Sweden, to solve its problems. The Nordic countries have thriving economies that combine high standards for working conditions with low unemployment. Without too much pain France could enjoy similar success.

Free trade fallacy II

Eight years ago, in "The Next American Nation", Michael Lind terrified Americans with the threat of "ever-increasing low-wage, high-skill competition" from the third world, to which free-traders allegedly had "no answer." But after this menace failed to materialise, Lind changed his tune. Developing countries, far from being hypercompetitive are, in fact, unable to compete with rich countries, he now argues (Prospect, January 2003).

At least he is consistent about one thing. He pins the blame on free trade, which he dismisses as utterly "discredited." But in fact, it is Lind's views that are-or should be-discredited.

Lind's argument is this. Developing countries that adopt free trade are failing to prosper, let alone catch up with rich ones. Most enjoyed much faster economic growth in the more interventionist 1960s and 1970s than in the more liberal 1980s and 1990s. In order to catch up with the rich world, newly industrialising countries ought to protect their infant industries-as Britain, the US, Germany, Japan and others once did. More broadly, Lind is disdainful of mainstream economic analysis, appealing instead to the lessons of history. But his grasp of history is as shaky as his knowledge of economics.

Lind ascribes the rapid development of the US, Germany and others in the latter half of the 19th century and the first half of the 20th to protectionist policies inspired by Friedrich List's ideas about economic nationalism. He quotes various statesmen who believed in protectionism and points to various protectionist measures countries employed, and deduces from this that those measures are responsible for their countries' development.

But the true historical picture is different. The main reason why Britain, followed by the US and northern Europe, developed so fast in the 19th century was the rapid pace of technological innovation. Free trade (adopted by nearly all countries bar the US) provided an added boost during the long boom from 1850 to 1875. Free capital flows were important too: British savings financed the development of the new world. America's openness to European workers was also crucial; around 35m Europeans set sail for the resource-rich and labour-scarce US in the century after 1820. Lind's claim-that protectionism explains how America and others got rich in the 19th century-does not stand up.

Nor does his contention that the raising of trade barriers that began in the late 19th century, gathered pace in the early 20th and culminated in the full-blown protectionism of the 1930s was not as catastrophic as people think. The collapse in trade and investment in the 1930s, and the consequent slide into depression, suggest otherwise.

Lind argues that while developing countries are industrialising, they should protect their budding businesses and only adopt free trade later. For sure, there is a respectable theoretical case for limited, and temporary, government support to infant industries: that companies learn by doing, that the technical knowledge they acquire spills over to other local businesses, and that inefficient capital markets may fail to finance these young companies at competitive rates. But in practice, governments have a dismal record at picking winners. Typically, they favour powerful lobbies, not the dynamic upstarts that become world-beaters. Even those with unusual foresight rarely provide would-be winners with an incentive to become competitive, because their pledges to keep support temporary do not typically prove to be credible. Moreover, if the root of the problem is deficient capital markets, governments ought to target their policies at fixing financial flaws, rather than taxing consumers and setting companies the wrong price incentives by imposing import barriers.

In the real world, protectionism does not aid development. It is true that some developing countries grew faster in the 1960s and 1970s than in the generally more liberal 1980s and 1990s. But that is not an argument against liberal economics. In each and every decade, countries that pursued free trade grew faster than more protectionist ones. Whereas developing countries with open economies are catching up with rich ones, those with closed economies are falling further behind. A trip to Bangalore in India, the countryside around Ho Chi Minh City in Vietnam, China's coastal regions or Ciudad Juárez on Mexico's border with the US provides ample evidence of this. Statistics confirm it: whereas income per person rose by only 1.4 per cent a year on average in the 1990s in developing countries that are turning their backs on globalisation, it soared by 5 per cent a year in those that are embracing it. Rich-country incomes rose by 2.2 per cent a year.

Even so, Lind contends that it is right to support a high-tech manufacturing sector "in the interests of national security, economic independence and economic diversification." In essence, individual aspirations for a better life should be subjugated to the national interest, as defined by government elites. But is that what poor people in poor countries want? And if so, are governments capable of delivering it? The rusting hulks of abandoned state-sponsored steel factories in Ghana and elsewhere suggest not.

Lind concedes that import substitution failed in many countries, including Argentina and India, but argues that it succeeded in others, such as South Korea. Even by his logic then, protectionism is no panacea. More importantly, a closer look at South Korea's record shows that most of its growth came from the industries where it had a comparative advantage, like shoes and electrical goods, rather than from government-directed heavy industries. Good government was crucial to South Korea's development. But its vital contribution was in prioritising education, making it easy for companies to import the inputs and technologies they needed for export, encouraging people to save and helping companies to invest-not in pursuing import substitution. Crucially, where the South Korean government provided cheap loans to companies, it ensured that the money was invested productively by cutting off funds to companies that were not successful exporters. Indirectly, the market, not the government, picked winners.

Lind concludes by calling for developing countries to have a choice in selecting a development strategy. Quite right-and they do. It is true that IMF programmes may stipulate certain policies that, although often good for the economy, trample on a country's right to decide for itself. But countries are not forced to sign up to these agreements. Nor are WTO rules foisted upon them: developing countries only make the policy commitments that they choose to and are, in any case, granted special and differential treatment. More to the point, it is simply untrue that developing countries are aching to pursue import-substitution polices but are prevented from doing so. Many, such as India, have mistakenly done so in the past and have now seen the error of their ways.

None of this is to deny that rich countries are hypocrites. They are often prone to an economic nationalism that protects lobbies-agro-industry, steelworkers, textile magnates-at the expense of the wider good. The global intellectual-property rules they support are self-serving. But that rich countries' actions are not as liberal as their words is a tar on their governments, not liberal ideas themselves.

Listening banks

The protesters who make a habit of disrupting big international financial gatherings have wrought at least one desirable change. The sprawling annual meetings of the IMF and the World Bank have been slimmed down this September. But this gesture of modesty has not silenced the critics. The global financial establishment is under unprecedented attack-not just for the alleged harm it causes, but for its perceived lack of legitimacy.

Joseph Stiglitz, the former World Bank chief economist, delighted the anti-globalisers recently with his claim that: "The most fundamental change that is required to make globalisation work in the way that it should is a change in governance."

The problem, he says in his book Globalisation and its Discontents, is that international financial institutions are not democratic enough. "The IMF... affects the lives... of billions throughout the developing world; yet they have little say in its actions." Rich-country bankers call the shots. Moreover, these financial mandarins operate in secret. This limits public scrutiny-all the more important when officials are not directly elected-undermines democratic accountability and breeds suspicion.

Undeniably, the IMF and the Bank are undemocratic and often secretive-as, indeed, are many of their critics, such as Greenpeace. So are other lending institutions, such as Barclays Bank. So what should be done? Stiglitz calls for three big reforms: a change in voting rights at the IMF and the Bank to give poor countries a bigger say; changes to ensure that it is not just the voices of finance ministries and bankers that are heard there; and greater openness to improve their legitimacy and democratic accountability.

Breaking the stranglehold that rich countries-in particular, the US-have over the IMF and the Bank seems reasonable. People in developing countries not only outnumber those in rich ones five to one, they are also the main beneficiaries (or victims) of IMF and Bank decisions. One option is to weight voting rights at the IMF and the Bank according to population. Another is to copy the WTO, where each country has one vote and a veto.

Unfortunately, in the unlikely event that rich countries agreed to it, a change in voting rights that gave poor countries control of the purse strings would not work. Banks cannot be run by their borrowers. While the WTO sets rules that apply equally to all, the IMF and the Bank basically lend rich countries' money to poor ones. They do make mistakes, but allowing developing countries to decide how and when money is lent to them would make matters worse. Imagine what would happen if China, India, Indonesia and sub-Saharan Africa-which together account for just over half the world's population-could help themselves to international loans at will.

Developing countries should not be given a majority vote, but they deserve a louder voice. Let them make the case for the help they want. Others beyond the narrow policy-making elite in Washington should be consulted too. In particular, NGOs, especially those from poor countries, often have valuable insights. (The Bank is already giving NGOs a bigger voice. Many NGO specialists work in the Bank's field offices and NGOs with relevant expertise are involved in most of its projects.)

But the biggest change needed is that international institutions should become more open. In a democratic age, secrecy is unacceptable (save in exceptional circumstances). Our parliaments meet in public so we can see what is being decided in our name. Our courts operate openly so that we trust that justice is being done. International economic policy is too important to take place in private.

Secrecy is a refuge for the wicked and the incompetent-and casts a shadow over even the good and the wise. I know this from my time working at the WTO. Governments use the cover of secrecy to blast the WTO for failings that are either invented or their own. Thus a minister who had participated in negotiations but had failed to get his way, or made a concession that he was loath to admit publicly, would claim that the decision had been taken behind his back. Other critics would infer skulduggery where there was none: for instance, an impartial dispute-settlement ruling that happened to benefit a US company would be put down to illicit corporate influence. What is true for the WTO is even more so for the more secretive IMF.

Defenders of the status quo object that international organisations could not function if they became more open. The officials who enjoy an easier life working in private certainly have a vested interest to claim so. Yet holding trade negotiations in public, for instance, might make them easier: governments might be too ashamed to face the public with their brazen defence of sectional lobbies at the expense of the national interest. Sunlight is the best disinfectant. Such a move would also dispel fears that the WTO is plotting to take over the world. Equally, as Stiglitz says, IMF policies ought to be debated publicly: what is proposed, why and the implications for winners and losers all ought to be discussed before the court of public opinion.

As I argue in my new book, Open World: The Truth about Globalisation, global institutions that are seen to be open and accountable will have more legitimacy and thus be more effective. They cannot escape from politics: they deal with highly political issues. They must become more political, not less.

Rich hypocrites

Oxfam is an antidote to claims that people do not care about politics any longer. They may not be enthused by traditional politics but they turn up in droves to Oxfam events. That is reason enough to pay attention to its new report on world trade rules, Rigged Rules and Double Standards. There is also merit in the charity's arguments. Oxfam says that free trade can benefit rich and poor countries alike, but claims that the rules that govern international trade are rigged in favour of the rich.

Often, they are. The most glaring example is the WTO's intellectual-property pact, known as the Trips (trade-related aspects of intellectual-property rights) agreement. This requires poor countries to enforce the same tough patent, copyright and trademark protection that rich countries do. Once Trips comes into force in the poorest countries - as it already has done in other developing countries - it will drive up their import bill and transfer huge sums from poor countries to rich countries.

It makes no sense for Mozambique to grant a legal monopoly to Microsoft, Merck, or Madonna. The point of patents is to strike a balance between encouraging innovation and spreading its benefits. Whereas rich countries do lots of research, poor countries do hardly any: nine in ten patents are owned by rich-country companies. So patent protection should be lower in poor countries than rich ones.

Trips is a drag on development since it makes it harder for companies in poor countries to copy the products and processes of those in rich ones. In a knowledge-based economy, that is a problem. In 2000, the US earned $38 billion (over half the global total) in royalties from abroad.

Oxfam is also right to highlight rich countries' high trade barriers on agriculture and textiles, poor countries' main exports. Rich-country subsidies to their farmers are greater than the GDP of sub-Saharan Africa. The EU's duty on offal is 252 per cent; the US tariff on groundnuts, 121 per cent. Rich countries tax processed imports (like instant coffee) more highly than commodities (like coffee beans), which discourages higher value-added manufacturing in poor countries. Oxfam says the cost of rich countries' import barriers to developing countries is $100 billion: twice what they receive in aid.

The most welcome aspect of the report is that it exposes the hypocrisy of the EU, which likes to pose as the friend of developing countries against the heartless Americans. NGOs are usually loath to criticise the EU, which supports them and panders to their concerns-by dressing up farm protectionism in green garb, for instance. Oxfam, though, has devised a "double-standards index" that tries to aggregate the protectionist impact of the many devilish ways that foreign goods are kept out. According to this index, the EU is the worst, followed by the US, Canada and Japan.

Pascal Lamy, the Frenchman who is the EU's trade commissioner, is one of the chief hypocrites. In public, he lambasts the WTO for not doing enough for developing countries, in private, he will not budge on liberalising farm trade. French farmers come first, second and third; poor countries (and European consumers) don't get a look in. As a previous Oxfam report said, the EU's "Everything But Arms" initiative - which promised to grant duty-free access to EU markets to the world's 49 poorest countries - turned out to be window-dressing. It ended up excluding sugar, rice and bananas, the commodity exports that matter most to poor countries.

Yet for all its strengths, Rigged Rules is still a missed opportunity. Oxfam remains wedded to the mercantilist fallacy that poor countries need to protect their own markets, even as they seek better access to rich countries'. But the poor in poor countries have most to gain from freer trade. Making imports more expensive benefits local monopolists. As India's record in the 1960s shows, substituting shoddy local production for imports is a dead-end. Poor countries need to be careful when opening their markets because some people may lose out at first, as Alan Winters says in his excellent new book Trade Liberalisation and Poverty. But protection condemns the poor to penury.

Another disappointment is that Oxfam cannot distance itself from the protectionist pleas of those who would impose minimum labour standards on poor countries. Trade unions' crocodile tears for workers in the third world are a means to protect their members. The right way to help workers in poor countries is by allowing them to trade their way out of poverty, and by offering carrots, not sticks, to improve labour conditions.

Perhaps the biggest pity is that Oxfam sees the WTO as part of the problem. In fact, compared with a world without rules, or one criss-crossed with regional and bilateral trade deals, the WTO is poor countries' best hope of achieving a fairer world. It is not perfect: witness the Trips agreement. But in a world without rules, might equals right. Regional trade rules, where the big powers lay down the law, are the ones that are truly rigged. When a heavyweight like the EU negotiates bilaterally with a developing country, it can easily impose iniquitous conditions. The US's recent trade agreement with Jordan, for instance, commits Jordan to tougher patent protection even than the Trips agreement requires.

At the WTO, in contrast, every country has a veto. Developing countries are finally starting to use this power constructively. Until recently, they used their veto primarily to block decisions. But last November in Doha they put forward an agenda that has the potential to bring them huge benefits. Rich countries' high trade barriers on agriculture and textiles will only be negotiated away at the WTO. The world is a desperately unfair place; the WTO can help make it fairer.

When I was an adviser to Mike Moore, head of the WTO, I urged him to work more closely with constructive critics like Oxfam. Not because NGOs should usurp the role of government. But because if Oxfam could mobilise a popular movement for free trade, it could do a world of good.

The not so global economy

When the World Trade Organisation last held a ministerial meeting, anti-globalisation riots made Seattle seem like a war-zone. Two years on, hapless WTO ministers are about to fly into a real war-zone. They plan to meet on November 9th in Doha, the capital of Qatar, the Gulf state that plays host to al-Jazeera, the Arab TV station that is scooping the world’s media with its coverage of the war in Afghanistan. The US and the EU insist the meeting should go ahead as scheduled, although an escalation of hostilities could yet derail it.

American and European leaders have been quick to link the push for freer trade with the fight against terrorism. “Trade is about more than economic efficiency,” declared Robert Zoellick, US trade supreme, “it promotes the values at the heart of this protracted struggle.” His EU counterpart, Pascal Lamy, echoed this view: “The greater the military and security pressures - and the greater the risk that resentment will be strong - the more we have to push for generous opening of our economies to developing countries.”

Reality does not live up to this rhetoric. Free trade is indeed a wonderful thing; it is a pity that rich countries do not practise what they preach. Not only do rich countries conspire to keep out poor countries’ main exports, agriculture and textiles, they are also busy carving up world markets through preferential pacts that make a mockery of free trade.

Perhaps rich countries will override their mercantilist instincts for the sake of fighting terrorism. But don’t bet on it. The dirty secret about Doha is that even the launch of a new WTO round of negotiations is unlikely to do much to bring about genuinely global free trade.

 

The Rise of the WTO

Surely, though, we already live in a global economy? That is what commentators and politicians everywhere keep telling us. It is true that many trade barriers have been slashed. Better transport and communications have drawn distant markets closer. The opening up of China and the collapse of the Soviet Union have brought another 1.7 billion people into the capitalist world. Many countries in the developing world, notably India and Mexico, have also liberalised their economies. Rich-country governments have privatised, deregulated and abolished most capital controls.

This globalisation has thrust the WTO onto centre stage. Its membership has swollen to 142 countries. After a long march that began in 1986, China is on the brink of joining. President Vladimir Putin has declared that Russia’s accession to the WTO is a “top priority”. One of Yugoslavia’s first acts after the removal of Slobodan Milosevic was to apply to rejoin the WTO. Even Saudi Arabia—which has grown rich by restricting rather than expanding its exports—is clamouring for membership. Another 30 countries are also in the queue.

The WTO’s role now stretches beyond liberalising trade. It is becoming a regulator of the would-be global economy. Its agreements span everything from agriculture, manufacturing and services to intellectual property, investment and subsidies. They stipulate, for instance, how high a duty Switzerland can impose on steel imports, which kind of government subsidies are acceptable, how countries must regulate their telecoms sector, as well as how long patents must be respected.

The WTO’s core principle is non-discrimination: governments are not meant to treat products differently on the basis of where they are made. They are encouraged to lower their trade barriers, which discriminate between domestic and foreign products; and when they do so, they are meant to lower them equally to all WTO members. That way all foreign producers compete on a level playing field. So, for example, Switzerland should tax American and Japanese steel equally and eventually aim to eliminate its import duties altogether.

WTO rules are enforced by a dispute-settlement mechanism that is binding on all its members. It operates much like a commercial court. When a country feels that another is breaching an agreement, it can appeal to a WTO panel. The panel can authorise the imposition of trade sanctions if a recalcitrant loser refuses to abide by its verdict.

No wonder, then, that everyone wants to be a member of the WTO. Countries want a say in setting the rules (the WTO operates by consensus, so every member’s consent is needed), as well as recourse to arbitration when they feel wronged. They want better access to export markets and the increased foreign investment that flows when investors know that domestic laws are bound by international agreement. In short, they want to avoid being left out of the ever-expanding global economy.

All of this is true. Yet it is only part of the picture. Talk of a global economy is overblown. National economies are not blending into one big global melting pot. Most economic activity still takes place within, not across, national borders. Whole swathes of the economy remain highly protected. When countries do trade, they do so predominantly with their neighbours. And increasingly, they do so according not to regional or bilateral rules, not global ones.

Consider the huge increase in international trade over the past 20 years. Cross-border trade in goods and services has tripled from $2,300 billion in 1980 to $6,800 billion in 1999. Yet over the same period, world output has also nearly tripled, from $10,700 billion to $30,900 billion. As a share of world output, cross-border trade has only inched up—from 21.5% in 1980 to 22% in 1999.

Some economies are more international than others. Whereas a huge continental economy like the US traded only 12% of GDP in 1999, a middling one like Britain traded 27% and a small one like Ireland 86%. While some economies are becoming more open, others are not. China traded twice as much in 1999 (21% of GDP) as it did in 1980. The US trades a bit more. Japan trades much less (down from 14.5% in 1980 to 10.5% in 1999).

Few countries are genuinely global traders. Most trade primarily with a handful of others, typically their neighbours. Take Western Europe. Over two-thirds of its merchandise trade is with other countries in the region. Among the 15 members of the EU, the figure is 63.5%. All EU countries trade more with each other than they do with the rest of the world. Look next at North America. The US, Canada and Mexico—the three members of the North American Free-Trade Agreement (NAFTA)—also trade mostly with each other. Over half of their exports are within Nafta, as are two-fifths of their imports. Finally, consider Asia. A little under half of Asia’s exports are to other Asian countries; nearly three-fifths of Asia’s imports come from the region.

Pull together all these statistics, and a different picture of the world economy emerges. Three largely self-contained regional hubs account for three-quarters of it: the EU, which trades a mere 11% of its collective output with the rest of the world; NAFTA, which trades just over 8%; and Japan, 10.5%. The rest of the world is linked to one, or several, of these hubs through a tangled web of bilateral trade agreements.

So much for the death of distance. Geography still matters. Transport costs are one reason why so much of the economy is not global. Shipping light bulbs across the world, for instance, is uneconomical. Another reason is that many companies need to be quite near their customers: Dell assembles and services computers for the European market in Ireland, not Asia. Indeed, since many services have to be provided on the spot, much of the economy is set to remain local. Nurses, hairdressers, fitness instructors and therapists cannot ply their trade from the other side of the globe. These “high-touch” services, as Adair calls them, are the fastest growing part of rich-country economies.

Politics remains important too. Companies do not operate in a borderless world. For a start, many trade barriers remain, notably in agriculture, textiles and many services. The average import duties on farm products is around 40-50%; Japan’s tax on foreign rice is nearly 1,000%; rich OECD countries spend more subsidising their farmers each year than the entire GDP of sub-Saharan Africa. National differences in accounting, tax and regulatory standards also segment markets. But the biggest reason why talk of a global market is fanciful is that three-fifths of world trade takes place on preferential terms.

Over 170 regional trade agreements are in force around the world, half of them concluded since 1990. A further 70 or so are in the making. Every WTO member, except Japan and South Korea, is a party to one—and both are now looking to join in.

Regional agreements may be bilateral or plurilateral, involve all trade or just some, be between neighbours or span continents. Some are customs unions, like the EU, with a common external tariff; others are free-trade areas, like Nafta, where each member has its own tariffs on imports from the rest of the world. They may have common institutions, like North American Development Bank or the European Commission. They may have a mechanism for settling intra-regional trade disputes, like both the EU and Nafta. But what they all have in common is that trade within them is freer than trade with the rest of the world. This preferential treatment encourages regional trade at the expense of global trade.

Take the EU. Meshing Europe’s markets together has skewed its pattern of trade. Trade within the EU’s single market, which is relatively cheap and easy, has grown much faster than trade with the rest of the world, where firms still have to contend with a thicket of tariffs and regulations. That is a big reason why Britain now sends 58.5% of its merchandise exports to the rest of the EU, up from 35% when it joined in 1973.

A similar process is happening in Nafta. Mexico has replaced Japan as the US’s second-biggest export market, behind Canada. Its two Nafta partners now account for 36% of US exports, up from 28% in 1990. Since 1997, US exports to non-Nafta countries have actually been falling. As for Canada and Mexico, nearly nine-tenths of their exports are now within NAFTA.

In this not-so-global economy, the WTO is less important than it seems. Regionalism makes a mockery of its core principle of non-discrimination. Admittedly, WTO rules do allow regional agreements, but only if they meet certain conditions: they must cover “substantially all trade”, eliminate internal trade barriers, and “not on the whole” raise protection against excluded countries. Few regional deals meet these criteria. Yet since all its members are rushing to conclude them, the WTO turns a blind eye. No country has challenged the legality of all these discriminatory deals—and none is likely to.

To be fair, regionalism is not all bad. Nafta has locked in Mexico’s economic and political reforms. The EU has cemented peace in Europe. It is building a single market with a single currency that promises huge economies of scale for companies and the benefits of increased competition, such as lower prices, for consumers. It has helped poorer countries, like Ireland and Spain, catch up with France and Germany. And it is a testbed and model for other countries that want to co-operate regionally.

Together, Europeans have more clout - not least when the Commission negotiates at the WTO or vets mergers, such as that between General Electric and Honeywell, that might otherwise harm European consumers. They can stand up to the US - over bananas, beef, steel, tax, planes, Cuba, and so on. The EU gives Europeans more policy options. Like Americans, they are freer to choose. That is a bonus - even if they sometimes choose the wrong things. But this added discretion comes at a cost, insofar as some Europeans’ interests diverge from others’. Acting alone, for instance, Britain might subsidise its farmers less.

All in all, the EU is a good thing. But its huge network of preferential pacts is not. The EU has “partnership” agreements with all most other European countries. It also has deals with Turkey, Israel and Morocco. It is negotiating agreements with most other Arab countries. By 2005, the only countries in its vicinity with which it is unlikely to have a sweetheart deal are Libya, Iraq and Yemen.

Further afield, the EU has struck deals with Mexico and South Africa. It is pursuing agreements with Chile and the four Mercosur countries (Argentina, Brazil, Paraguay and Uruguay). It is also pressing 71 poor African, Caribbean and Pacific (ACP) countries, mostly ex-colonies, to sign up to new regional arrangements. The EU’s network of preferences covers most of the world. There are just six countries—Australia, Canada, Japan, New Zealand, Taiwan and the US—with which it trades on a non-preferential basis.

The rationale for all these preferential pacts is partly political. The European Commission is keen on them because they are foreign policy by other means (something normally controlled by member states). Bilateral deals strengthen EU member states’ influence abroad. The Europe and Euro-Med agreements, for example, help to anchor Eastern Europe and North Africa in the EU’s sphere of influence. They may also help to keep neighbour governments stable and potential migrants at home. And they stir up less controversy with anti-globalisation protesters than negotiations at the WTO.

Economics is a bigger spur, however. Thanks to its bilateral deals, the EU is an export and investment hub with preferential access to markets in a great many spokes. That helps European exporters corner foreign markets. They have an edge not only over the Americans and the Japanese, but also over firms from “spoke” countries, since, for example, South Africa and Mexico do not enjoy privileged access to each other’s markets.

Poor countries, however, often lose economically from their deals with the EU. Consider the South African agreement. Undeniably, some South African firms can now sell their goods more easily in the EU. But their farmers, who are highly competitive, cannot, since “sensitive” agricultural products, such as cereals, are excluded. This gives them a perverse incentive to switch to making goods that the EU allows in more freely.

South African consumers get a raw deal too. Import prices are unlikely to fall, since South Africa is only lowering its tariffs to EU firms, who may well respond by raising their prices. But the Europeans will gain market share from the Americans—and Africans too—who still incur high tariffs. And they have stamped out some local competition by insisting that South Africa stop describing some of its products as grappa and ouzo, spirits that the EU says can be made only in Italy and Greece.

The biggest losers from all these sweetheart deals are the countries they exclude. Yet the deals create their own infernal logic, whereby those who are discriminated against seek their own preferential deal. The EU is well aware of this: it sought a deal with Mexico because its exports to that country have slumped since Mexico joined NAFTA.

The US has suddenly woken up to this European attempt to carve up world markets. The Business Roundtable, a big-business lobby group, warned in February that the US was “falling behind” in the race to sign new preferential deals. The Bush administration has taken note and given new impetus to plans to extend Nafta throughout the Americas. He aims to conclude the Free Trade Area of the Americas (FTAA) by January 2005.

Latin America is still to play for. And the scramble for Asia is now on. The big question is whether East Asia will manage to cobble together a regional hub of its own. A group that included China, Japan and South Korea plus the ten members of the Association of South-East Asian Nations, among them Singapore, Thailand, Indonesia and Malaysia, would be a heavyweight in international trade.

The creation of such a regional hub is no longer inconceivable. East Asians are still smarting from the high-handed way that they feel they were treated during the world financial crisis in 1997-9. They are offended by western crowing at the demise of the once-lauded Asian model. And they are furious that the US slapped down proposals for an Asian Monetary Fund. They have reacted by setting up a regional system of currency swaps to help them deal with future Asian crises. And they have made tentative steps on the trade front too.

To be sure, powerful obstacles remain. There is immense antipathy between many East Asian countries. Many see their neighbours as rivals rather than partners. Just as the EU would find it hard to admit Russia, so China’s neighbours would find it difficult to throw in their lot in with such a giant. Clearly, there is still an opportunity for the US, on which most of the region relies for its security, to carve up markets for itself in East Asia, as the EU is doing in eastern Europe, the Middle East and Africa.

This headlong rush for advantage is unlikely to lead to outright hostility between rival trade blocs. Fears about a Fortress Europe, for instance, have so far proved unfounded. But regionalism does end up making everyone worse off. A maze of preferential agreements, with differing tariff rates, rules-of-origin requirements and health regulations, distorts trade and creates huge new administrative burdens, not to mention opportunities for corruption. It is a lawyer’s heaven, and an economist’s hell.

The spread of regionalism would not be so worrying if global trade was getting freer. Privileges granted to a few would soon be eroded by better access for all. Regional hubs might turn out to be building blocks of a genuinely global economy. But since 1997, moves towards freer global trade have stalled. Efforts to launch a new WTO round in Seattle were a spectacular failure. Might there be a breakthrough in Doha?

The omens are not good. Most countries pay lip-service to the desirability of a new WTO round. Their rhetoric has taken on a new urgency since September 11th. But they show few signs of making the necessary compromises. The EU is not willing to make politically painful farm reforms. Its latest tactic is to seek guarantees that freeing farm trade would not harm the environment - this from the same EU that subsidises the pesticides that pollute our rivers and poison our wildlife. The Bush administration refuses to reform its iniquitous “anti-dumping” laws that allow it to keep out imports that it deems too cheap.

The uncomfortable truth is that neither the US nor the EU particularly wants a new WTO round. They can take it or leave it: they don’t need access to others’ export markets as much as others do to theirs. Why face down the powerful coalition of protectionists and protesters opposed to freer global trade when the status quo will do fine?

Perhaps the current terrorist crisis will concentrate minds enough to fudge the launch of a new WTO round. But meaningful liberalisation is another thing. Tightening the screws on regional preferences isn’t even on the agenda for Doha. We look set to continue living in a not-so-global economy.

Against globaphobia

Perhaps the riots in Seattle marked a turning point for a globalising world. In the past 50 years cross-border trade and investment have boomed, raising living standards across the world and lifting millions out of poverty. But now a backlash against this closer integration has begun. This backlash is surprising. By and large, it comes not from developing countries which were battered when world financial markets seized up in 1997-98, but from rich countries which escaped largely unscathed. It is strongest in the US, the biggest beneficiary of free trade, luxuriating in an economic boom. And its main target is not multinational companies or global banks, but a once obscure regulator with 500 staff and an annual budget of £48m: the World Trade Organisation (WTO).

The protesters who mobbed its summit in Seattle last December have propelled the WTO to notoriety. Yet it remains widely misunderstood. The popular perception is of a secretive, unaccountable body which tramples on national laws that protect the poor, the environment, and public health, in order to advance big companies' global ambitions. "Many decisions affecting people's daily lives are being shifted away from our local and national governments and instead are being made by a group of unelected trade bureaucrats sitting behind closed doors in Geneva," according to Ralph Nader, a leading American consumer-rights campaigner. The WTO, it is said, threatens countries' sovereignty and democracy itself.

This distorted image of the WTO is peddled by an unlikely alliance of media-savvy pressure groups and old-fashioned protectionists. Greens make common cause with smokestack industries, consumer activists with trade unions, development lobbyists with rich-country farmers. These "globaphobes" have all sorts of gripes, many of them contradictory. Some rage that rich-country markets are being flooded with cheap imports from poor countries, others that they are rigged against them. Many who rail at the WTO's powers want to hijack them for their own ends. But all of them harness people's anxieties about the might of big business, the pace of economic change, and a sense of powerlessness in the face of intangible global forces-and focus these fears on to the WTO. Ostensibly, globaphobes have the WTO in their sights because it is powerful. In fact they target it because it is weak. The WTO cannot easily fight back. It has no votes to deliver, no lobbyists in national parliaments, no campaign contributions to splash around and no vast PR budget. Its total budget amounts to less than a quarter of that of the World Wide Fund for Nature, one of its many critics.

The WTO's critics are abetted by governments for whom it is also a convenient scapegoat. Like the EU, the WTO is blamed for beneficial but unpalatable policies. For example, governments often blame job losses, or rising inequality, on "unfair" competition from foreigners, while insisting that the WTO prevents them from taking protectionist measures. Attacking the WTO also deflects attention from domestic failings. The Clinton administration, whose trade policy is in hock to corporate lobbies, blasts the WTO for ignoring public opinion. EU governments, whose regulatory lapses have led to mad-cow disease and dioxin poisoning, claim that the WTO threatens food safety. And developing countries whose reforms falter argue that the WTO is biased against them.

This portrait of the WTO is a travesty. Although the WTO has its faults, it is generally a force for good. Indeed, by helping to free world trade, the WTO and the General Agreement on Tariffs and Trade (Gatt) which it replaced in 1995, have probably done more to raise living standards and reduce poverty than any other man-made device. Sceptics should compare the long boom in the US and Europe, as trade barriers fell in the 1950s and 1960s, with the protectionist nightmare of the 1930s. Or they should consider how trade has benefited South Korea: in 1970, poorer than Ghana; now, richer than Portugal. Or they should read country studies showing that openness boosts economic growth. Or study the paper by Jeffrey Sachs and Andrew Warner, which finds that developing countries with open economies grew by 4.5 per cent a year in the 1970s and 1980s, while those with closed economies grew by 0.7 per cent a year. (At that rate, open economies double in size every 16 years; closed economies must wait 100 years.)

The benefits of free trade are now taken for granted. In Seattle, Americans who chanted that trade should be "local not global" sported Japanese cameras, chatted on Finnish mobile phones, kept warm with Colombian coffee and doubtless wore clothes made in Asia. So the case for free trade bears restating. Eliminating taxes on foreign goods gives consumers lower prices and more choice. It also encourages domestic firms to specialise in what they do best, rather than making goods which are more efficiently produced elsewhere. Moreover, it boosts economic growth, because other countries' technologies are more readily adopted and foreign competition spurs domestic firms to increase productivity.

But what about the costs of free trade? Governments lose the revenue from import duties. The profits of domestic firms fall. Capital and workers must shift to more efficient uses. In the short term, there are losers. Their pain-like that of anyone who loses their job-can and should be eased with welfare benefits and job retraining. But it is odd for protectionists to argue that the temporary losses of a few should prevent the country reaping the much bigger-and permanent-gains from free trade. After all, the interests of candle makers were not allowed to stop the introduction of electricity. Nor are governments scrambling to stop the Internet cutting out middlemen. Freeing trade, like new technology, causes change; that is how it boosts economic growth. Some of us lose at first, but eventually we all gain.

Critics scoff that this model of free trade is naïve. In the real world, they say, big companies monopolise markets. Breaking down trade barriers merely helps these behemoths crush their smaller competitors. This argument is perverse. For one thing, big companies are not as omnipotent as they seem. Not one of the world's ten biggest firms by market value a decade ago is still in the top ten. The world's biggest firm, the US's Cisco Systems, was founded in 1986. Europe's largest companies, Britain's Vodafone and Finland's Nokia, were minnows a decade ago. Moreover, opening markets to foreign competition curbs big companies' dominance. Closed domestic markets, where national champions can cosy up to government, are much more likely to be monopolised than global ones. And if big firms come to dominate global markets, then their monopoly is better tackled by antitrust watchdogs-or indeed by competition rules at the WTO-than by raising trade barriers.

But the critics are right about one thing: companies do have an unhealthy influence on governments' trade policy. That is precisely why the WTO is such a good thing. In an ideal world, each government would act in its country's best interests and liberalise unilaterally. But this is often politically difficult, because industries that fear foreign competitors tend to lobby governments harder than the disparate mi