A good election to lose?

For anyone of a progressive bent, the prospect of the Tories returning to power is profoundly depressing. However sick of Gordon Brown people might be, David Cameron is hardly an appealing alternative. So at one level it is cheering to see the Conservatives' poll lead melt away with the winter snow. While a narrow Tory victory remains likely, according to political betting markets, it is not in the bag. But while keeping the Tories out would be heartening in the short term, Gordon Brown's re-election would most likely be disastrous for Labour in the longer term.

Some election victories are a poisoned chalice. With hindsight, it was fortunate for Labour and catastrophic for the Conservatives that John Major won in 1992. Sterling's ejection from the ERM shredded the Tories' reputation for economic competence, and five years of in-fighting, blunders and scandal consigned the Conservatives to the political wilderness after 1997. It seemed for a while as if the party might never win office again. The Tories would surely have bounced back more quickly if they had lost in 1992. Conversely, a Labour victory in 1992 could have been fatal. Had the pound plunged within months of Labour taking office, the party's chances of re-election would have been remote. The Labour government would have marked a brief progressive interregnum between long periods of Conservative dominance.

While we do not have the benefit of hindsight, 2010 feels a lot like 1992. Most people are fed up with the government but unconvinced by the opposition. The ruling party has become too comfortable with power and often seems bereft of purpose. The prime minister is at best uninspiring, more often dismal. Most importantly, the economic outlook is unpromising – and there is a growing chance that a run on the pound will wreak havoc with the recovery and the government's plans. Even if catastrophe is avoided, running Britain in an age of austerity will be a thankless task, especially for politicians who believe in active government.

Tax hikes, spending cuts, curbing public-sector pay, cutting public-sector jobs – does Labour really have the stomach for it? Do Labour politicians want to spend the next five years undoing a lot of what they have achieved over the past 13? Do they honestly think voters will look kindly on them next time around if their sales pitch is that their cuts were "kinder" and more reluctant than the hypothetical cuts voters might have suffered under a Tory government? Even if the economy stages a phoenix-like recovery, will voters thank Labour for it? If Labour scrapes through in 2010, there is a good chance it would face a 1997-style electoral oblivion in 2015.

All the more so since five more years of Gordon Brown would test the patience of even the most diehard Labour supporters. Whatever his qualities might be, he is singularly ill-suited to being prime minister. His style rankles. His decision-making (or indecision) is erratic. He is tainted by all the mistakes of the past 13 years – not least cheering on the financial bubble that has now gone spectacularly bust. And since Labour has not had the guts to get rid of him over the past three miserable years, it seems highly unlikely that the party would find the courage to do so after he had won an electoral mandate. Besides, whoever the leader might be, voters would doubtless be gasping for change after four terms – 18 years – of Labour government.

To put it another way, if the choice for Labour is between either an unrewarding extra term in office followed by several terms on the margins or a narrow defeat, a period of renewal and a good chance of returning to government within five years, surely the latter is preferable? Surely only those whose political lifespan is nearing its end, those who depend on Gordon Brown for their advancement, and those who cling to the trappings of office would prefer the former?

The possibility of a hung parliament does not fundamentally alter this calculation. Since the Liberal Democrats have all but ruled out a coalition, a minority government (and most likely a second election) would prolong the uncertainty – increasing the risk of a sterling crisis – but would not change the underlying choice between Tory now or Tory later.

Of course, there are ifs, buts and maybes. One objection is that a Tory victory might result in such severe harm to Britain – for instance, a sequence of events that resulted in Britain leaving the EU – that it must be avoided at all costs. A more immediate danger is that if George Osborne slashed spending, the economy would tank again. That is a big worry. But even a re-elected Labour government might be forced to bring forward budget cuts if markets panic. And in political terms, the likelihood of Tory economic mismanagement strengthens the argument that losing the election would benefit Labour longer term.

Another risk is that Labour might tear itself apart in opposition, rendering itself unelectable, allowing the Tories to win again by default in 2015 unless the Liberal Democrats could capitalise on the situation – a rerun of 1983. That said, Labour might also tear itself apart if it was re-elected, as John Major's Tories did.

Others will argue that Labour could succeed where Margaret Thatcher failed and go on and on and on. A Labour victory might cause the Conservative party to implode (extremely unlikely) or result in electoral reform that entrenched a progressive majority. That possibility is certainly appealing, not least to Lib Dems and Greens. But with or without a change in the voting system, it seems highly unlikely that Labour would stagger on into an unprecedented fifth term after five more years of austerity under Gordon Brown, still less that the Lib Dems would want to prop them up in office.

The prospect of a Europhobic, economically confused, anti-immigrant, privilege-defending Tory government led by a lightweight PR man is soul-destroying. But as disheartening as it now seems, this is an election that Labour might be better off losing.

Don't take globalization for granted

Twenty years ago, nobody foresaw the imminent fall of the Berlin Wall; two years ago, no one was predicting the partial nationalization of the Western banking system. The future is unknowable; caution, skepticism, and, above all, humility are essential in seeking to peer into it.

What, then, do we know? We know that globalization is the combination of distance-shrinking technology and market-opening government policy that is bringing the world closer together. Global connections are—for the most part—cheaper, faster, and more pervasive than ever. Technological progress is almost certain to continue, while powerful economic and political interests support further global integration. Continued globalization would therefore seem inevitable.

But it isn’t. Technology can’t (short of a nuclear winter) be uninvented, but its impact can be impeded. Today, globalization is neither uniform nor universal. It will always be incomplete. Clearly, then, it is also reversible. The cost of connectivity could rise, while governments could make foreign interactions costlier or tougher.

History shows that economic disintegration can happen: witness the devastating 1930s, the economic closure of Russia and China when they became communist, or the widespread pursuit of import-substitution policies in the 1960s and 1970s. Now, the global financial crisis has undermined faith in free markets. A long and deep recession could stoke protectionist pressures. An alliance among the losers from globalization, those who fear they might become losers, ideological opponents to globalization, and opportunistic lobby groups could conceivably throw it into reverse.

The retreat, if it happens, may be patchy rather than wholesale. Globalization is not an all-or-nothing state of the world; it is a process that can progress—or regress—to varying degrees and in different ways country by country. It operates through at least five channels: cross-border trade in goods and services; international capital mobility; the movement of labor across borders; the flow of ideas, information, and technology around the world; and politics: cooperation among national governments, international rules and institutions, and the activities of nongovernmental actors, such as Greenpeace, the Catholic Church, and even online social networks, such as Facebook.

Start with product markets. The Word Trade Organization’s (WTO) Information Technology Agreement prohibits countries from imposing tariffs on many IT products, but its scope is disputed: the United States objects to the EU’s tariffs on flat-screen monitors and multifunction printers, for instance. As new high-tech products emerge, they will be vulnerable to tariff encroachment and trade-limiting regulations. In agriculture, WTO rules have little bite. Most developing countries have plenty of scope to raise their tariffs on manufactured goods, since their current applied rates are well below the maximum allowed. Governments’ commitments to liberalizing trade in services, which account for the bulk of the global economy, are patchy.

A panoply of other measures can also be used to gum up trade, such as antidumping duties, trade-inhibiting regulations, and official tolerance of monopolies, cartels, and other anticompetitive practices. And if governments really want to, they can ignore WTO rules.

This need not involve a trade war. The WTO’s core principle of nondiscrimination is already being eroded almost daily as preferential pacts proliferate. Far from being “free-trade agreements,” these bilateral or regional deals are their antithesis, giving privileged access to some at the expense of others and tying up trade in a web of rules-of-origin requirements and other red tape. Such deals are also more prone to have quasi-protectionist labor and environmental clauses tacked on to them. Worse, they create their own infernal logic, whereby those who are discriminated against seek their own special deal.

After 13 years without a comprehensive WTO agreement, they seem like the only game in town for politicians and businesspeople, sapping efforts to conclude an ambitious Doha round and raising new obstacles to it, as countries and companies fight to preserve the preferences they have acquired.

Even where markets remain reasonably open, other factors can limit globalization. Regulations that are not protectionist in intent can nonetheless act as barriers to trade: think of food safety standards, port security inspections, and different accounting standards. Preferences can also tilt toward the local for all sorts of reasons.

Among them:

    * Green initiatives: People may opt for local holidays and farm produce to shrink their carbon footprint.
    * Culture: Viewers may prefer television programs that relate to their everyday experience.
    * Nationalism: Some may reject cheaper and better imports because they want to consume national products.
    * Politics: Witness the consumer boycott of Danish products in many countries following the Muhammad cartoon row—and the “Buy Danish” backlash.
    * And, of course, economics: Rising prosperity and demographic aging tends to skew demand away from imported goods towards services—such as cleaning and social care, that can only be provided on the spot. With or without government intervention, global connections could weaken.

One big question is whether higher oil prices will render globally scattered supply chains uncompetitive. To a certain extent, high oil prices are eventually self-limiting since they stimulate the development of additional supplies and crimp demand. Greater efficiency and the development of alternative energy sources could permanently depress oil demand. In any case, transport costs are relatively unimportant for higher value-added trade. So oil may not be that significant a drag on globalization.

Consider capital next. The global financial crisis continues to surprise; its long-term consequences are unpredictable. It could foster greater economic policy coordination, closer monetary integration in Asia, and the expansion of the eurozone. Or it could rankle national sensibilities in the Pacific and even split the eurozone.

The crisis would appear likely to curb financial globalization. Countries that maintain capital controls are less likely to lift them; poor countries that struggled to attract external finance in the go-go years will find it even tougher. Tougher international regulation could also hamper capital flows (not a bad thing in itself, admittedly). Yet tougher national rules could drive more finance offshore. Desperation has lowered the barriers to sovereign-wealth funds and other foreign investors taking big stakes in American and European banks. Ambitious reforms to the global financial system could end up prompting more, not less, financial globalization.

How so? Consider that although money flows freely, it does not reliably irrigate everywhere. The promise of financial globalization—that it will spread risk and allocate capital better—remains largely unfulfilled. Even emerging economies with excellent investment prospects cannot count on regular capital inflows; many feel obliged to pile up vast foreign-currency reserves. This is a huge waste of resources—and it perversely results in them becoming net savers. Judicious reforms, starting with the swap arrangements the Fed has started offering to a handful of emerging-economy central banks, could thus support further financial globalization

The economics of the madhouse

The failures of global finance have brought the world economy to its knees, threatening a re-run of the Great Depression of the 1930s. Such a terrible outcome is much more likely if policymakers follow Ha-Joon Chang’s suggestion that the world needs a dose of protectionism to see it through these troubled times.

Around the world, we are witnessing the devastating impact of globalisation going into reverse. What was once a virtuous circle of rising trade and booming economic growth has become a vicious spiral of collapsing demand and plunging exports. The question is: how to break this spiral? The answer, in my view, is coordinated government action to boost global demand, combining large fiscal stimulus packages, unconventional monetary policy measures, and the nationalisation and restructuring of zombie banks that are dragging the economy down with them. Chang, in contrast, favours limited protectionism—in effect, a tax on imports.

This should ring alarm bells among people who may be tempted by the siren song of protectionism. Most governments are scrambling to boost spending and /cut/ taxes to stimulate demand. David Cameron’s Conservatives oppose such a fiscal stimulus. Chang goes one step further: he is proposing a (selective) tax hike instead. The immediate impact would be to reduce people’s purchasing power in a highly regressive way. And since Chang proposes that all governments agree to raise their import taxes, demand would be dealt a further knock by the fall in demand for our exports. Higher taxes and lower exports as a cure for the global recession? This is the economics of the madhouse.

Chang is surely aware of this. After all, even he concedes that an all-out trade war would be a bad thing. But the difference between limited protectionism and a trade war is a matter of degree: the former would involve fewer casualties, for sure, but it would not lead to economic resurrection. And history shows that limited protectionism is often a precursor to much larger conflicts.

Chang claims that rising protectionism in the 1930s was not as harmful as is often claimed. It is true that trade collapsed for several reasons, including falling demand. But protectionism greatly amplified the damage. According to a study by Jakob Madsen of Monash University (Trade Barriers and the Collapse of World Trade During the Great Depression), world trade declined 14% in inflation-adjusted terms between 1929 and 1932 due to declining incomes, 8% because of policy-induced tariff increases, 5% due to deflation-induced tariff increases (when prices are falling, a tariff of, say, £1 per item rises in real terms), and a further 6% because of the imposition of non-tariff barriers. So, most of the collapse in trade was due to rising protectionism rather than falling demand.

Nor did protectionism save jobs. Research by Doug Irwin of Dartmouth College, the leading US trade historian, concludes that “The Smoot-Hawley tariff of 1930, for example, significantly reduced imports but failed to create jobs overall because exports fell almost one-for-one with imports, resulting in employment losses in those industries.”

Clearly, then, the costs of protectionism are large. Yet Chang claims that “temporary” protectionism would have a big benefit: it would provide breathing space for companies and workers to reinvent themselves. But that too is dubious. Protectionism does not provide the right incentives for businesses and workers to adapt. Companies that have a captive local market tend to milk it, rather than seeking out more competitive markets overseas—especially if they are prevented from doing so by others’ protectionism. And while protectionism may start off as a “temporary” response to the crisis, companies that benefit from it have every incentive to find new reasons to maintain it, and to devote their energies to lobbying politicians to that end. Just look at Europe’s Common Agricultural Policy, which was originally designed to prevent Europeans starving. The last thing we need is a CAP writ-large.

Protectionism would obstruct the world economy from adjusting, rather than encouraging it. There is, for instance, huge overcapacity in the US and European car industries. If each country acts to prop up their carmakers, none will thrive. Only if the least efficient shrink can the carmarkers that produce the cars people actually want to buy thrive. Chang’s prescription is also bizarre considering his main focus is aiding developing countries. If the EU keeps out foreign cars, India’s Tata Motors and his native South Korea’s Hyundai, Daewoo and Kia will suffer.

In Britain’s case, advocating protectionism is particularly perverse. One big reason why the manufacturing sector has shrunk so much in recent years is the pound’s prolonged overvaluation. Now that the pound has collapsed, UK-based exporters, not least its remaining manufacturers, have received a timely boost that will make them more competitive when the global economy recovers. An increase in global protectionism would close off their future export markets.

The real help that companies need to tide them through the crisis is not protectionism but access to finance and broad measures to stimulate demand. These would also boost employment, especially if combined with cuts in payroll taxes and increased help for workers to retrain and find new jobs.

If I was king for a day...

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Foreigners aren't grabbing "British" jobs

As the recession bites, unemployment soars, and protests against foreign workers proliferate, the publication of Office for National Statistics figures (pdf) showing that the number of foreign-born people in work rose last year would appear to confirm what opponents of immigration have been saying all along: foreigners are taking "British" jobs. But the picture is far more complex than that.

Note, for starters, that critics would single out immigrants whatever the statistics showed. When immigrants are in work, they are taking our jobs; when they are out of work, they are a burden on the welfare state. Immigrants can't win: they are damned if they do and damned if they don't.

Second, opponents of immigration (and others, including myself) have previously pointed out – correctly – that ONS migration figures were deeply flawed. In particular, they did not accurately count the number of migrants from central and eastern Europe, who as EU citizens can come and go freely. If many of the Poles taking up jobs in Britain were not counted in the boom times, they are unlikely to be counted if they have since lost their jobs or left now we are in a bust. Foreign-born workers may thus not be faring as well as the ONS figures suggest.

Third, the category that the ONS has highlighted – foreign-born people – includes British citizens born abroad and immigrants who arrived as children and are only now entering employment after finishing school or university. In fact, 40% of the UK's foreign-born workers are now British citizens. On what grounds would the wildcat strikers and opponents of immigration object to their employment?

The other category that the ONS provides figures for – non-UK nationals – includes people who have been in this country for decades but have never taken up British citizenship. Again, what would be wrong if more of them were now working? What we would really like to know is whether the number of recent migrants in work is rising, but unfortunately those figures are not available. We would also need more research into what is driving the employment trends, which again we don't have.

Digging a little deeper in the ONS statistics that we do have, one finds that the 175,000 rise in the number of non-UK nationals in work (which is subject to a margin of error of plus or minus 111,000) comes from an unexpected source. Employment among east Europeans has not risen, it has increased (subject to big margins of error) among Indians (up 24,000), citizens of the 14 other countries that were EU members before 2004 (up 25,000), South Africans (up 27,000), and Pakistanis and Bangladeshis (up 31,000). At the same time, figures released to parliament last month show that the number of work permits granted to Indians last year rose by 24,000 to 50,000, while those granted to South Africans rose by 2,000 to 4,900 and those to Pakistanis by 1,700 to 3,300 (a mere 725 were granted to Bangladeshis). Together, this suggests that nearly all of the rise in the number of South Africans and Pakistanis in work last year is due to people who were already in Britain finding jobs, not new arrivals. Since the employment rate among Pakistanis, particularly Pakistani women, has historically been low, it is surely a good thing that more of them are now working.

The bigger point, which bears repeating again, is that there is not a fixed number of jobs to go around, so that making divisive statements about one group of people taking jobs off another is not only invidious, it is also inaccurate. Everyone who works creates jobs for others when they spend their wages as well as in complementary lines of work. Women who work are not taking jobs off men; black employees are not depriving white people of work; people from outside London who work in the capital are not nabbing jobs off those who were born there; and foreigners are not grabbing British jobs. The debate we should really be having is how to create more jobs. Investing more in our rickety infrastructure would be a good place to start.

Overturn the barricades

The economy is shrinking, unemployment is soaring, insecurity is rife - no wonder people are angry. As wildcat strikes against foreign workers spread across Britain, people who fear for their own jobs may feel sympathetic. But however understandable the strikers' emotions may be, they have got it all wrong.

Foreign workers are not responsible for the mess we're in; the financial crisis is. Blame bankers (British and foreign), finger blase regulators and blinkered politicians, spread responsibility among everyone who piled on debt and gambled on house prices - but don't scapegoat Italian oil workers.

Nor would kicking out foreign workers create more jobs for British people. The notion that there is a fixed number of jobs to go around is a nonsense. Workers (foreign or otherwise) not only take jobs, they also create them. Gordon Brown should have known better than to legitimise the old National Front canard of "British jobs for British workers" in his 2007 conference speech. He should eat his words.

Fewer foreigners around would mean even less spending in the shops, and so cost British people their jobs. Chucking foreign employees out would cause further dislocation to businesses already struggling with shrivelled credit and collapsing demand. It would play havoc with public services, depriving patients of doctors and nurses, the elderly of carers, and children of teachers. It would plunge the economy into an even bigger hole - and we'd end up with fewer jobs for British people, not more.

Let's be clear: if British workers are being discriminated against in Lindsey or elsewhere, that is unacceptable. It would be a breach of both British and EU law. But there is no evidence of that. What the strikers appear to want is that foreign workers be discriminated against - and that too is unacceptable.

The free movement of labour is not only economically beneficial and morally right, it is a legal requirement of EU membership. If Britain were to discriminate against other European workers, what is to stop other EU countries discriminating against British ones? Some 2 million Brits are thought to work in another EU country - do we want to put their jobs at risk too?

During the boom years when the pound was overvalued, Britain attracted workers from around the EU. But with the UK economy now predicted to be hardest hit by the global recession, Brits may feel tempted to seek work on the continent. That's what happened when unemployment reached 3 million in the 1980s, as workers similar to the brickies who featured in Auf Wiedersehen, Pet sought work in Germany and elsewhere.

Pundits and politicians are forever intoning that we must not fall prey to protectionism. Barricading ourselves off from outsiders leads not to salvation, but to economic depression and political extremism. That's one reason why the EU, with its single market, impartial regulations and common political institutions, is so important. Reverting to a policy of each to his own, beggar-thy-neighbour, and devil take the hindmost, would cause the EU to unravel.

That would delight Europhobic Tories, Ukip, the BNP, MigrationWatch and a host of rancid fellow-travellers. But the trade union and wider Labour movement should have no truck with it. Solidarity does not stop at the water's edge. The EU is a champion of workers' rights. And if the flaws of financial globalisation are to be fixed - and climate change curbed - it will be in partnership with Europe, not against it.

Now of all times Derek Simpson, Jon Cruddas and others on the left should not be making common cause with what Peter Mandelson has rightly called "the politics of xenophobia".

MigrationWatch is twisting the truth

Are immigrants taking our jobs? It is an explosive issue, especially with Britain sinking into recession and unemployment rising. So opponents of immigration will doubtless seize on a new report by the independent thinktank MigrationWatch UK, which claims that those dastardly foreigners who have the cheek to look after your granny or pick English strawberries are stealing jobs from British people. Yet the claims of Sir Andrew Green's thinktank are flatly contradicted by figures from the Office for National Statistics (ONS).

MigrationWatch claims that nearly all the jobs created in the UK since 2001 have gone to immigrants. But figures from the labour force survey (xls), show that employment among British-born people actually rose by 378,000 between the second quarter of 2001 and the second quarter of 2008, the dates arbitrarily chosen by MigrationWatch. If one excludes the recent fall in employment due to the financial crisis and instead compares the last three months of 2000 with the last three months of 2007, the number of UK-born people with jobs has risen by just over half a million (520,000).

MigrationWatch also claims that employment among UK-born people has fallen by 230,000 since the second quarter of 2004, when Britain opened its labour market to the Poles and other eastern Europeans joining the EU. But this too is contradicted by ONS figures. These show that the number of British-born people in jobs actually rose by 43,000 between the second quarter of 2004 and the same period of 2008. Excluding the impact of the financial crisis, employment rose by 175,000 between the second quarter of 2004 and the last three months of 2007.

MigrationWatch says that "there has been no progress at all in getting British-born unemployed workers into work" since 2001, and blames immigrants for this. But ONS figures suggest otherwise. They show that the employment rate among British-born people – the proportion of UK-born people of working age in employment – rose sharply in Labour's first term, from 73.5% in the second quarter of 1997 to 76% in the third quarter of 2000. Since then it has remained roughly steady: it was 75.6% in the second quarter of 2004 when Britain opened up to east European workers and 76% in the last quarter of 2007. In other words, the employment rate stopped improving well before eastern European migrants started arriving in large numbers, and has not worsened since.

The bigger point is this. As even MigrationWatch is forced to concede, there is not a fixed number of jobs in the economy. Immigrants don't just take jobs, they also create them, as they spend their wages and fill roles in complementary lines of work. If Britain threw out its Polish workers there wouldn't suddenly be more jobs for British people – just as throwing women out of work wouldn't provide more jobs for men.

Whichever way you look at it, immigrants are not taking British people's jobs. On the contrary, they are helping to provide vital public services and keep small businesses going. Not for the first time, MigrationWatch's xenophobic prejudice is causing it to twist the truth. Andrew Green should be ashamed of himself.

No left turn

Tony Blair once said that ‘we're at our best when at our boldest'. Gordon Brown is - finally - heeding that advice. His plan to shore up Britain's banking system is our best hope of pacifying the financial panic, getting credit flowing through the economy again and avoiding a 1930s-style depression. No wonder it is being copied across the world.

The need for massive state intervention in the banking system is regrettable. But exceptional times call for exceptional measures. Britain - and the world - is suffering a full-on financial heart attack. Unless the financial arteries of the economy are unclogged soon, huge job losses, bankruptcies, repossessions and a sharp fall in living standards beckon.

The government must do whatever it takes - including, if necessary, fully nationalising Britain's banks for a while - to rescue the economy from financial oblivion. Once the immediate crisis has passed, better and tougher financial regulation should be a priority. But while the glaring failings of global finance clearly need fixing, should the rest of the economic rulebook be torn up too?

Many on the left think so. Ken Livingstone, the Guardian's Seumas Milne and others argue that the government should turn its back on market economics. Since capitalism seems to be collapsing under the weight of its internal contradictions, they believe, the government should finish it off and regulate left, right and centre. More measured voices, such as the TUC's Brendan Barber, favour a ragbag of measures such as curbs on boardroom salaries and a new industrial policy.

But the priority now is tackling the crisis and averting a depression; everything else is a dangerous diversion. If struggling businesses that have just had their overdraft cut fear that they are about to be clobbered with higher taxes and more red tape, investment and jobs will suffer. The last thing a heart attack victim needs is to have a healthy leg amputated.

The government's bank rescue plan needs to be accompanied by measures to support the economy, not shackle it. The Bank of England should continue to cut interest rates, soon. Even though inflation is well above the target rate of two per cent, it is set to fall sharply as oil prices tank. Collapsing demand means that the real threat now is deflation, not inflation.

Some argue that the Bank of England's independence should be compromised. But that would be a mistake. Even the perception of political meddling in setting interest rates would add to financial uncertainty, undermine the credibility of monetary policy and raise the cost of government borrowing. As we learnt to our cost in the 1970s and the late 1980s, letting inflation rip does not lead to a sustained improvement in unemployment and economic growth; quite the reverse.

But once the crisis has passed, the government should reform the setting of monetary policy. The Bank of England's target measure of inflation should be amended to include housing costs. Its mandate should also be broadened so that it takes more account of asset prices. This would allow the Bank to raise interest rates to prevent bubbles getting out of hand - and thus avert future busts.

Faced with the threat of a depression, the government must not be hamstrung by its fiscal rules. Rightly, the government plans to borrow huge sums to finance the rescue of the banking system. It is well placed to do so since government debt as a share of GDP is low. This need not increase the national debt in the long term: Sweden's government turned a profit on its investment when it rescued its banks in the early 1990s. The government must also be ready to boost demand with tax cuts and spending increases if the recession turns really nasty. Fiscal tightening will certainly be needed - but only once the economy is recovering.

The bigger question, though, is whether, once the immediate crisis has passed, economic policy in areas other than finance needs to be revised. Leftwing populists have been quick to bury what they describe as the era of ‘unfettered markets', but an economy where the government takes around 40 per cent of national income in tax, pays for and provides essential services such as healthcare and education, and regulates everything from employment rights to credit-card contracts, can scarcely be described as one where the state has shrivelled and markets have free rein. So the issue is not whether the financial crisis sounds the death-knell for the free market, but whether it tips the balance towards greater state intervention.

That question is in fact two: first, does the crisis in financial markets suggest that competitive markets more generally do not work as well as we previously thought?; and second, will the crisis shift public opinion towards supporting a bigger role for the state? My answer to the first question is no; and while the answer to the second question is still unclear, people do not appear to be hankering to turn the clock back to the 1970s - notwithstanding the success of the TV series Life on Mars.

As I wrote in 2002 in my first book, Open World: The Truth about Globalisation: ‘Financial markets are unlike other markets. They are inherently unstable. They are prone to Manias, Panics, and Crashes ... Why? Because they involve bets on an unknown and unknowable future.' Product markets are very different: the market for cars or baked beans is not prone to destabilising speculation - and even if people did start gambling on the price of baked beans, its impact on jobs and the economy would be limited. The temporary part-nationalisation of Britain's banks does not call for increased intervention elsewhere. Royal Bank of Scotland may have come unstuck, but Tesco continues to deliver the goods.

Faced with a nasty recession partly caused by reckless lending in the US, the temptation to blame outsiders for our woes will grow. But we shouldn't throw the baby out with the bathwater. Britain benefits hugely from its openness to foreign products, ideas and people. The low prices in ASDA and Primark are only possible thanks to free trade, and commerce with China will provide many of the jobs of the future. Recent migrants from eastern Europe have filled vital jobs and revitalised the economy through their dynamism. Beggar-thy-neighbour protectionism made the Great Depression much worse; we would be crazy to repeat the same mistake.

Britain's flexible labour markets will be a key strength in the tough times ahead. They allow the economy to adapt rapidly to change, helping to redeploy workers from shrinking industries to growing ones and keeping unemployment down. Combined with measures to make work pay, help people find jobs, and equip them with the skills they need, New Labour's labour-market policies stand us in good stead. We should not be trying to protect yesterday's jobs at the expense of tomorrow's.

While tax rises will probably be needed in the medium term to pay for the costs of the crisis and an unexpectedly deep recession, support for higher taxes is hardly likely to be an election winner. Taxes must also remain low enough to support opportunity and enterprise. If working hard and starting a business is not rewarding enough, economic growth will suffer - and with it the ability to invest in public services. And unless public services continue to be reformed, with choice driving up standards and giving people what they want, voters are likely to feel their money is being wasted.

With Labour so far behind in the polls, the only chance of recovery depends on rescuing the economy from the worst crisis since the 1930s. Brown has come into his own in the past month, while the Conservatives, who are unconvincing critics of City practices, are flailing. But lurching to the left in the mistaken belief that markets no longer work and that voters are crying out for bigger government would be a huge mistake.

Call this a cure?

Extraordinary times call for extraordinary measures. Alistair Darling's statement was a pre-budget report only in name; in reality, it was an emergency budget crafted by Gordon Brown. It was big and bold, but it should have been bigger and bolder. Worse, the main plank of the government's plan to support the economy – a cut in VAT to stimulate consumption – is misplaced.

On the big picture, Gordon Brown is right and David Cameron is wrong: a fiscal stimulus is urgently needed to prop up the economy as demand slumps. Faced with the sharpest downturn since the 1930s, interest-rate cuts are not enough. While a further increase in government borrowing is risky, doing nothing – and risking an even longer and deeper recession – would be reckless.

The forecasts for government borrowing are huge – £78bn in this tax year, £118bn in the next – but national debt will still peak at only 57% of GDP, comfortably below the level deemed prudent by EU rules. It is not a tragedy if public debt rises even higher in the short term. So the Conservatives' critique is wide of the mark. The real problem with the government's stimulus package is that it is too small and poorly targeted.

A stimulus of £20bn between now and April 2010 is not trifling, but it amounts to only 1% of GDP. It will do little to fill the gap left by the collapse in private consumption and investment, not least since some of the stimulus will be saved. In comparison, president-elect Obama's team are considering a fiscal boost of $500bn, or even $700bn, over two years – which is equivalent to 1.75%-2.5% of GDP in each year. A bigger stimulus would not only provide a bigger boost to the economy directly, it could also help restore confidence, by signalling to consumers and companies that the government is serious about supporting the economy.

The focus of the emergency budget is also misdirected. Encouraging debt-ridden consumers to spend more is wrongheaded. For a start, it may not work: since retailers' hefty discounts are doing little to tempt shoppers to spend, a cut in VAT of 2.5% is unlikely to either. But even if it does work, encouraging consumers to go on yet another spending spree is unwise when they need to start saving more. It would be far better had the government done more to limit job losses, repossessions and bankruptcies and invest in areas, such as infrastructure, that bring long-term benefits to society.

For sure, the measures to help small businesses are welcome. A combination of tax cuts and loan guarantees will help. But a large share of the assistance consists of merely deferring a planned rise in corporation tax. A temporary cut in corporation tax for small businesses would have provided a lifeline for them and their employees.

Likewise, the £1.3bn package to protect jobs is too small. More jobs could be saved if the government introduced a temporary cut in employers' National Insurance contributions. And while the £1.8bn housing package is better than nothing, three months' grace for those struggling with their mortgages will bring little relief. The government should also provide funds for housing associations or local authorities to buy up property that banks wish to repossess, allowing homeowners to remain as tenants if they wish.

Above all, the focus of the stimulus package should have been a big increase in investment in infrastructure and other public works, along the lines proposed by president-elect Obama. Instead, the government merely brought forward £3bn in capital spending, a drop in the ocean. It should be doing much more: bringing forward and increasing spending on social housing, upping and accelerating investment in Britain's crumbling infrastructure, especially transport, and offering bigger subsidies for energy-efficiency measures, such as loft insulation.

Longer term, the government's growth and deficit forecasts look optimistic. It seems unlikely that the economy will start growing again as early as the second half of next year. The recovery is also likely to be slower than the government predicts, since consumers will be struggling with the burden of their excessive debts for many years. So looking forward, the tax rises in the next parliament are likely to be bigger than the 0.5% increase in National Insurance contributions and the introduction of a new 45% tax band on incomes above £150,000 announced.

The measures announced in the pre-budget report are unlikely to be the last word. As the crisis continues to take violent and unpredictable new turns every other week, with the US banking giant Citigroup forced to seek a bail-out over the weekend, further action will no doubt be needed soon. The government may need to inject further capital into Britain's banks – and outright nationalisation may even be necessary. A further fiscal stimulus is also likely to be needed in next year's budget. It's a pity Darling didn't announce it yesterday.

What it takes to be British

Read it here

This is not money for nothing

Tony Blair once said that the government was best when it was boldest. Gordon Brown is – finally – heeding that advice. The government's three-pronged plan to shore up Britain's banking system is bold and right. It is our best hope of pacifying the financial panic, getting credit flowing through the economy again and thus avoiding a 1930s-style depression.

The Bank of England's half-point cut in interest rates is also welcome, particularly since it was coordinated with other central banks. It signals that the US and Europe are finally acting together to tackle the global financial crisis. But a larger cut is needed soon: at 4.5%, UK interest rates are still far too high.

The bigger challenge is to get banks lending again – to each other, to companies and to individuals. They need enough cash to conduct their day-to-day operations; secure access to medium-term funding; and extra long-term capital to provide a cushion against bad debts and allow them to lend to creditworthy borrowers.

The government's plan addresses all three of these needs. The Bank of England will supply £200bn in short-term funding; the government will underwrite £250bn of medium-term finance; and it will also inject £25bn in long-term capital initially – and perhaps up to £50bn in total – in the form of preference shares that pay a fixed return and protect taxpayers' investment.

Headline writers may describe the government plan as a £500bn bail-out, but that is completely misleading. The £200bn consists of short-term secured loans; the £250bn is a form of insurance, for which the government will be paid a fee; and the £50bn is an investment that pays a return. This is not money for nothing.

And while it is certainly true that taxpayers' money is at risk, we will also share in the upside when the banks recover – as they are much more likely to do thanks to the government's intervention. Most importantly, the risk of doing nothing – or of continuing to do too little, too late – is far greater. If the banks went under, so would businesses and jobs. By keeping the UK banking system afloat, the government – acting on behalf of all of us – is giving the economy a life raft.

Many of the details of the government's plan are still unclear. Ideally, the preference shares should pay a hefty interest rate to properly compensate taxpayers and give banks an incentive to seek private financing if and when they can. Taxpayers' money should also come with strings attached, such as guarantees that banks will use the extra capital to lend to small businesses and individuals rather than pay extravagant dividends and unjustified bonuses. And, of course, the plan must be implemented speedily and efficiently.

We are by no means out of the woods yet. Global financial markets are in turmoil; other governments need to follow Britain's bold lead soon. The UK economy has many other weaknesses: consumers are overladen with debt, often secured against housing that remains overpriced; unemployment is rising; food and energy prices remain painfully high; and the global gloom is hardly auspicious for exporters, despite the fillip of a weaker currency. What's more, the banking rescue package will swell the government's already-large deficit – although borrowing to invest in banks need not increase the national debt in the long term. But while 2009 will no doubt be unpleasant, the government's actions should stave off economic collapse. Amid all the gloom, that is certainly good news.

Taking stock

The time for half-measures is over. Britain is no longer in the grips of a credit crunch or even a financial crisis; it is suffering a full-on financial heart attack. Markets have seized up. Banks will no longer lend to each other. Credit to companies and individuals is drying up. Unless credit starts flowing again soon, a nasty recession – conceivably even a depression – looms and with it, massive job losses, bankruptcies, repossessions and a sharp fall in living standards. The government needs to act – now.

But what to do? Ken Livingstone, Seumas Milne and others argue that the government should turn its back on market economics. Since capitalism seems to be collapsing under the weight of its internal contradictions, the government should finish it off. More measured voices such as the TUC's Brendan Barbour favour a ragbag of measures, such as a new industrial policy. But all of them are missing the point. Righting the huge problems in financial markets certainly requires decisive government intervention, but lashing out at generally well-functioning product and labour markets is perilously misplaced. The last thing a heart-attack victim needs is to have a healthy leg amputated. The priority now is tackling the financial crisis; everything else is a dangerous diversion.

But while the government should not try to turn the clock back to the 1970s, it does need to change course. Its ad hoc approach will no longer do. The nationalisations of Northern Rock and Bradford & Bingley, and the government-orchestrated rescue of HBOS, were justified at the time. But damage limitation is no longer enough – not least since Lloyds' rescue of HBOS seems to be dragging it down, too. Now Royal Bank of Scotland seems under threat; Barclays may be next in line. Waiting for the next bank to collapse and then picking up the pieces will not restore confidence or get credit flowing around the economy again.

Across Europe, governments are rushing to following Ireland's lead and guarantee (nearly) all deposits in the banking system. Here, the Treasury has just raised the guarantee on savers' deposits to £50,000. But while it may soon be forced to extend a broader guarantee, this will not tackle the root causes of the crisis: a lack of capital in the financial system and sheer panic.

A cut in interest rates would do some good. Although inflation is well above the target rate of 2%, the Bank of England should slash rates when it meets on Thursday. As the global economy tanks, oil prices are sinking, so inflation is set to fall. Collapsing demand means that the real threat now is deflation, not inflation. But a big cut in interest rates will not be enough. If banks are unwilling to lend, monetary policy alone is virtually useless – in Keynes' words, it is like "pushing on a string". Bolder measures are needed.

The US has opted for a $700bn bailout. In theory, taking bad debts off banks' books should reassure markets that that they are not about to go bust. Banks may be willing to lend to each other again, their share prices may recover somewhat, and investors – not least Asian governments and those of oil-rich states – may be willing to pump some of their huge cash reserves into them. But the bailout route is deeply flawed. It provides the most help to the banks that made the biggest mistakes. It exposes taxpayers to huge potential losses. And it does little to recapitalise the banking sector and thus encourage it to start lending again.

There is a better way. As now seems likely to happen in some form, with the chancellor's statement on Wednesday morning, the government should buy stakes in – and in some cases, take over – stricken banks, an approach that worked well in Sweden in the early 1990s. With the government standing behind banks, the fear that they are about to go bust would vanish. An injection of taxpayers' money would strengthen banks' balance sheets, allowing them to start lending again. But it would not be money for nothing: the government could acquire preference shares, which pay a hefty interest rate and put taxpayers first in line to be repaid if a bank fails. These could be combined with warrants (basically, options to buy shares at a future date at a specified price), so as to give us all a share in the profits when banks – and the economy – recover.

John Hussman, a US analyst and investor, has suggested a novel variant of this idea. He proposes that the government provide capital in the form of a "super-bond". This would be subordinate to deposits, and so could be counted as capital. But if a bank went bust, taxpayers would be repaid before shareholders and senior bondholders, thus protecting the financial system, customers and taxpayers. The super-bond could pay a relatively high interest rate to give banks an incentive to shift to private financing when conditions improve, but interest payments could be deferred until banks were profitable so as not to drain their cash reserves now.

A government recapitalisation of the banking sector – combined with much tougher financial regulation to limit future excesses – would be good politics, as well as sound economics. With Labour so far behind in the polls, its only chance of recovery depends on rescuing the economy from the worst crisis since the 1930s. Decisive action would marginalise the Conservatives, who are unconvincing advocates for state intervention in the financial system and are, in any case, powerless to act. And since even David Cameron has been forced to concede that government injections of capital may be needed, the government has political cover to act.

Gordon Brown has shown that he can be bold when circumstances demand it. Now is such a time.

       

Statistical Powellism

With a stagnant economy and Led Zeppelin performing, Britons could be forgiven for thinking they had travelled back to the 70s. This week saw yet more throwbacks, with the proposal of Labour MP Frank Field for non-EU migrants to be thrown out after four years - sorry, for "balanced migration", and the return of manpower planning. Oh dear.

Field should know better than to team up with the Tory MP Nicholas Soames and MigrationWatch to put forward a "one in/one out" temporary-worker scheme. The plan is unfair, unworkable and harmful to the economy. Throwing out people who have been working here for four years would deprive us of people who have demonstrated their contribution to society and adapted to British life; it would also deter many talented people from coming. And since only a select few would be allowed to settle, with priority given to the rich and well-paid, Russian oligarchs and American investment bankers could doubtless stay while Asian acupuncturists and African nurses would be turfed out. This is Powellism dressed up in statistics.

The Field-Soames plan is in tune with the Conservatives' sketchy plans for an immigration quota. Fortunately, the government has rejected it. Unfortunately, its own policies are not much better. It is pressing ahead with a new points-based system, modelled on Australian lines, for vetting workers from outside the EU.

This system will allow a top tier of highly educated people to enter, while slamming the door on those with fewer skills. Among a middle tier, only those with a job offer in areas where a shortage is deemed to exist will be admitted. On Tuesday, a government-appointed committee of wise men and women delivered a provisional shortlist of shortage occupations, which the government is due to finalise in October. Doctors, secondary-school teachers and social workers are no longer welcome, nor are midwives, most nurses and, crucially, care workers.

Neil Kinnock once warned Britons not to be young, not to fall ill, and not to grow old; and the government will now be turning away people from Kenya or the Philippines who could help meet the desperate need for carers for the young, the old and the sick. With suitable British applicants vanishingly few and Polish workers increasingly going home as the plunging pound devalues their wages, pensioners will not just be struggling with fuel bills this winter, they will be shamefully short of care. The immigration minister, Liam Byrne, trumpets how "tough" the new system is, but it is toughest on the weakest and poorest.

While there are lots of things that Britain might want to import from Australia - such as its wine and cricketing success - its devilishly complicated system of micromanaging immigration is not one. Governments are no good at second-guessing the ever-changing labour needs of complex modern economies. Even if the government could somehow ascertain whether Britain needs more IT staff or welders right now - its advisory committee says not - it certainly can't predict what the economy will need a year from now. Only a year ago estate agents were in hot demand; now bailiffs are.

The new points system is like an 11-plus for foreigners. It prejudges how people will contribute to society and denies opportunity to those who don't make the grade. It would have turned away most of the people on the Windrush, the father of Olympic hero Kelly Holmes, and - had he been born abroad - a young Richard Branson. A Labour government should know better.

Think again, Frank

Labour MP Frank Field's new proposal for "balanced migration" is many things, but it certainly isn't balanced. A "one-in/one-out" immigration policy is unfair, unnecessary and unworkable – and would deal yet another blow to Britain's faltering economy.

Field frets that Britain's "open door" policy will lead to a large increase in the settled UK population, which he believes is not unsustainable. He proposes instead what amounts to a temporary-worker scheme, policed by employers. Foreigners could work here for up to four years, but would then be sent packing. Businesses that failed to produce evidence that their foreign workers had left the country would be denied future work visas. There would be a strict quota – perhaps 20,000, including dependants – on the number of non-EU workers able to gain permanent residency, selected on the basis of their skills as reflected in their salary.

Field's proposal, cobbled together with Tory MP Nicholas Soames and the swivel-eyed xenophobes at MigrationWatch, is utterly misconceived. For a start, Britain does not have an "open-door" immigration policy: while people from within the EU can come and work here freely, those from outside the EU, which the Field-Soames proposal would target, cannot. The door is already slammed shut for all but the most highly skilled non-Europeans.

Second, as I have written previously, it is a fallacy that Britain's population is destined to rise inexorably. The recent increase in immigration is largely temporary, and is already reversing itself: as the pound plummets and the economy teeters on the brink of recession, Britain is far less attractive to foreign workers. But, in any case, since when are other people such a bad thing? If having more people around is so terrible, why isn't Frank Field suggesting that densely populated cities such as London, Birmingham and Glasgow prevent people from the rest of the country from settling there?

Even if one accepts that stabilising the population is desirable, Field's proposal would not necessarily do so. Preventing most temporary non-EU workers from settling permanently would not limit entry from the EU, or keep out asylum-seekers, clandestine migrants, visa overstayers, and those entering on family reunification visas; nor, indeed, would it prevent Britons from having more babies and living longer. Indeed, if large numbers of Britons stopped emigrating, stabilising the population would require expelling existing migrants.

While the suggestion that employers should be able to hire the foreign employees they need has some merit, forcing most of those still here after four years to leave does not. After all, if their employers would rather they remained, these migrants are clearly contributing to the economy and society as a whole. Throwing them out would deprive Britain not only of the skills with which they arrived, but also of those they have acquired while living and working here. As an Arsenal fan, I don't want Kolo Touré chucked out, and I'm sure Portsmouth fans would be loath to see Kanu go, too.

What's more, making it much harder for skilled workers to stay on is Britain is hardly conducive to attracting them in the first place. Talented people increasingly have a choice about where to work; and with Australia, Canada and other countries wooing them assiduously, making them feel unwelcome here is tantamount to shooting our hobbling economy in the foot.

Common sense also suggests, and international experience in the US and elsewhere confirms, that businesses are hardly equipped to enforce immigration policy. At the same time, if workers would only allowed to stay in the country on their employers' say so, they would be far more vulnerable to exploitation.

But perhaps the worst thing about the proposal is that the select few who would be allowed to settle in Britain would be the rich and the highly educated. Most likely, they would be American investment bankers and Russian billionaires rather than Asian acupuncturists or African nurses. That is hardly fair or progressive. Frank Field should think again.

Tear down the walls

Europe prides itself on being a continent of human rights, freedom and international solidarity. Yet it is fighting an increasingly dirty war against immigration, with casualties mounting every day. The biggest victims are the poor and the vulnerable, who are demonised as "illegal" or "bogus". But EU governments are also doing huge harm to the societies they purportedly want to protect.

Britain continues to hunt down unauthorised migrants and is planning to introduce ID cards for foreigners. In Italy, Gypsy camps have been burned down, and the Berlusconi government, far from protecting the targets of such racist attacks, is whipping up animosity against them and fingerprinting them. Spain is increasing its efforts to stop desperate Africans from reaching European soil, causing thousands to die each year as they take longer and more dangerous routes to avoid detection. Last month 15 people died of dehydration and exposure when their boat engine failed as they tried to reach Almería, on the Costa del Sol. The previous week 14 people drowned when their boat sank off nearby Motril.

Those lucky enough to escape death en route to Europe now face being locked up when they arrive. The EU's new "return directive", which was recently approved by European interior ministers and MEPs, allows governments to imprison - sorry, detain - unauthorised migrants for up to 18 months. Why? For daring to cross a border in search of a better life.

As the EU begins to adopt a common approach to immigration, the British government is helping to draft Europe-wide measures that attract little coverage in the UK. Frontex, the EU's border force, is helping southern European governments to patrol the Mediterranean and around the Canaries. And while the return directive was front-page news in Spain, it was a footnote in Britain.

There is plenty more to come. Nicolas Sarkozy, the son of a Hungarian migrant, has made cracking down on migration a priority for France's EU presidency, which lasts until the end of this year. His proposed migration pact aims to make it easier for the EU to attract highly qualified migrants, establish common European refugee and asylum policies by 2010, beef up policing of the EU's borders, and expel more illegal migrants. EU leaders are due to decide on the plans in October.

They should reject them. Europe's clampdown on immigration is neither fair nor sensible. Undocumented migrants are not criminals, nor are they an invading army. They are human beings less fortunate than ourselves. Most come to do jobs that comfortable Europeans no longer want to do, but as Europe's front doors are closed, they have to creep in through the back. Far from threatening Europe's ageing societies, they are reinvigorating them. What's more, the billions of pounds they send home dwarfs the sums that European governments give in aid.

The cruel irony is that, despite all the suffering they cause, Europe's increasingly costly border controls fail to keep foreigners out. Instead, they foster people-smuggling and an ever-expanding shadow economy in which illegal migrants are vulnerable to exploitation, labour laws are broken and taxes go unpaid. They also encourage people who would rather work temporarily to remain permanently, because migrants fear that if they go home they will not be able to return to Europe. Surveys of Senegalese migrants in Italy show that most would prefer to spend part of their time working in Europe and part back home, just as the Poles who commute back and forth to Britain do. A sensible immigration policy would facilitate this.

Open Borders Work (Part 2)

Opponents of immigration marshal a battery of objections to opening up borders. They claim that it would cost jobs, pose a huge welfare burden, and threaten Americans’ way of life — even their security. Yet these fears are mostly nonsense.

Critics argue that low-skilled immigration is harmful because the newcomers are poorer and less-educated than Americans. But that is precisely why they are willing to do low-paid, low-skilled jobs that Americans shun. In 1960, more than half of American workers older than 25 were high-school dropouts; now, only one in ten is. Understandably, high-school graduates aspire to better things, while even those with no qualifications don’t want to do certain dirty, difficult, and dangerous jobs. Many low-skilled jobs cannot readily be mechanized or imported: old people cannot be cared for by a robot or from abroad.

And as people get richer, they increasingly pay others to perform arduous tasks, such as home improvements, that they once did themselves, freeing up time for more productive work or more enjoyable leisure. Thus, as advanced economies create high-skilled jobs, they inevitably create low-skilled ones too. The way to reconcile aspirations to opportunity for all with the reality of drudgery for some is through immigration.

Fears that immigrants threaten American workers are based on two fallacies: that there is a fixed number of jobs to go around, and that foreign workers are direct substitutes for American ones. But just as women did not deprive men of jobs when they entered the labor force too, foreigners don’t cost Americans their jobs. They don’t just take jobs; they create them too. When they spend their wages, they boost demand for people who produce the goods and services that they consume; and as they work, they stimulate demand for Americans in complementary lines of work. An influx of Mexican construction workers, for instance, creates new jobs for people selling building materials, as well as for interior designers. Thus while the number of immigrants has risen sharply over the past 20 years, America’s unemployment rate has fallen.

But do some American workers lose out? Hardly any; most actually gain. Why? Because, as critics of immigration are the first to admit, immigrants are different from Americans, so that they rarely compete directly with them in the labor market; often, they complement their efforts — a foreign child-minder may enable an American nurse to go back to work, where her productivity may be enhanced by hard-working foreign doctors and cleaners.

Study after study fails to find evidence that immigrants harm American workers. Harvard’s George Borjas claims otherwise, but his partial approach is flawed because it neglects the broader complementarities among immigrant labor, native labor, and capital. A recent National Bureau of Economic Research study by Gianmarco Ottaviano and Giovanni Peri finds that the influx of foreign workers between 1990 and 2004 raised the average wage of U.S.-born workers by 2 percent. Nine in ten American workers gained; only one in ten, high-school dropouts, lost slightly, by 1 percent. Moreover, the new arrivals boost the returns to capital and benefit consumers through cheaper goods and services. Overall, then, America clearly gains. Ethically, it is hard to object to a policy that makes poor immigrants and the vast majority of Americans better off at the expense of a small number of people whose lot could be improved through such things as better education and training.

But might things be different if America’s borders were open to all and sundry? Israel’s experience is instructive. When the Soviet Union collapsed, the mass exodus of Russian Jews swelled Israel’s working-age population by 8 percent in two years and by more than 15 percent between 1989 and 1997 — the equivalent of 15 million foreigners unexpectedly arriving in the United States over the next two years, and 29 million by 2016. Jews everywhere have an automatic right to settle in Israel, which leaves the country open to mass inflows of immigrants, irrespective of the country’s economic needs and circumstances.

The influx of Russian Jews in the 1990s posed a severe test of the economic viability of Israel’s “right of return” policy. After all, the newcomers didn’t speak Hebrew and didn’t have jobs to go to. Yet as I explain in detail in my book Immigrants: Your Country Needs Them, Israel was able to absorb this huge and unexpected inflow of immigrants without a rise in unemployment, and with only a temporary fall in wages. The upshot is clear: even when migration is motivated by political crisis rather than economic demand, flexible advanced economies can absorb large numbers of immigrants with scarcely any cost to native workers.

Innovation and dynamism

Yet narrow calculations of immigrants’ impact on native wages or their net contribution to public finances neglect the much broader benefits of creating a more open and dynamic society. The exceptional people who come up with brilliant new ideas and set up new enterprises often happen to be immigrants. Instead of following the conventional wisdom, they tend to see things differently, and as outsiders they are more determined to succeed. Around a third of the Americans who won Nobel prizes in physics in the past seven years were born abroad. Nearly half of America’s venture-capital-funded start-ups have immigrant cofounders.

Most innovation comes from groups of talented people sparking off each other — and foreigners with different ideas, perspectives, and experiences add something extra to the mix. If there are ten people sitting around a table trying to come up with a solution to a problem and they all think alike, then those ten heads are no better than one. But if they all think differently, then by bouncing ideas off each other they can solve problems better and faster, as a growing volume of research shows. Just look at Silicon Valley: Google, Yahoo!, and eBay were all cofounded by immigrants who arrived not as graduates, but as children. And an ever-increasing share of a society’s prosperity comes from solving problems — developing new medicines, computer games, and environmentally friendly technologies, designing innovative products and policies, providing original management advice. Since diversity boosts innovation and enterprise, which are the source of most economic growth, critics who claim that immigration has few or no economic benefits are profoundly mistaken.

Immigration and welfare

Milton Friedman once claimed that you can’t have free immigration and a welfare state. He was right on many things, but in this case he was mistaken. Admittedly, if people from poor countries are better off on welfare in rich countries than they are working in their country of origin, they could conceivably be motivated to move, and if enough poor people did that, welfare provision could become economically and politically unsustainable. But even in such cases, immigrants would still be even better off working than being on welfare. So immigrants would have to be both enterprising enough to move in the first place but then suddenly be sapped of enterprise once they arrive. This is highly improbable — and there is no evidence, as even immigration critic George Borjas concedes, that the United States actually does act as a “welfare magnet” for people in poor countries.

In countries where we observe high unemployment among immigrants, the reason is not that foreigners are lazy and don’t want to work. The blame generally lies with labor-market restrictions that privilege insiders at the expense of outsiders. Throwing immigrants out wouldn’t reduce unemployment; it would more likely raise unemployment among native-born people. In any case, if rich countries opened their borders, they could at the same time restrict the availability of welfare to foreigners initially, just as the 1996 welfare-reform act cut off immigrants’ access to federal public benefits.

It is perverse to use the welfare state as an excuse to keep immigrants out. If the price of gaining the right to work in a country was not being able to claim welfare benefits when they arrive, most immigrants would take it. But unfortunately, they are not offered that option.

The costs of intervention

Many people say that they have no objection to legal immigrants, but that illegal immigrants are a problem. Of course, if the U.S. borders were open, the distinction would disappear. But in any case, illegal immigrants are not the problem; they are a symptom of the real problem: nonsensical immigration restrictions.

That immigrants are in the United States illegally is a sign not of moral turpitude but of misguided government intervention in the labor market: since employers cannot obtain visas for low-skilled foreigners to come work legally, foreigners who want to take up jobs in the United States have no choice but to come illegally instead. These generally hard-working and enterprising people’s only crime is wanting to work hard to earn a better life for themselves and their children — the epitome of the American dream. Without them, America would grind to a halt.

In any case, governments cannot stop people from moving across borders. Despite efforts to build a Fortress America, half a million foreigners bypass U.S. border defenses each year. Some enter covertly; most overstay their visas and then work illicitly. Far from preventing immigration, increasing draconian policies mostly drives it underground.

That creates huge costs: a humanitarian crisis; the soaring expense of border controls and bureaucracy; a criminalized people-smuggling industry; an expanding shadow economy, where illegal migrants are vulnerable to exploitation, labor laws are broken, and taxes go unpaid; a loss of faith in politicians who cannot keep their promises about immigration; a corrosion of attitudes towards immigrants, who are perceived as lawbreakers rather than hard-working and enterprising people; and the mistreatment of refugees in an attempt to deter people who want to come work from applying for asylum, besmirching the American commitment to help those fleeing tyranny.

These problems are generally blamed on immigrants, but they are actually due to immigration controls. It should be obvious, even to those who view immigrants as a threat, that the U.S. border controls are not just costly and cruel, but ineffective and counterproductive. Far from protecting society, they undermine law and order, just as Prohibition did more damage to America than drinking ever has.

Those who claim that tougher measures could stop immigration are peddling a false prospectus. Even if, at huge cost, the United States built a wall along its long border with Mexico, deployed an armada to patrol its shores, searched every arriving vehicle and vessel, denied people from developing countries visas altogether, and enforced stringent internal checks on people’s right to be in the United States, migrants would get through: documents can be forged or stolen, people smuggled, officials bribed. Even with a shoot-to-kill policy, people got across the Berlin Wall. And by trying to protect the land of the free from the phantom menace of immigration, anti-immigrationists would end up turning the United States into a police state. Politicians should instead have the courage to stop fighting a costly, unjust, and unwinnable war against immigration.

Open borders and terrorism

Having open borders does not imply opening the United States up to terrorism. If terrorists are home-grown, such as the Oklahoma bombers, or are foreigners already in the United States, then even the most stringent immigration controls could not feasibly keep them out. If foreigners are suspected terrorists trying to get in, then the government should use the standard legal means to apprehend them and have them extradited.

Tighter border security is perfectly compatible with free immigration: if most people were allowed to cross borders legally, government officials could focus their efforts on apprehending the tiny minority of terrorists, rather than diverting their efforts trying to keep out Mexicans who want to come work. Conversely, even if the United States granted no immigrant visas at all, terrorists could still enter the country on tourist, student, or short-term business visas, or under the visa-waiver program. And whatever you think about the merits of building a wall along the border with Mexico, it certainly won’t keep out terrorists. When I visited the Border Patrol in El Paso, Texas, they said their top priority was catching would-be terrorists. I asked them precisely how many terror suspects they had apprehended. The answer was “zero.” Does that mean al-Qaeda operatives are flooding into the United States across the New Mexico desert unnoticed? Of course not: they would most likely enter the country through a normal entry point using a false passport, or a genuine ID, if they are not yet suspects. There are more effective means of combating terrorism. Building a border wall is a hugely costly diversion.

Many people fear that if the United States opened its borders, everyone in poor countries would move in and American societies would collapse. It is a deep-rooted fear, as if immigrants were the barbarians at the gates. But it is misplaced.

After all, America didn’t do too badly when millions of poor European immigrants arrived in the late 19th and early 20th century. Nor has Britain collapsed since it opened its borders to Poland and the seven other ex-Communist countries that joined the European Union in 2004. If you consider that Poland is almost as poor as Argentina, Europe’s partial experiment with open borders is not a million miles away from the United States’s opening its labor markets to Latin America.

When Britain opened its borders to the Poles and other East Europeans, all 75 million people in those much poorer countries could conceivably have moved, but in fact only a fraction have, and most have already left again. Many are, in effect, international commuters, splitting their time between Britain and Poland. Of course, some will end up settling, but most won’t. Most people don’t want to leave home at all, let alone leave it forever: they want to go work abroad for a while to learn English and earn enough to buy a house or set up a business back home.

Studies show that most Mexican migrants have similar aspirations. If they could come and go freely, most would move only temporarily. But perversely, U.S. border controls end up making many stay for good, because crossing the border is so risky and costly that once a person has got across he tends to stay. A Mexican who overstays his visa knows that if he returns home, he will never be able to reenter the United States legally.

The case for open borders is compelling. Yet persuading skeptics won’t be easy. That’s why the argument for setting people free has to be made at several levels. There is a principled case: it increases freedom and reduces injustice; a humanitarian case: it helps people in developing countries; an economic case: it makes Americans richer; and a pragmatic case: migration is inevitable, so it is in everyone’s interests to make the best of it.

Allowing people to move freely may seem unrealistic. But so too, once, did abolishing slavery or giving women the vote. Campaigning for open borders is a noble cause for our time.

Open Borders Work (Part 1)

Imagine you were born in a part of the country where farming was no longer productive, or in a rust-belt town where the local factories had closed. You hear of good jobs in California and Colorado, so you decide to move. How would you feel if, when you arrived at the state line, you were denied the opportunity of a better life because you happened to have been born in a different state? Welcome to what it is like to be Mexican.

Freedom of movement is one of the most basic human rights, as anyone denied it can confirm. Yet governments obstruct people’s movement across borders in all manner of arbitrary and iniquitous ways. They require that people prove — how? — that their lives are in danger before admitting them. They determine which family members are permitted to join their relatives and which are not; Danes’ non-European spouses cannot come to live with them in Denmark unless both are age 24 or more. Americans’ foreign girlfriends and boyfriends also struggle to gain admission; the rules for foreign pets are laxer. Those seeking to come to work are vetted through a byzantine set of rules and quotas that delight bureaucrats, lawyers, and lobbyists, but deny most people the opportunity to better themselves and do untold damage to the U.S. and global economy.

Immigration controls are generally seen as normal, reasonable, and necessary, but in fact they are economically stupid, politically unsustainable, and morally wrong. For a start, the freedom to leave a country and enter another is the ultimate safeguard against tyranny. Throughout history, emigrating has often meant the difference between life and death: remember the Pilgrims who set sail on the Mayflower, the Huguenots who fled France to take refuge in England, and the Jews who escaped Nazi Germany. In the aftermath of the Second World War, the shameful recognition that governments had conspired to send countless Jews to their deaths by denying them refuge led to their signing on to Article 14 of the Universal Declaration of Human Rights, which states, “Everyone has the right to seek and to enjoy in other countries asylum from persecution.” In practice, though, this right is often honored in the breach.

While it is vitally important that asylum-seekers are able to seek refuge abroad, fear of persecution is not the only legitimate reason that people might want to cross national borders. They might be seeking a better job. They might want to be with the ones they love. They might simply want to experience something different. And why shouldn’t they be able to?

Those fortunate enough to be rich and highly educated take it for granted that they can move around the world more or less as they please. They vacation in Mexico, safari in Africa, even go on trips around the world; they increasingly work abroad for periods of time; and some end up settling elsewhere — like the many Americans who now live in London, and the many Londoners who now live in the United States. Why, then, do we seek to deny this right to others?

Opponents of open borders often respond that Americans aren’t actually free to go where they choose. They point out, correctly, that one needs a visa to go to many countries and that the Chinese government, for instance, may very well deny you one. But why should America be basing its policies on what the Chinese government does? Should the United States deny people freedom of speech because the Chinese government does so? The point about universal human rights is not that they are necessarily universally applied, but that they ought to be. That others fail to apply them is not a reason for the United States to fail to do so too.

Article 13 of the Universal Declaration of Human Rights states, “Everyone has the right to leave any country, including his own.” But what is the right to leave a country if one cannot enter another? Since even international human-rights law does not give people the right to cross borders freely, the United States should lead by example, by passing a constitutional amendment guaranteeing open borders.

Costs and benefits

Many people argue that opening the borders would have devastating consequences. But are the potential costs really so great that they warrant the huge injustice of denying people the possibility of moving freely? Might there not be big benefits to opening up the borders too? And even if one thinks immigration is a threat, are the costs of immigration controls not even greater?

This is not a point of abstract principle. Each year thousands drown trying to reach Europe. More people have died trying to cross from Mexico to the United State in the past decade than were killed on 9/11. By denying desperate people the opportunity to cross borders legally, the United States is driving them to risk death. Of course, voters and government officials would rather migrants didn’t die. But implicitly, they consider it a price worth paying for protecting the borders. That sounds shocking — and it is. But how else can we explain the general indifference to the deaths that U.S. immigration controls cause? Why is the official response always that “we” must remain tough in enforcing “our” border controls, rather than questioning whether the system makes sense? Immigrants are not an invading army; they are mostly people seeking a better life.

Freeing up migration is not just morally right, it is economically beneficial. When workers from poor countries move to rich ones, they too can make use of advanced economies’ superior capital, technology, and institutions, making them much more productive, and the world much better off. The departure of one in six Swedes for North America between 1870 and 1910, relieved pressure on the land, drove up the productivity and wages of those who remained, and helped catapult Sweden from grinding rural poverty to prosperity within fewer than 50 years.

Migrants from poor countries can earn wages many times higher in rich ones, and the money they send home — some $300 billion a year officially, perhaps the same again informally — dwarfs the $100 billion that Western governments give in aid. These remittances are not wasted on weapons or siphoned off into Swiss bank accounts; they go straight into the pockets of local people. They pay for food, clean water, and medicines. They enable children to stay in school, they fund small businesses, and they benefit the local economy more broadly. Where remittances account for a large share of the economy, they slash the poverty rate by a third. Even in countries that receive relatively little, they can cut the poverty rate by nearly a fifth. And by keeping children in school, paying for them to see a doctor, and funding new businesses, remittances can also boost economic growth. What’s more, when migrants return home, they take with them new skills, new ideas, and the money to start new businesses. Africa’s first Internet cafés were started by migrants returning from Europe.

Economists estimate that abolishing immigration controls could more than double the size of the world economy. This dwarfs the benefits of any other public-policy change. Just as the freeing up of international trade and capital flows since the Second World War has helped power a huge rise in living standards across the world, the freeing up of international labor mobility could deliver vast economic gains over the next 50 years. Indeed, the economic gains from migration are akin to those from trade.

Consider an American who requires medical care. He could be treated locally by an American doctor; he could go abroad to be treated by a foreign doctor; the foreign doctor could treat him remotely — over the Internet, for instance; or the foreign doctor could come to the United States to treat him. In the last three cases, the United States is importing medical care from the foreign doctor; the final case, which we classify as migration instead of trade, is simply a form of international services trade where a foreign provider comes to America to offer his services to consumers on the spot. But where services have to be delivered locally — the elderly cannot be cared for from afar; taxi drivers have to operate locally; dishes have to be washed on the spot — international migration is the only form of international trade that is possible.

Migration and trade

Now if one accepts that international trade is generally mutually beneficial — because, in a nutshell, it permits greater specialization, reaps economies of scale, reduces prices, increases choice, boosts competition, stimulates innovation, and raises economic growth — then so too, surely, is the particular form of it that involves foreign service-providers crossing borders to ply their trade. And just as governments have no place denying us the opportunity of watching foreign films, eating foreign food, or driving foreign cars, they should not be denying us the opportunity of engaging in mutually advantageous economic transactions with foreigners that entail their moving to our vicinity.

Where governments permit it, a global labor market is emerging: international financiers cluster in New York and London, IT specialists in Silicon Valley, and actors in Hollywood, while multinational companies scatter skilled professionals around the world.

Yet rich-country governments endeavor to keep out Mexican construction workers, Filipino care workers, and Congolese cooks, even though they are simply service providers who ply their trade abroad, just as American investment bankers do. And just as it is often cheaper and mutually beneficial to import computers from China and IT services from India, it often makes sense to import menial services that have to be delivered on the spot, such as cleaning.

Economic theory suggests that the gains from trade are greatest when countries are different. The United States has an aging, well-educated population, while the developing world has a much younger and generally less well-educated population. In effect, the work forces complement each other. It’s unfortunate that many free-traders who rejoice that Vietnamese people are bettering themselves by working in Nike factories to produce shoes for Americans are opposed to their coming to better themselves in America. People who truly believe in open societies and individual freedom are a rare breed.

18 meses de cárcel por buscar una vida mejor

Europa se dice civilizada, un continente de derechos humanos, de libertad y solidaridad. ¿Cómo, entonces, se justifica la nueva directiva de retorno de los inmigrantes sin papeles, aprobada por los ministros del Interior de la UE, que permite detener a los inmigrantes indocumentados hasta 18 meses? Un año y medio en, seamos honestos, ¡la cárcel! ¿Y por qué? Por atreverse a cruzar una frontera en busca de una vida mejor.

Eso no puede ser justo. Los inmigrantes indocumentados no son criminales ni un ejército invasor, son seres humanos menos afortunados que nosotros. Vienen a satisfacer la enorme demanda de mano de obra necesaria para hacer los trabajos que nosotros no queremos hacer; pero no les permitimos hacerlo de manera legal.

Esa directiva, y los controles más estrictos, no sólo son crueles y costosos, sino también inefectivos y contraproducentes. Los muros de Ceuta y Melilla no impiden pasar a la gente, como tampoco lo hizo el muro de Berlín. Cada año miles de personas mueren tratando de llegar hasta Europa, así que encerrar durante 18 meses a algunos de los que lo consiguen no va a impedir la inmigración ilegal. Ya hay millones de indocumentados en Europa, y detenerlos y expulsarlos es imposible. ¿No sería mejor que legalizásemos y regulásemos la inmigración?

El Parlamento Europeo debería rechazar hoy la directiva de retorno. El control cada vez más estricto de las fronteras crea más problemas de los que soluciona. En vez de proteger a la sociedad, multiplican los controles que fracturan y corroen el respeto por la ley y el orden. Si seguimos así, con el tiempo llegaremos a un Estado policiaco. ¿Es ésa la Europa del futuro que queremos?

5 Myths about NAFTA

Sen. Hillary Rodham Clinton often likes to take credit for her husband's achievements as president. But then there's NAFTA. Clinton may have been present at the creation of the North American Free Trade Agreement in 1994, but she wants everybody to know that it's not her baby. She now proposes to "fix" the agreement to make trade "work for working families." Sen. Barack Obama, meanwhile, makes the fallout from NAFTA sound downright nuclear, lamenting that "entire cities . . . have been devastated as a consequence of trade agreements that were not adequately structured to make sure that U.S. workers had a fair deal." Despite the heightened rhetoric, he, too, wishes to "fix" the treaty, not nix it. Only the presumptive Republican nominee, Sen. John McCain, would leave NAFTA untouched; his priority is freeing up global trade.

The Democratic rivals have bought into most of the myths that have been peddled about the agreement and have placed their opposition to NAFTA at the center of their campaigns. Here's some information that could help them update their stump speeches.

1 NAFTA has transformed the U.S. economy.

Hardly. Critics rightly point out that NAFTA's economic benefits were oversold, but they're wrong to heap the blame for all America's woes on it. NAFTA, which expanded the existing Canadian-U.S. free-trade area to Mexico, has had only a marginal effect on the U.S. economy. Yes, exports to Mexico have more than tripled since 1993 -- but at $161 billion last year, they still account for only 1.1 percent of the economy. Considering that total U.S. exports have more than doubled over the same period, to more than $1.6 trillion a year, the boost from NAFTA is just a trifle.

Though imports from Mexico have risen nearly five-fold since 1993 -- potentially threatening some U.S. businesses -- they only amounted to $230 billion in 2007, or less than 1.7 percent of the $14 trillion U.S. economy. That's peanuts. And for all the fears of factories being shipped south on the back of an 18-wheeler, the total U.S. investment in Mexican factories and offices adds up to a mere $75 billion. Mexico received just $19 billion in foreign direct investment in 2006, while the United States attracted $175 billion. Thus, the "giant sucking sound" that Texas businessman and independent presidential candidate H. Ross Perot heard back in the 1990s doesn't sound so giant after all. But the benefits of NAFTA don't seem so remarkable, either.

2 NAFTA has put countless Americans out of work.

Not really. Obama claims that NAFTA has destroyed a million American jobs. Suppose he's right. Total employment still rose by 27 million jobs between 1993 and 2007, to 137.6 million, and the unemployment rate has fallen. At worst, then, NAFTA has cost only a tiny minority of American workers their jobs. And even that is a one-sided view. As Mexico opened its economy to U.S. trade and investment, NAFTA created new American jobs, too.

NAFTA critics also decry the trade deficit with Mexico, but at $70 billion a year, it accounts for only 0.5 percent of the U.S. economy. These figures should quiet NAFTA foes, who point to lost jobs and stagnant manufacturing wages, as well as boosters, who trumpet claims of rising output and record-high exports. The fact is, NAFTA has had only a fractional impact on these trends. Mexico's biggest impact on the U.S. labor market is not through trade, but through immigration. And the money that Mexican migrants send home contributes more to the Mexican economy than foreign direct investment does.

3 "Fixing" NAFTA would be easy and cost-free.

Not so. Any changes would require a lengthy and complex renegotiation with Canada and Mexico. As Canada's prime minister, Stephen Harper, has pointed out, "Of course, if any American government ever chose to make the mistake of opening [NAFTA], we would have some things we would want to talk about as well." Just the threat of pulling out of NAFTA would do some damage, too. Far from boosting America's international reputation -- something all presidential candidates agree is important -- it would fan fears that the United States is an unreliable ally and discourage foreign governments from committing to future agreements with Washington. The slim chance of concluding the World Trade Organization's Doha round of global trade talks would vanish. And if the next president wants, for instance, Mexico's help in dealing with immigration reform and Canada's hand in combating terrorism, then blaming America's friendly neighbors for its perceived woes is hardly the way to start.

4 Making NAFTA's labor and environmental regulations stricter would benefit U.S. workers.

Probably not. Clinton wants to make the treaty's labor and environmental provisions "far tougher and absolutely binding" and to require that all future trade agreements include similar language. The stated purpose is to raise labor and environmental standards around the world and to make it harder for companies to ship jobs to countries where workers have fewer protections than in the United States. But America's trading partners would probably see the move as covert protectionism -- since when have the Teamsters cared about Mexican wildlife? -- and may retaliate. Meanwhile, consumers would probably resent the increased cost of their imports.

In any case, tough social clauses could backfire on the United States. Canada's labor and environmental standards are generally higher than the United States', and Canadians could claim that lax American standards amount to unfair competition. Given that Canada and Mexico have joined global efforts to curb climate change, they might wish to restrict American imports if the United States continues to hold back. And Mexican workers arguably have stronger labor rights than Americans: Unlike the United States, Mexico has ratified most of the International Labor Organization's conventions on core labor standards, including those on freedom of association, collective bargaining and employment discrimination. If the United States bashes Mexican labor practices, what's to stop Mexico from objecting to American imports produced in non-unionized factories?

5 Renegotiating NAFTA should be a priority for the new president.

Absolutely not. With the housing market plunging, the financial system seizing up and the economy apparently shrinking, tinkering with a treaty that governs trade with two of Washington's trading partners is a costly distraction -- whatever your view of NAFTA. The next president will have much bigger things to worry about, such as stopping the economy from going into a tailspin; cushioning the blow for vulnerable Americans who lose their homes, their jobs and their health care in the downturn; and helping frame new regulations that protect the economy against future financial excesses without stifling the market. Compared to all that, changing NAFTA looks like small change.

Opportunity knocks

The government is in a mess over immigration. Its statistics are a shambles, policy is confused and its pronouncements are all over the place. Instead of putting a positive case for immigration, it appears in turn weak, defensive and outright hostile. No wonder it is on the back foot.

It needn’t be so. The government should be pointing out that allowing the Poles and other eastern Europeans who joined the EU in 2004 to come and work here is a key reason why Britain is still enjoying its longest ever economic boom. Thank goodness its forecast that only 13,000 would come was a huge underestimate! It should support its case with heavyweight research that changes hearts as well as minds, along the lines of the Stern report on the economics of climate change. And it needs to do more to tackle the issues, notably the unresponsiveness of public services, that can make immigration problematic.

Hard-working migrant workers have given the economy a new lease of life. The Poles building affordable homes for key workers, Lithuanians cleaning hospitals and Czechs caring for the elderly are delivering higher living standards and better public services for all. Many are doing jobs that British people no longer want: as the head of any retirement home can attest, suitable British candidates do not apply. And because the new immigrants are more willing to move to where the jobs are, and to change jobs as conditions change, they have made the economy more dynamic, enabling it to grow faster for longer without running into inflationary bottlenecks – thus keeping mortgage rates down. So when the Conservatives propose to curb immigration, Labour should make clear that this would lead to higher interest rates for everyone and granny making do with less care.

Instead, the prime minister echoes the National Front by calling for ‘British jobs for British workers’. That is not only economically incoherent, it is politically inept. As Gordon Brown well knows, there is not a fixed number of jobs to go round. When women started working in large numbers, they did not deprive most men of their jobs – and nor are immigrants stealing ‘British’ jobs. Foreigners don’t just take jobs, they also create them: when they spend their wages, which creates extra demand for the people who produce the goods and services they consume, as well as in complementary lines of work. The influx of Polish builders, for instance, has created new jobs for people selling building supplies, as well as for interior designers. A foreign childminder may enable a British nurse to go back to work, where her productivity is enhanced by foreign doctors and cleaners. Of course, some people may lose out from immigration, as from any change, and the government must be there to help them, yet unemployment is no higher than it was three years ago and wages are higher. The TUC unabashedly supports the free movement of workers within the EU – and so should Labour.

Brown’s balls-up has provided political cover for the Conservatives to attack immigration without being accused of being racist. The two Davids, Cameron and Davis, have jumped at the chance. The truth is that while it is not necessarily racist to oppose immigration, it often is. Psychological studies confirm that opposition to immigration tends to stem from an emotional dislike of foreigners; intelligent critics then construct an elaborate set of seemingly rational arguments to justify their prejudice. When immigrants are out of work, they are scrounging from the state; when they are working, they are stealing our jobs. When they are poor, they are driving standards down; when they are rich, they are driving prices up. One Tory politician with whom I was debating bemoaned that Poles were earning misery wages and living in squalid conditions 12 to a room, and then blamed them for rising house prices. Immigrants can’t win: they’re damned if they do and damned if they don’t. So while it’s important to address people’s fears and consider people’s arguments, it is also important to expose the xenophobia that often lies behind them.

But what to do about white working-class Labour voters who feel left behind by economic change? For sure, the government should do more to acknowledge their pain. Extending schooling to 18 is a good way of building on the successes of the New Deal. Advancing equality of opportunity must always be a priority. But helping the disadvantaged to get a fairer chance in life should not slip into validating the prejudice that their plight is due to their immigrant, or non-white British-born, neighbours. The poor ethnic minority communities in Oldham or Burnley are a symptom, not a cause, of deprivation.

Nor are immigrants to blame for the shortage of social and other affordable housing, which is mostly due to planning restrictions and the failure to build enough new homes. The government’s bold plans to build 3 million of them – no doubt with the help of plenty of Polish labour – will certainly help. The Tories’ objection that Britain is full up is nonsense. Even now, nearly three-quarters of the country remains agricultural land. At the government’s target density of 40 homes per hectare, 3 million new homes would take up a measly 0.31% of Britain’s total surface area – and even less if they are built on brownfield sites.

Certainly, though, public services need to become more responsive to change of all sorts. This is not just a matter of better planning, based on more accurate statistics; it is about greater adaptability. In our globalising world, tastes and technologies are in perpetual flux and economic opportunities no longer stop at national borders. It is the source of our prosperity – economic growth ultimately comes from replacing old with new – but also unsettling for many. The solution is not to try to make the world stand still; it is, as Bill Clinton put it, to make change our friend. When conditions change, the NHS, schools, the police and public transport must adapt. Irrespective of immigration, we need public services that are more responsive to people’s changing needs.

Ultimately, the immigration debate is about what kind of Britain we want to live in. Do we want a closed, stagnant and conservative society, or an open, dynamic and progressive one? Labour should be unashamedly in favour of the latter. When the likes of Migrationwatch and their Tory allies warn of impending doom if the non-white and foreign-born population of Britain continues to rise, we should point out that in London three in 10 people are already foreign-born – and far from being a hellhole, it is a bustling metropolis that fuels Britain’s prosperity. Immigrants’ collective diversity and dynamism help spur innovation and long-term economic growth, because people who think differently can solve problems better and faster, as a huge volume of research shows. Twenty one of Britain’s Nobel laureates arrived as refugees; Google, Yahoo! and eBay were all co-founded by immigrants who came to the US not as highly-skilled graduates, but as children.

Opening the borders to eastern Europeans was brave and right – and in any case, it is done. To make the most of Britain’s new wave of immigration, we should treat it as an opportunity, not a threat. It is a symptom of success, not of failure. The only sure way to turn the clock back to the early 1980s – when people were fleeing Britain rather than flocking here – is a devastating recession. Surely even the Conservatives don’t want that?

Border wars

To read it, click here

The case for immigration

There is a contradiction at the heart of our globalizing world: while goods, services and capital move across borders ever more freely, most people cannot. No government except perhaps North Korea’s would dream of banning cross-border trade in goods and services, yet it is seen as perfectly normal and reasonable for governments to outlaw the movement across borders of most people who produce goods and services. No wonder illegal immigration is on the rise: most would-be migrants have no other option.

This is perverse. Immigrants are not an invading army; they are mostly people seeking a better life. Many are drawn to rich countries such as the United States by the huge demand for workers to fill the low-end jobs that their increasingly well-educated and comfortable citizens do not want. And just as it is beneficial for people to move from Alabama to California in response to market signals, so too from Mexico to the US.

Where governments permit it, a global labor market is emerging: international financiers cluster in New York and London, IT specialists in Silicon Valley, and actors in Hollywood, while multinational companies scatter skilled professionals around the world. Yet rich-country governments endeavor to keep out Mexican construction workers, Filipino care workers and Congolese cooks, even though they are simply service providers who ply their trade abroad, just as American investment bankers do. And just as it is often cheaper and mutually beneficial to import information technology services from Asia and insurance from Europeans, it often makes sense to import menial services that have to be delivered on the spot, such as cleaning. Policymakers who want products and providers of high-skilled services to move freely but people who provide less-skilled services to stay put are not just hypocrites, they are economically illiterate.

From a global perspective, the potential gains from freer migration are huge. When workers from poor countries move to rich ones, they too can make use of advanced economies’ superior capital and technologies, making them much more productive. This makes them – and the world – much better off. Starting from that simple insight, economists calculate that removing immigration controls could more than double the size of the world economy. Even a small relaxation of immigration controls would yield disproportionately big gains.

Yet many people believe that while the world would gain, workers in rich countries would lose out. They fear that foreigners harm the job prospects of local workers, taking their jobs or depressing their wages. Others fret that immigrants will be a burden on the welfare state. Some seem to believe that immigrants somehow simultaneously “steal” jobs and live off welfare.

Governments increasingly accept the case for allowing in highly-skilled immigrants. The immigration bill before the Senate would tilt US policy in that direction, establishing a points system that gives preference to university graduates. Such skills-focused points systems are in vogue: Canada and Australia employ one; Britain is introducing one; and other European countries are considering them.

For sure, as the number of university graduates in China, India and other emerging markets soars in coming decades, it will be increasingly important for the US to be able to draw on the widest possible pool of talent – not just for foreigners’ individual skills and drive, but for their collective diversity.

It is astonishing how often the exceptional individuals who come up with brilliant new ideas happen to be immigrants. Twenty-one of Britain’s Nobel-prize winners arrived in the country as refugees. Perhaps this is because immigrants tend to see things differently rather than following the conventional wisdom, perhaps because as outsiders they are more determined to succeed.

Yet most innovation nowadays come not from individuals, but from groups of talented people sparking off each other – and foreigners with different ideas, perspectives and experiences add something extra to the mix. If there are ten people sitting around a table trying to come up with a solution to a problem and they all think alike, then they are no better than one. But if they all think differently, then by bouncing ideas off each other they can solve problems better and faster. Research shows that a diverse group of talented individuals can perform better than a like-minded group of geniuses.

Just look at Silicon Valley: Intel, Yahoo!, Google and eBay were all co-founded by immigrants, many of whom arrived as children. In fact, nearly half of America’s venture-capital-backed start-ups have immigrant founders. An ever-increasing share of our prosperity comes from companies that solve problems, be they developing new drugs, video games or pollution-reducing technologies, or providing management advice. That’s why, as China catches up, America and Europe need to open up further to foreigners in order to stay ahead.

Diversity also acts as a magnet for talent. Look at London: it is now a global city, with three in ten Londoners born abroad, from all over the world. People are drawn there because it is an exciting, cosmopolitan place. It’s not just the huge range of ethnic restaurants and cultural experiences on offer, it’s the opportunity to lead a richer life by meeting people from different backgrounds: friends, colleagues and even a life partner.

Yet it is incorrect to believe that rich countries only need highly skilled immigrants, still less that bureaucrats can second-guess through a points system precisely which people the vast number of businesses in the economy need. America and Europe may increasingly be knowledge-based economies, but they still rely on low-skilled workers too. Every hotel requires not just managers and marketing people, but also receptionists, chambermaids and waiters. Every hospital requires not just doctors and nurses, but also many more cleaners, cooks, laundry workers and security staff. Everyone relies on road-sweepers, cabdrivers and sewage workers.

Many low-skilled jobs cannot readily be mechanized or imported: old people cannot be cared for by a robot or from abroad. And as people get richer, they increasingly pay others to do arduous tasks, such as home improvements, that they once did themselves, freeing up time for more productive work or more enjoyable leisure. As advanced economies create high-skilled jobs, they inevitably create low-skilled ones too.

Critics argue that low-skilled immigration is harmful because the newcomers are poorer and less-educated than Americans. But that is precisely why they are willing to do low-paid, low-skilled jobs that Americans shun. In 1960, over half of American workers older than 25 were high-skill dropouts; now, only one in ten are. Understandably, high-school graduates aspire to better things, while even those with no qualifications don’t want to do certain dirty, difficult and dangerous jobs. The only way to reconcile aspirations to opportunity for all with the reality of drudgery for some is through immigration.

Fears that immigrants threaten American workers are based on two fallacies: that there is a fixed number of jobs to go around, and that foreign workers are direct substitutes for American ones. Just as women did not deprive men of jobs when they entered the labor force too, foreigners don’t cost Americans their jobs – they don’t just take jobs; they create them too. When they spend their wages, they boost demand for people who produce the goods and services that they consume; and as they work, they stimulate demand for Americans in complementary lines of work. An influx of Mexican construction workers, for instance, creates new jobs for people selling building materials, as well as for interior designers. Thus while the number of immigrants has risen sharply over the past twenty years, America’s unemployment rate has fallen.

But do some American workers lose out? Hardly any; most actually gain. Why? Because, as critics of immigration are the first to admit, immigrants are different to Americans, so that they rarely compete directly with them in the labor market; often, they complement their efforts – a foreign child-minder may enable an American nurse to go back to work, where her productivity may be enhanced by hard-working foreign doctors and cleaners –
while also stimulating extra capital investment.

Study after study fail to find evidence that immigrants harm American workers. Harvard’s George Borjas claims otherwise, but his partial approach is flawed because it neglects the broader complementarities between immigrant labor, native labor and capital. A recent NBER study by Ottaviano and Peri finds that the influx of foreign workers between 1990 and 2004 raised the average wage of US-born workers by 2%. Nine in ten American workers gained; only one in ten, high-school dropouts, lost slightly, by 1%. 

Part of the opposition to immigration stems from the belief that it is an inexorable, once-and-for-all movement of permanent settlement. But now that travel is ever cheaper and economic opportunities do not stop at national borders, migration is increasingly temporary when people are allowed to move freely. That is true for globe-trotting businessmen and it is increasingly so for poorer migrants too: Filipino nurses as well as Polish plumbers.

Britain’s experience since it opened its borders to the eight much poorer central and eastern European countries which joined the European Union in 2004 is instructive. All 75 million people there could conceivably have moved, but in fact only a small fraction have, and most of those have already left again. Many are, in effect, international commuters, splitting their time between Britain and Poland. Of course, some will end up settling, but most won’t. Most migrants do not want to leave home forever: they want to go work abroad for a while to earn enough to buy a house or set up a business back home.

Studies show that most Mexican migrants have similar aspirations. If they could come and go freely, most would move only temporarily. But perversely, US border controls end up making many stay for good, because crossing the border is so risky and costly that once you have got across you tend to stay.

Governments ought to be encouraging such international mobility. It would benefit poor countries as well as rich ones. Already, migrants from poor countries working in rich ones send home much more – $200 billion a year officially, perhaps twice that informally (according to the Global Commission on International Migration) – than the miserly $100 billion that Western governments give in aid. These remittances are not wasted on weapons or siphoned off into Swiss bank accounts; they go straight into the pockets of local people. They pay for food, clean water and medicines. They enable children to stay in school, fund small businesses, and benefit the local economy more broadly. What’s more, when migrants return home, they bring new skills, new ideas and capital to start new businesses. Africa’s first internet cafés were started by migrants returning from Europe

The World Bank calculates that in countries where remittances account for a large share of the economy (11% of GDP on average) they slash the poverty rate by a third. Even in countries which receive relatively little (2.2% of GDP on average) remittances can cut the poverty rate by nearly a fifth. Since the true level of remittances is much higher than official figures, their impact on poverty is likely to be even greater.

Remittances can also bring broader economic benefits. When countries are hit by a hurricane or earthquake, remittances tend to soar. During the Asian financial crisis a decade ago, Filipino migrants cushioned the blow on the Philippines’ economy by sending home extra cash – and their dollar remittances were worth more in devalued Filipino pesos. Developing-country governments can even borrow using their country’s expected future remittances as collateral. Even the poorest countries, which receive $45 billion in remittances a year, could eventually tap this relatively cheap form of finance, giving them the opportunity of faster growth.

By keeping kids in school, paying for them to see a doctor and funding new businesses, remittances can boost growth. A study by Giuliano and Ruiz-Arranz of the International Monetary Fund finds that in countries with rudimentary financial systems, remittances allow people to invest more and better, and thus raise growth. When remittances increase by one percentage point of GDP, growth rises by 0.2 percentage points.

John Kenneth Galbraith said “Migration is the oldest action against poverty. It selects those who most want help. It is good for the country to which they go; it helps break the equilibrium of poverty in the country from which they come. What is the perversity in the human soul that causes people to resist so obvious a good?”

Part of the answer is that people tend to focus their fears about economic change on foreigners. Other fears are cultural; more recently, these have got mixed up with worries about terrorism. Mostly, this is illogical: Christian Latinos are scarcely likely to be a fifth column of Al-Qaeda operatives, as Pat Buchanan has suggested. But logic scarcely comes into it. Psychological studies confirm that opposition to immigration tends to stem from an emotional dislike of foreigners. Intelligent critics then construct an elaborate set of seemingly rational arguments to justify their prejudice.

In Who Are We?, Harvard academic Samuel Huntington warns that Latino immigrants are generally poor and therefore a drain on American society, except in Miami, where they are rich and successful, at Americans’ expense. Ironically, when he shot to fame by warning about a global “clash of civilizations”, he lumped Mexicans and Americans together in a single civilization; now he claims that Latinos in the US threaten a domestic clash of civilizations. He frets that Latinos have until recently clustered in certain cities and states, and then that they are starting to spread out. Immigrants can’t win: they’re damned if they do and damned if they don’t.

Rich-country governments should not let such nonsense define their policies. Opening up our borders would spread freedom, widen opportunity and enrich the economy, society and culture. That may seem unrealistic, but so too, once, did abolishing slavery or giving women the vote.

The case for opening Europe's borders wide to migrant workers

Read my article for Europe's World here

Better than nothing

The new U.S. immigration bill drafted by leading Democratic and Republican senators is a deeply political bargain that has been hammered out over months, and it shows: The result is a 380-page Frankenstein.

The bill aims to seal the nation’s leaky borders while enabling undocumented workers to regularize their status, and seeks to fill the low-skilled jobs that Americans no longer want to do by admitting migrant workers on a temporary basis. Permanent settlers would gain entry via a points system weighted toward applicants’ education and job skills rather than family ties.

The bill’s crafters have heralded it as a historic deal, a model of bipartisanship, a grand bargain that will bridge the United States’ immigration divide. But detractors of all ideological stripes, pitchforks and torches in hand, are waiting to tear this fragile compromise limb from awkwardly grafted limb.

Indeed, there is plenty to criticize. From the Maginot-like border fence to the bureaucrat-friendly points system, the senators have pulled together a grab bag of bad ideas. Still, as Sen. Dianne Feinstein urged in announcing the bill, it would be short sighted to allow the perfect to be the enemy of the (passably) good.

That’s because, for all the bill’s flaws, they pale in comparison to one thing: the proposal to allow the nation’s 12 million illegal residents to obtain legal status. It’s a victory for common sense that recognizes that these hard-working people, on whom Americans rely to pick fruit, clean dishes, and look after their children as well as their elderly parents, are here to stay, and that it is in everyone’s interests that they come out of the shadows and into mainstream life.

Now for the flaws, and they are many. The bill mandates that, before becoming legal residents, illegal immigrants must pay up to $5,000 in fines and fees and the head of the household must leave the country before applying to return. They may fear that they may not be able to get back to the United States if they do so. Returning home could prove particularly problematic for Chinese illegals, for instance, and the fine seems unduly punitive. The bill also recognizes that a continuing inflow of foreign workers is needed to fill low-skilled jobs, and proposes to offer 400,000 temporary-work visas a year to that end. But it requires that tighter border controls and more stringent workplace checks on employees’ identity and legal status be enforced before the regularization process and temporary-worker scheme can start. That could take years.

If the illegal immigrants are to be regularized, why prolong their agony? If the economy needs low-skilled foreign workers, why delay giving them visas? After all, if they can’t come legally, they will inevitably come illegally instead. (Even if you somehow believe that the new border controls—as many as 18,000 more border-patrol agents, 200 miles of vehicle barriers, and 370 miles of fencing along the 2,000-mile-long border with Mexico—will eventually succeed in stopping illegal migrant flows, they aren’t yet in place.) And since only those who arrived in the United States before 2007 will be entitled to regularize their status, any delay in setting up the temporary-worker scheme will create a new class of illegal migrants. Far better to issue the new temporary-work visas immediately. That would slash illegal immigration: Few foreigners would risk death, exploitation, or deportation if they could come and work in the United States legally instead.

The bill proposes that temporary workers be granted two-year visas that could be renewed twice provided migrants returned home in between. Those who didn’t leave when their visa expired would be permanently barred from reentering the United States. It seems unduly disruptive to require temporary workers to leave the United States between visa renewals, but given the opportunity to return to the United States legally, most would doubtless comply. But requiring them to leave for good after their visa has been renewed twice makes no sense. At that point, they would face the same dilemma that foreigners in the United States on a short-term visa do now: Overstay and work illegally, or lose the chance to ever work in the United States. Many would no doubt choose to remain illegally, creating a new shadow workforce a few years down the line. The proposed electronic ID checks in workplaces won’t prevent that: documents can be forged or stolen, and people can work illicitly. It would surely be better to allow foreign workers to keep renewing their visas indefinitely.

The proposed points system is also half-baked. This would grade prospective migrants according to a range of criteria, with most weight given to the perceived demand for their skills in the U.S. job market. Such points systems are in vogue: Canada and Australia employ one; Britain is introducing one; and other European countries are considering them. They appeal to conservatives who believe that highly skilled immigrants contribute more to the economy and make better citizens. And they reassure voters by fostering the illusion that the government is selecting the right people that the country needs.

But bureaucrats cannot possibly second-guess the requirements of millions of United States businesses, let alone how the fast-changing economy’s employment needs will evolve over time. In effect, the points system amounts to government officials picking winners—a notion that conservatives rightly criticize in industrial policy and elsewhere. Hayek must be turning in his grave.

Inevitably, workforce planners make costly mistakes. At the height of the dot-com boom, Australian officials scoured the world to attract IT specialists, many of whom ended up driving cabs when boom turned to bust. Indeed, Australia has pushed its selection system to such absurd lengths that bureaucrats have identified 986 separate occupations, 399 of which potentially qualify for a skilled-migrant visa.

Such absurdities wouldn’t happen in the United States of America, you say? Unfortunately, politicians tend to find the temptation to micromanage irresistible. Even before they had agreed on the new bill, senators were debating how many points should be awarded to a refrigerator mechanic with a certificate from a community college, according to the New York Times.

What’s more, a points system allows nothing for serendipity: that people end up contributing to society in unexpected ways. Who would have guessed, when he arrived from Taiwan as a child, that Jerry Yang would go on to cofound Yahoo!, or that a Kenyan student named Barack Obama who came to study in Hawaii would marry a Kansan woman and have a son who may become the next U.S. president?

Despite all of these failings, the bill is an improvement on the current mess, and perhaps the best that can be hoped for considering how hugely controversial immigration has become. It will be far easier to amend an imperfect law piece by piece than it would be to risk this fragile deal coming apart—dashing the hopes of 12 million hard-working people who want to become Americans. They are the reason why, all complaints aside, the U.S. public should give this Frankenstein a chance.

Migrant tax would slash illegal entry into Europe

It is time that Europe’s politicians admitted to voters that governments cannot stop people moving across borders. Despite efforts to build a Fortress Europe, more than a million foreigners bypass its defences each year: some enter covertly; most overstay their visas and work illicitly. While draconian policies do curb migration somewhat, they mostly drive it underground.

That creates huge costs: a humanitarian crisis, with thousands drowning each year trying to reach Europe and thousands more detained; the soaring expense of border controls and bureaucracy; a criminalised people-smuggling industry; an expanding shadow economy, where illegal migrants are vulnerable to exploitation, labour laws are broken and taxes go unpaid; mistrust of politicians who cannot fulfil promises to halt immigration; corroded perceptions of immigrants as law-breakers rather than enterprising people; and the mistreatment of refugees to deter people who want to work from applying for asylum, besmirching our commitment to help those fleeing terror.

These problems are blamed on immigrants, but they are actually due to our immigration controls. Far from protecting society, they undermine law and order, just as Prohibition did more damage to America than drinking ever has. Pragmatic governments ought to legalise and regulate migration instead.

All the more so, since immigrants are not an invading army, but mostly people seeking a better life who are drawn to Europe by the huge demand for workers for low-end jobs which our increasingly well-educated and comfortable citizens do not want. The only way to reconcile aspirations to opportunity for all with the reality of drudgery for some is via immigration.

Migration’s benefits are akin to trade’s. Filipino care workers, Congolese cleaners and Brazilian bar staff are simply service providers who ply their trade abroad – and just as it is often cheaper and mutually beneficial to buy IT services from India, it often makes sense to import menial services that are delivered on the spot.

Moreover, because newcomers are more willing to move to where the jobs are, and to shift jobs as conditions change, they make the economy more flexible and boost growth as Britain’s recent experience shows. And just as women entering the workforce did not cost men jobs, nor do immigrants: they create jobs as they spend wages. Far from competing with native workers, immigrants often complement them. A foreign child minder may enable a doctor to return to work, where hard-working foreign nurses and cleaners enhance her productivity.

Immigrants’ diversity boosts innovation because foreigners with different perspectives and greater drive can help solve problems better. Consider Silicon Valley: Intel, Google and Ebay were all co-founded by immigrants. As China catches up, Europe must open up to foreigners to stay ahead.

Those who claim that tougher measures could stop immigration are delusive. Even if Europe became a police state, its borders would be permeable. Even if the EU built a wall along its vast eastern border, deployed an armada to patrol its southern shores, searched every arriving vehicle and vessel, denied people from developing countries visas, migrants would get through: documents can be forged, people smuggled, officials bribed.

If open borders are politically unacceptable, Europe should create a legal route for people from developing nations to come and work, regulated through an extra payroll tax on foreign workers. This would be transparent and flexible, raise revenue that would highlight migrants’ contribution to society, and give companies an ­incentive to hire, or train, domestic staff.

Even if set relatively high, it would undercut people smugglers and slash illegal immigration. Who would risk death, exploitation or deportation if they could come to work within the law by paying an extra tax? And if foreigners could come and go freely, many would stay only temporarily, since most do not want to leave home for ever. Over time, the tax could be gradually lowered – or raised again if migration led to unexpected problems.

Politicians should have the courage to stop fighting an unwinnable war. Treating immigration as an opportunity, not a threat, would enhance its benefits and mitigate its costs. ­London’s cosmopolitan dynamism shows how a more open Europe could thrive.

Första steget mot fri invandring

Click to read an article I wrote for the Swedish magazine, Neo.

Migrant nation

View the pdf here

Open up to migrants

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Migrants at work

View pdf of article

View Management Today's website here.

Don't believe this claptrap. Migrants are no threat to us

Fear of foreigners is nothing new, yet rarely has panic about immigration been so feverish. It tops voters' list of concerns, jangling raw nerves about jobs, public services, race and terrorism. The new bogeyman is a Muslim asylum seeker. Yet, contrary to tabloid hysteria, we are not being swamped with immigrants - nor are they a threat. Fewer than 10% of people in Britain were born abroad. Asylum applications were a mere 25,710 in 2005, while 15,685 failed asylum seekers were deported; the refusal rate exceeds 80%. Britain, a soft touch? Hardly.

While immigration has risen over the past 15 years, the net inflow in 2005 was still only 185,000 - 0.3% of the UK population. Headlines about 600,000 eastern Europeans arriving since 2004 are misleading: most of them have already left again and many are, in effect, international commuters who spend only part of the year here; the number staying longer than 12 months has risen by just 110,000.

So it is claptrap to blame migrants for overcrowded roads, trains and hospitals, which are largely the result of rising affluence and decades of underinvestment. On the contrary, were it not for foreign doctors and nurses, the NHS would collapse.

Britain's open door for eastern European workers is a huge success. It has proved to be a revolving door - and far from bringing Britain to its knees, temporary migrants fill vital gaps in the labour market. Mostly young and single, they pay taxes but cannot claim most benefits (6% claim child benefit), so they are not a drain on the state but a boon. Nor do they steal our jobs: the employment rate is virtually unchanged on a year ago, while average wages are up 3.8%. Unemployment has nudged up, but not because of migrants. Just as women entering the workforce did not cost men jobs, nor do foreigners: they create jobs as they spend their wages.

"Those parts of the country that are seeing job losses are not those where migrant workers are most prevalent," notes Brendan Barber, the TUC general secretary. "They will go where there are job vacancies, not dole queues" - even to the Scottish Highlands, where Poles are reviving communities that young Scots have fled. Precisely because they are more willing to move to where the jobs are, and to do dirty, difficult and dangerous work that young Britons shun, migrants have helped sustain Britain's longest-ever economic boom without sparking inflation.

Consider old-age care, the fastest-growing sector of employment. Young Britons eschew it. To persuade them otherwise would require a huge wage hike - and since public finances are strained, that implies either pensioners making do with less care, budget cuts elsewhere, or tax rises. But immigrants face a different set of alternatives: since wages in London are five times higher than in Warsaw, they are happy doing such work. This is not exploitation: it makes everyone - migrants, taxpayers, Britons young and old - better off. Where there is abuse, legal migrants have recourse to unions and the law. It is illegal migrants, victims of our callous but ineffective border controls, who are most at risk: remember the cockle pickers of Morecambe Bay.

Migrants from poor countries working in rich ones send home much more - $200bn a year officially, perhaps another $400bn informally - than the miserly $80bn western governments give in aid. These remittances go straight into local people's pockets, paying for food, clean water and medicines, enabling children to stay in school, and benefiting the local economy. Just as EU trade barriers that prevent African farmers selling the fruits of their labour in Britain are unfair, so are immigration controls that stop Africans selling their labour here.

Immigrants also make native workers more productive: nurses from the Philippines allow doctors to provide more patients with better care. They also add diversity and dynamism, stimulating innovation and enterprise, and thus economic growth: witness the buzz of a cosmopolitan city such as London. Innovation most often comes from groups of talented people sparking off each other. If they have different perspectives they can solve problems better. Look at Silicon Valley: Intel, Yahoo!, Google and eBay were all founded by migrants.

Undeniably, learning to live together can be tough. Yet closing our borders would not reduce the terrorist threat from a tiny home-grown minority, while anti-immigrant rhetoric fuels hatred towards existing ethnic minorities. While concern about entrenched segregation is understandable, the real issue is not multiculturalism, but social exclusion. Nobody is terrified of rich whites clustering in Chelsea.

As for shared values, society is broad enough to accommodate nuns and transsexuals, Marxists and libertarians, eco-warriors and city slickers - but we must all abide by parliamentary democracy constrained by fundamental principles such as freedom within the law, equality before the law and tolerance of differences. And while we fall well short of the lofty ideals of liberal democracy - discrimination is rife, tolerance limited - they are still the standards we aspire to and the basis of our peaceful coexistence.

Mr Reid's continental dog's breakfast

When John Reid became Home Secretary, he promised to get a grip on Britain’s shambolic immigration system. But less than six months later, he is already making an even bigger mess of it.

Until now, at least Britain had a simple, principled and beneficial stance towards migrants from the new EU member states: they could come and work freely, but not claim welfare benefits. It was a policy in keeping with our country’s liberal traditions and our longstanding support for East Europeans in their struggle to break free from communism and then to join the EU. It was a policy that boosted Britain’s economy without causing social dislocation.

It would have made eminent sense, then, to extend this successful open-door policy to Bulgaria and Romania once they join the EU in January. But unfortunately, the Home Secretary has decided otherwise. He has opted instead for a policy that will satisfy nobody: a bureaucratic dog’s breakfast that panders to anti-immigrant prejudice but is all growl and no bite.

From next year all Bulgarians and Romanians will be allowed to travel to Britain without a visa, but only some will be free to work legally. Doctors and other highly skilled workers will be entitled to work, as will those with specific skills that are proclaimed to be in short supply and students (but only part-time). So too will the self- employed, such as builders and plumbers. However, low-skilled workers will be permitted to seek jobs only in farming or food processing. Even then, there will be a quota of 19,750 places.

A panel of wise men, the new Migration Advisory Council, will try to divine the future employment needs of the entire British economy — I mean, advise the Government on whether more low-skilled workers are required, and whether other sectors might benefit from the sweat of Romanians and Bulgarians. And who does Mr Reid think should manage this devilishly complex new scheme? Of course, the Home Office’s Immigration and Nationality Directorate, the body described as “unfit for purpose” by one J. Reid.

This harebrained scheme is unworkable, undesirable and unnecessary. It will not prevent Bulgarians and Romanians working in Britain; it will encourage them to do so illegally, or by becoming self-employed. After all, if a Bulgarian kitchen porter can’t be employed in a hotel legally, what is to stop him setting up as a sole trader and contracting his services to several hotels — or more likely, just working on the black market, opening himself up to exploitation?

Mr Reid’s answer is on-the-spot fines of up to £1,000 for immigrants working illegally, and unlimited ones (anything from £5,000 upwards) for employers. It sounds tough, but enforcing them would require an expensive, highly intrusive and so far non- existent army of inspectors. Only 24 employers have been prosecuted for hiring illegal workers since 2001. And even if the Government did recruit a beefed-up body of inspectors, what could they do if a Bulgarian caught red-handed working on the black did not have £1,000 to pay the fine? Very little: once Bulgaria and Romania are EU members, the Home Office cannot simply deport their citizens.

The onus, then, would have to be on employers to enforce the rules. But how? What is to stop immigrants using forged papers? As the US experience shows, businesses do not have the manpower or skills to police immigration law effectively, but requiring them to do so poses a huge financial and administrative burden.

The Government assured the public that Britain would attract a mere 13,000 immigrants a year from the new East European members of the EU that joined in 2004. Well, the official prediction proved wide of the mark. So how, then, are we supposed to believe that the Government has any idea how many low-skilled workers the economy will need next year? And by what scientific formula did it come to the quota figure of 19,750?

With or without such an arbitrary limit, a surge of Bulgarian and Romanian migrants is unlikely. Most of those who want to work abroad have already emigrated, mostly to Spain and Italy. And since birds of a feather tend to stick together, most new migrants are likely to head to those two countries too.

But even if many do end up coming to Britain, what’s wrong with that? Opening the door to Polish plumbers and Lithuanian labourers has hardly devastated the country. Quite the reverse: the East Europeans are doing jobs that British people can’t or won’t do. Their labour has enabled the economy to continue growing faster for longer without sparking inflation or lengthening the dole queues.

Contrary to the alarmism, this open door has proved to be a revolving one. About 600,000 East Europeans may have come to work in Britain since May 2004, but most have already gone home again: ONS figures show that in the year to June 2005 net migration — the extra number of East Europeans staying longer than 12 months — was only 74,000. In short, they boosted Britain’s population by a mere 0.12 per cent.

Mr Reid is an intelligent man. He must be aware of all this. But still he opts to play to the anti-immigration gallery. Such are the depths to which new Labour has plummeted. The one certainty is that the result of his absurd scheme will be another salvo of media stories of Home Office incompetence.

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

 

Do corporations rule?

Dear Philippe

Do corporations rule the world? No doubt about that.

Who prevented the US from signing the Kyoto Accord despite massive evidence that global warming is a fact? The US corporate lobby, of course.

Whose interests are served by the World Trade Organization (WTO), the most powerful multilateral organisation ever created? Transnational corporations (TNCs).

Financial crises have become more and more frequent since the 1980s, prompting calls for an effective global financial architecture with strong capital controls to prevent the destabilizing herd like moves of speculative capital.

Any move in this direction, however, has been squelched by the corporate lobby: the tiniest speed-bumps to the destabilising, lightning-speed movements of finance capital are non-existent, even as prominent Wall Streeter Robert Rubin, a partisan of non-regulation, predicts that "future financial crises are almost surely inevitable and could be even more severe."

Indeed, all efforts to regulate the operations of TNCs have failed, the most notorious instance being the way the United Nations Center for Transnational Corporations (UNTC), a body set up to monitor and regulate corporate abuse, was dismantled under TNC pressure and converted instead into an office to promote foreign investment.

The spectacular scandals involving Enron, Arthur Andersen, WorldCom, and many others could only take place in the atmosphere of feverish deregulation and extremely lax government controls that eroded the firewalls between management and board, auditor and audited, stock analyst and stock broker, commercial banking and investment banking.

While some heads have rolled, this is a case of ritual punishment since many TNCs continue to be marked by the same corrupt, non-transparent practices, with reform stymied by a powerful corporate lobby to which both the Democratic and Republican parties are beholden.

With the Bush administration, corporate rule is at its peak. This is an administration that has aggressively sought to reverse 35 years of environmental legislation and open up protected areas to exploitation by Big Oil and Big Energy.

This is an administration that, owing to the opposition expressed by US banks, killed a modest move to create a Chapter 11-type mechanism to allow developing countries undergoing financial crisis to declare bankruptcy and reorganise their affairs.

This is an administration that brazenly went to war partly to benefit its cronies in Big Oil and unashamedly awarded other corporate cronies like Halliburton with massively profitable war contracts.

This is an administration that is undertaking the most radical experiment in privatisation in occupied Iraq - the creation of a free-market legal order that would render that country completely permeable to foreign investors.

Perhaps the arrogance and corruption of unfettered power is best exemplified by Big Pharma. It is one of the biggest beneficiaries of the draconian global patent law, the Trade Related Intellectual Property Rights Agreement (TRIPs). TRIPS legalises the TNC's monopoly over key advanced technologies and allows them to privatize knowledge developed in a cooperative fashion by human communities over the centuries

Big Pharma has spent the last decade trying to suppress attempts by developing country governments to loosen patent rights and thus deliver affordable antiretroviral drugs to millions of HIV-AIDS afflicted patients.

Big Pharma is tremendously flush. It makes a 20 per cent return on investment, making it the most profitable industry in the US. And it can do this by making not only anti-retrovirals expensive on the market but other drugs too, including many of vital interest to sick people in developed countries like the United States. The World Health Organization (WHO) estimates that most patented medicines retail at 20 to 100 times their cost of manufacture!

But Big Pharma says, hey, we need monopoly profits to support research and development (R&D). Really? Big Pharma is no longer that interested in doing R&D in diseases that afflict many of the world's peoples.

Even though tropical diseases were the main killers of the world's peoples, only 13 of 1233 new drugs that reached the market between 1975 and 1997 were approved specifically for tropical diseases. Poor people have little market power, which explains why so much of the resources of Big Pharma is currently devoted to producing and improving chemical toys like Viagra, for which there is immense demand from the rich and the middle classes.

Dear Walden

Big companies are rich and powerful - no doubt about that - but do they run the world? Certainly not.

The biggest constraint on corporate power comes from competition. A huge company like Vodafone is only successful because consumers choose to buy its products: if you don't like their service, you can switch to Orange or another mobile-phone company.

If Vodafone fails to keep its customers happy, it will eventually go bust or get bought up. That's what happened to Midland Bank, once the world's largest, and now owned by HSBC; or British Leyland, once the world's third-biggest carmaker, which eventually became the now-defunct Rover Group.

Of course, competition is not a cure-all. Some companies gain an unhealthy monopoly. Others are able to fix prices. Companies may exploit their workers or pollute too much, and so on. So governments often need to regulate companies - and they do.

Undeniably, corporate lobbying sometimes has an undue influence on government regulation: the TRIPS agreement that you have singled out for criticism is a good example. But despite all their flaws, it is simply not true that governments always, or mostly, do the bidding of big businesses.

Companies are just one of many powerful lobbies: farmers, trade unions and pressure groups also have a big say. They all compete to influence government decisions and secure support from voters for their positions.

Take Kyoto. Yes, corporate lobbying played a part in the US' refusal to sign it - but so did the widespread belief among American voters that it was against US interests. If companies rule supreme, how come European governments signed up to Kyoto?

The WTO is a good example of governments seeking to overcome corporate power. Even though the benefits of free trade far outweigh the costs, governments often find it hard to lower trade barriers. Companies that fear foreign competitors tend to lobby governments harder than the disparate millions of consumers who benefit from cheaper imports.

The WTO helps to break this deadlock. Governments offer to open domestic markets in exchange for greater access to foreign ones. This galvanises exporters' support for liberalisation, which helps to overcome the opposition of import-competing industries. The economy as a whole benefits as a result.

There are plenty of examples of governments acting to curb, rather than advance, corporate interests. In 2001 the European Commission stopped the world's biggest company, General Electric, from buying Honeywell. It has also fined Microsoft for abusing its monopoly on computer operating systems.

Governments regulate companies' behaviour in all sorts of ways. Companies have to pay their employees a minimum wage, provide a healthy and safe work environment, and not discriminate against women or minorities.

They generally have to recognise unions and give some notice and compensation to workers they want to fire. They have to comply with environmental standards on everything from how much they can pollute to how much they must recycle.

Food and drugs have to be shown to be safe. Consumer-protection law sets out standards for advertising as well as customers' right to refunds. Product-liability laws make companies accountable for any harm their products may cause. A whole of host of industries, such as water, electricity, telecoms, banking and broadcasting, are even more tightly regulated.

Since the Labour Party came to power in 1997, the British Government has raised taxes on business and imposed many new regulations such as the minimum wage. If companies ran the world, surely they would have prevented this happening?

And where governments fear to tread, lawyers do not. In America, Big Tobacco has paid out over $150bn after successive class-action suits and a court has just ordered the giant pharmaceutical company Merck to pay $253m in compensation to a woman for the harm that its Vioxx drug did to her. So much for Big Pharma's "unfettered power".

Dear Philippe

The successful class action suits against Big Tobacco or the Vioxx settlement that you mention do not contradict the fact that corporations are the most powerful institutions of our time.

At the very least, governments are expected to protect the life and limb of citizens. Merck and the cigarette companies endangered public health and safety in brazenly criminal ways. The state would itself have lost legitimacy had it not acted.

But, in fact, rather than serve as a demonstration of corporate weakness, the two cases illustrate corporate power. Given the inescapable link between cancer, heart disease, and other ailments and cigarette smoking, cigarettes should have been a severely controlled hazardous substance by now. Instead, cigarette promotion continues unabated, bringing continued profits to King Tobacco.

And let's face it: the Vioxx settlement of $253 million is a slap on the wrist of an immensely profitable corporation, considering that a report by the US Food and Drug Administration concluded that the arthritic painkiller might have contributed to an estimated 27,785 heart attacks or deaths since it hit the market in 1999.

If these figures ultimately prove true, Merck's officers should be criminally prosecuted and jailed for wilful negligence, criminal misrepresentation, conspiracy, and multiple manslaughter.

The fact of the matter is that the regulatory framework in the US that was constructed between 1930 and 1970 to provide some protection for workers, consumers, the environment, and small businesses has been drastically eroded by corporate pressure over the past two-and-a-half decades.

The Glass Steagall Act preventing commercial banks from engaging in the sale of securities was first subverted by the Federal Reserve Bank, which allowed commercial banks to set up investment houses, then repealed in 1999 amid great joy on Wall Street.

Owing to anti-competitive practices, a district court judge ordered Microsoft broken in two in 1999, but this was reversed by the Bush Department of Justice in 2002, which allowed Microsoft to walk away with not even a fine and with what amounted to just a warning that government would be looking over its shoulder.

With such reluctance to enforce anti-trust laws on the part of Washington, is it any wonder that collusive and monopolistic practices would proliferate over the past two decades, involving not only hustlers like Enron and WorldCom but scores of blue chip titans, such as Citigroup, Times Warner, and Merrill Lynch?

As for the rights of workers, two-and-a-half decades of union-busting by government, a spew of right-to-work laws, runaway shops, and uncontrolled outsourcing has reduced the size of organised labour in the US from 25% in the early seventies to at most 13% today.

And today's labour movement in Britain is a ghost of what it was before Margaret Thatcher's union-busting, pro-corporate regime. Now if we talk about the erosion of corporate regulation in the North, in the developing world we are talking about no effective regulation at all.

Governments dare not enforce environmental and occupational safety laws nor press for decent wages and safeguard union rights for fear that foreign investors will simply pack up and leave for corporate nirvana: China.

You say that the biggest constraint on corporations is the market. Tell that to millions of Americans who have been made so desperate by sky-high prices for essential drugs set in classic oligopolistic fashion by Big Pharma that they have resorted to crossing the Canadian border to get the same products at a fraction of the price.

Tell that to motor vehicle buyers around the world whose choice has been whittled down to the same range of obsolete fossil-fuel contraptions churned out by about 14 conglomerates in 2004, down from about 30 significant independent producers two decades ago.

Governments dare not enforce environmental and occupational safety laws nor press for decent wages and safeguard union rights.

And while we're on the subject of climate change, was the signing of the Kyoto Protocol by the European Union a sign of corporate weakness, as you imply? Hardly.

As we all know, the targets for emission reduction are dangerously low given the scale of the problem. European corporations knew they could hit the targets with minimal impact on their profits, and this slight cost was more than offset by the gain in public relations.

Their contrasting responses to Kyoto show that European corporations are probably smarter than the Americans, but not that they are any less powerful.

Corporate power is out of control. It needs to be tamed. And that will have to be done, not by the market but by the combined action of governments and global civil society.

Dear Walden

Governments, not companies, are the most powerful institutions of our time.

Even the biggest companies have to compete to attract capital and workers that are free to move elsewhere: they have to persuade potential shareholders and lenders to give them funding and convince people to come work for them and stay working for them.

They also have to continue persuading customers to buy enough of what they produce at a high enough price to earn sufficient profits to pay shareholders and workers an acceptable return. If they fail to do so, they will go bust or get taken over.

Governments, on the other hand, can impose taxes and regulations on people and companies. General Motors, America's biggest carmaker, has to abide by local fuel-efficiency and product-safety standards wherever it wants to sell cars.

Exxon, America's biggest oil company, pays taxes even in tiny Luxembourg. If Exxon developed an oil field in Algeria, the Algerian government could tax it, or even nationalise it. Even tin pot states can arrest or conscript their citizens and fight wars.

All of Wall Street's combined financial clout could do nothing to avenge the destruction of the World Trade Centre; but the American government could. A handful of states can blow up the earth. And unfortunately, even states that fail to deliver the basics for their citizens - like food and security, let alone prosperity and freedom - rarely disappear.

The only "companies" that have powers remotely comparable to those of states are the drug cartels. Colombia's earn billions of dollars a year, control parts of the country, have private armies and operate outside the law.

You argue that tobacco and pharmaceutical companies are not tightly regulated. But this is nonsense. Tobacco companies must comply with ever-more stringent regulations such as ever-bigger health warnings and an advertising ban in Europe, while smokers are increasingly banned from lighting up in public places.

As for the Vioxx settlement, the $253m payout is doubtless only the first of many claims that Merck will face.

In fact, many would argue that governments regulate too much, not too little. Smokers complain about the punitively high price of cigarettes and the restrictions on where they can indulge their habit.

Patients awaiting new life-saving drugs grumble at the long and costly delays that onerous government safety tests impose; the overwhelming majority of Vioxx users who have benefited from the drug without harmful side-effects bemoan its withdrawal from use.

More broadly, many blame high unemployment in France and Germany on the red tape that ties up companies in knots. And the high price that Americans pay for medicines is in large part due to government-granted patents that give companies the exclusive right to sell the drugs they develop for 20 years.

Whether you think that governments regulate too much or too little, there is no doubt that they are capable of regulating companies - and thus that companies do not enjoy the unfettered power that you claim.

You conclude that: "Corporate power needs to be tamed. And that will have to be done, not by the market but by the combined action of governments and global civil society." If, by your own admission, governments can still tame companies, then companies are clearly not the most powerful beasts in the jungle.

Walden Bello is professor of sociology at the University of the Philippines. He is the author of 15 books, including the recently published Dilemmas of Domination: the Unmaking of the American Empire (New York: Henry Holt, and Co., 2005). He was the recipient of the Right Livelihood Award (also known as the Alternative Nobel Prize) in 2003 for his work on globalisation.

Philippe Legrain writes about globalisation and European issues. He was previously special adviser to the then Director-General of the World Trade Organisation, Mike Moore. Before that, he was trade and economics correspondent for The Economist.

The socialist who can breathe life into free trade

From September 1st, the shaky prospects for freer world trade will rest on the shoulders of a French socialist. With the World Trade Organisation's Doha round deadlocked and little time left to reach agreement, the new man in charge of the WTO, Pascal Lamy, faces a daunting challenge. Unless the former European Union trade commissioner can help break the deadlock and hammer out the outlines of a deal before trade ministers meet in Hong Kong in December, hopes for a successful outcome to the Doha round will fade. That would be a disaster for the world economy and for export-reliant developing countries in particular.

The omens are not good. The potential gains to poor countries from freer world trade dwarf those from debt relief and increased aid. But at the Group of Eight summit in Gleneagles in July, when public pressure for progress in "making poverty history" was intense, the leaders could not even bring themselves to set a date for eliminating rich countries' agricultural export subsidies, a relatively minor but pernicious weapon in the protectionist armoury. If farming lobbies are powerful enough to outgun the Live8 campaign under the global media spotlight and refuse to make even token concessions towards helping the world's poor, the chances of them giving up their subsidies at the WTO look slim.

Talks on freeing up farm trade have reached an impasse. The end-of-July deadline ministers set last year for reaching the outlines of a deal has been missed. The Group of 20 agriculture-exporting developing countries is demanding big cuts in rich-country subsidies and tariffs, but the EU and the US are stalling by quibbling over details. Developing countries are refusing to agree to big cuts in tariffs on industrial goods. Offers to open up to international competition markets for services remain paltry. The lack of progress is partly due to posturing and brinkmanship. But time is running out. Unless Mr Lamy can work some magic when negotiators return later this month, Hong Kong will be a rerun of the Cancún fiasco two years ago.

Optimists argue that President George W. Bush's success in convincing a recalcitrant Congress to approve the Central American Free Trade Agreement (Cafta) augurs well for the WTO talks. They say it demonstrates the Bush administration's commitment to freeing trade, its willingness to face down powerful protectionist lobbies for the greater good and its ability to win over a sceptical Congress.

Perhaps. More likely, Cafta highlights the limits of what the administration can hope to achieve. The prospect of being cut out of export markets such as the Dominican Republic and Nicaragua, to which Cafta will give the US preferential access, is hardly likely to strike fear in Brussels and force the EU's hand at the WTO. And even though the Cafta countries are so small that they pose little threat to American farmers and manufacturers, the Cafta deal scraped through the House of Representatives by only two votes. What chance is there that the administration will seek an ambitious Doha agreement that would increase competition from China? What hope is there that Congress would approve such a deal? And if not now, when? Mr Bush's fast-track authority, which allows him to negotiate trade deals that Congress must approve or reject unamended, expires in 2007 and is unlikely to be renewed.

Weak and unpopular leaders in America and Europe are ill-placed to face down protectionist lobbies and persuade anxious voters to embrace freer trade. Americans are worried about their ballooning trade deficit, with China in particular. They prefer to blame the deficit on foreign foul play rather than on their own weaknesses, not least the urge to splurge on all things foreign. Many Europeans fear that globalisation threatens their comfortable way of life. They have lost confidence in political elites, who appear to have no answers to high un employment and feeble growth, but are not convinced that economic reform can be married with security and social justice. If the Doha round is to succeed, it will take more than a mercantilist bargain between the likes of Brazilian farmers, Chinese manufacturers, European insurers and American retailers. Political leaders also have to persuade voters that globalisation is an opportunity not a threat, that booming China's cheap exports are a boon and that free trade is not a race to the bottom but a ladder up for all.

Mr Lamy should lead by example. Although he has few formal powers, this longtime friend of French farmers can disprove the doubters and become a forceful advocate of freer trade.

No-voters score own goal against Europe

Tony Blair must be thanking his lucky stars. The British prime minister never wanted to fight a referendum campaign on the European Union constitutional treaty that he stood a good chance of losing. Now, thanks to the No votes in France and the Netherlands, it looks like he will be spared the ordeal. When, in April 2004, he caved in to demands for a referendum, it looked like a gamble that would take Europe off the agenda in this year's election but potentially destroy his premiership shortly thereafter. Now it looks like a stroke of genius. But even so, Mr Blair, and more importantly Britain, will not escape unscathed from the aftermath of the No votes.

For a start, the constitutional treaty was a triumph of British diplomacy. It put paid to dreams of a federal European superstate, making clear that the EU was and would remain a union of independent nation states that chose to co-operate to varying degrees in different areas where it suited them. It anchored Britain, if not at the heart, at least in the mainstream of European politics, with its relative importance, economic success and defence capabilities offsetting the loss of influence from its non-membership of the euro and its lukewarm attitude towards closer European integration. It made possible greater co-operation in defence and foreign affairs without undermining Nato or circumscribing Britain's ability to pursue its own policies where the EU could not agree a common position. It made big steps towards common EU policies on immigration and asylum but left Britain the right to opt in or out of them. It opened the door to the further enlargement of the EU, thereby spreading stability and prosperity east and south and diluting French and German influence over the EU's direction. It contained significant reforms to make the EU more effective, notably the appointment of a permanent president of the European Council to drive forward the agenda of national governments rather than that of the European Commission. And it would have made the EU more democratic, by giving national parliaments more say over EU legislation and creating a citizens' initiative right.

Britain is likely to suffer from the ensuing crisis in the EU. Jacques Chirac, France's president, has interpreted the French No vote not as a rejection of his stale and bankrupt leadership but as a protest against what is seen as the threat to France's social and economic model from globalisation and the liberalising forces in the EU. And while France may no longer lead in Europe as it once did, it can usually marshal a coalition to block reform.

In March, Mr Chirac had already blocked the EU's proposed services directive, which would finally create a single market in services which account for 70 per cent of the EU economy and boost jobs and growth. Hopes that it might be revived soon have almost certainly been dashed. This is a particular blow for British business, whose advantage in media, law, accountancy and banking meant it had much to gain from liberalisation. Britain will also suffer from the likely stalling of economic reform in France, Germany and elsewhere, which will make the European Central Bank even more reluctant to cut euro interest rates: both will cramp economic growth in the EU, which accounts for over half Britain's exports.

The French No will also make the forthcoming EU budget negotiations even more acrimonious. Britain will come under immense pressure to give up its budget rebate, which will put it at loggerheads with the other 24 members of the EU. At the same time, France's opposition to reforming the Common Agricultural Policy, an important British objective, will harden. And if France and others refuse to agree to CAP reform, prospects for the Doha round of negotiations at the World Trade Organisation look bleak.

Indeed, protectionist pressures in Europe are already rising. Peter Mandelson, the EU's trade commissioner has been forced to threaten restrictions on Chinese textile imports under pressure from Paris.

The French No vote will lead to a prolonged period of stagnation and bitterness that will harm Britain's interests in Europe. It also deprives Mr Blair of the chance of lancing the boil of British euroscepticism. An effective, broad-based Yes campaign could have won a referendum next year, securing Britain's position in Europe and adding to Mr Blair's legacy. The battle not fought may indeed have saved Mr Blair from a humiliating defeat. It has also deprived him of a crowning triumph.

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.

Europe's no basket case

“Shock! Horror! Cato Institute declares American capitalism superior to European social democracy.” That was my cynical initial reaction to Cowboy Capitalism: European Myths, American Reality, a new book published by the free-market Washington, DC-based think-tank that comes recommended by the usual right-wing suspects: Milton Friedman, James Buchanan and Henry Paulson, the boss of Goldman Sachs.

But my first reaction was slightly unfair. Cowboy Capitalism is written by a German journalist, Olaf Gersemann, and was originally intended for a German audience. Its aim was to shake Germans' complacent assumptions about the superiority of their economic model and dispel some of the commonly believed myths about the weaknesses of the US economy. There is no denying that Germany's economy faces serious problems - and the German edition of this book is an important contribution to the debate about how the country should reform.

But the newly published and expanded American edition has a much more ambitious goal. It seeks to demonstrate that the US economy is not only much more successful at delivering higher living standards and employment than Europe's, but that it does so without causing greater injustice and insecurity. As Gersemann puts it, “The message is simple: While US-style capitalism may or may not have delivered results to be proud of, its performance, as measured by economic and social indicators, has clearly been superior to that of its continental counterparts.” Unfortunately for him, he fails to prove either point convincingly. Repeatedly, when weighing up the evidence, he gives America the benefit of the doubt, while interpreting the facts about Europe in the darkest light.

Consider his dramatic opening paragraph: “Over the last 25 years the US economy has enjoyed an average annual real growth rate of 2.9 percent. That's 55 percent more than the German economy mustered, 48 percent more than in France.” Game, set and match to Gersemann? Hardly. America's population is growing by some 1% a year, while Europe's is broadly stable, so comparing GDP growth rates tell us little about how well each economy is doing at delivering the goods for its citizens. A better yardstick is how fast living standards are rising, for which the growth in GDP per person is a decent proxy. According to my calculations from the IMF's World Economic Outlook, GDP per person in the US rose by 53.7 percent over the past 25 years - an average of 1.7 percent a year - exactly the same growth rate as in Germany and France, and less than the 2 percent annual rise recorded in Italy.

Admittedly, Germany's economy, the original subject of Gersemann's book, has performed poorly in recent years as it struggles with the burden of a botched reunification and the straitjacket of outdated regulations. Over the past seven years, GDP per person in Germany has risen by an average of only 1.3 percent a year, compared with 2.1 percent in the US. But over the same period, France's economy has notched up gains of 2 percent a year, a statistical deadheat with the US. So it is too soon to write off European social democracy on the basis of GDP statistics alone.

On the contrary. US statistical methods distort the comparison in America's favour, notably by accounting differently for firms' spending on information technology. As The Economist, hardly a cheerleader for social democracy, notes in its latest survey of the world economy, studies suggest that Europe's annual GDP growth would be almost half a percentage point higher if it were measured in the same way as America's. Presto - Europe is doing as well as, or even better than, America.

America's economic performance in recent years has also been artificially inflated by an unsustainable fall in its saving rate - driven first by the stockmarket bubble and sustained by the subsequent housing market bubble - which has temporarily boosted GDP growth. When the US saving rate eventually rises, and growth slows, America's performance will look even less impressive. Europe's growth rate, on the other hand, is likely to improve as its saving rate falls and it reforms its labour and product markets. So Gersemann's claim that “looking forward, the picture for the United States looks far brighter than for the continental European countries” is highly dubious.

Nor is it clear than even in absolute terms, America's economy performs better than Europe. True, according to OECD figures, France's GDP per person in 2002 was 76% of the US figure, Germany's 72% and Italy's 71%, so that, measured in GDP terms, living standards in Europe appear lower. But comparing GDP per hour worked, France's average productivity levels are 113% of America's, Germany's 94% and Italy's 93%, so European workers perform at least as well as their US counterparts. Part of the reason why America's GDP per person is higher than Europe's is that more Europeans are involuntarily unemployed. But most of the gap - according to calculations by the Conference Board, a US business lobby that is scarcely a fan of European ways - is due to Europeans' shorter working hours. Since the aim of life is happiness, not maximising GDP, and to the extent that Europeans are choosing to work less and enjoy more leisure as they become more productive, rather than slaving away all day at the office, this is a perfectly valid lifestyle choice that does not imply that Europe's economy is inferior to America's.

It is simply not true that Europe is a basket case. Nor, therefore, is it true that it needs to remodel itself along American lines - smaller government, lower taxes, less regulation -in order to prosper. Just look at countries like Sweden and Finland that have high taxes, big governments, large welfare states and stringent regulations, yet continue to prosper. They consistently top rankings of countries where it is good to do business, attract huge amounts of foreign investment to match, are masters at pioneering new technologies, and enjoy an enviably high quality of life.

Unfortunately, some European countries have shockingly high unemployment rates - and this is a scourge for both the jobless and the economy as a whole, because valuable talent is going to waste. Whereas the US jobless rate is 5.4%, Italy's is 8.5%, France's is 9.9% and Germany's is 10.7%. Worse, long-term unemployment is much higher than in America, especially in regions such as eastern Germany and southern Italy.

Clearly, France, Germany and Italy need to implement reforms that reduce involuntary unemployment. But there is no basis for Gersemann's assertion that they must deregulate their labour markets along American lines to do so. Well-devised regulations and active labour market policies can boost workers' conditions and security without costing jobs. That is how highly regulated Denmark and Sweden enjoy higher employment rates than America (and similar unemployment rates) without the wrenching insecurity of the US labour market, where workers fear losing their healthcare and pensions if they are fired or if their company falls on hard times.

For a German audience, Gersemann's book is a welcome antidote to lazy anti-American views. But his new edition for the US market simply panders to the prejudices of its right-wing publishers. If only his analysis of the United States was as trenchantly sceptical as his analysis of Europe, he might have written a more balanced - and more persuasive - book.

Disaster relief

It goes without saying that George W. Bush is not loved in Europe. Even before the Iraq war raised animosity toward him to fever pitch, the perceived stupidity, ignorance, and arrogance of the "Texan cowboy" had gone down badly across the Atlantic. His evangelical Christian beliefs do not sit well with mostly secular Europeans. His assertion of U.S. exceptionalism sticks in the craw. His contemptuous dismissal of the United Nations has angered even those Europeans who normally favor a strong alliance with the United States. So two days after the presidential election, when the Daily Mirror ran a front page picture of Bush next to the headline, "How can 59,054,087 people be so dumb?," it was widely assumed that the paper was reflecting popular sentiment in this part of the world.

And it was speaking for most Europeans--just not for the Europeans who matter most. In France, Norway, Holland, Spain, Germany, Italy, and Britain, those surveyed preferred Kerry by ludicrously large margins that reached, in some countries, as high as eleven to one. (Only in Poland did researchers find a slim plurality of 31 to 26 for Bush.) But if the European public was rooting for Kerry, the preferences of European leaders were another matter entirely. And there is reason to suspect that, privately, most are relieved that Bush won reelection. Why? Because a Kerry victory was neither in the interests of those leaders (like Tony Blair) who have aligned themselves with Bush, nor to the advantage of antiwar leaders (like Jacques Chirac and Gerhard Schroder) who would have had to become more involved in war-torn Iraq if Kerry had won.

Start with Blair. Perhaps to appease those in the ruling Labor Party who fear they could pay a heavy price for their leader's perceived closeness to the unpopular U.S. president in the British general election expected next year, some in Blair's circle hinted, prior to last Tuesday, that the prime minister was rooting for Kerry. But the truth is that a Kerry victory would have left Blair dangerously exposed, with his two closest allies on Iraq, Bush and Jose Maria Aznar of Spain, going down to defeat in the span of seven months.Blair would have found it even harder to defend an already-unpopular war to his constituents if the new man in the White House admitted the war was a mistake. Italy's Silvio Berlusconi and Poland's Aleksander Kwasniewski, having both cast their lots with Bush on Iraq, would also likely have been reluctant to see him go.

But the consequences of a Kerry victory would have been least attractive for antiwar leaders like Chirac, Schroder, and Jose Luis Rodriguez Zapatero, Spain's new prime minister. Don't be fooled by the statement of Hubert Vedrine, the French foreign minister, who said that following the U.S. election there is "a kind of hangover in global opinion ... just about all peoples wanted a change." The central plank of Kerry's plan for improving the situation in Iraq was to "internationalize" it--that is, to get France, Germany, and other countries involved so as to reduce the military and financial burden on the United States and enhance the legitimacy of American-led operations in the country. Such pressure from a freshly elected U.S. president who had made so much of the vital need for America to consult and value its European allies would have been hard for Chirac, Schroder, and Zapatero to resist. To reject Kerry's entreaties would not only poison relations with the new president; it would also confirm what most Republicans believe--that France and Germany are simply not reliable allies.

Yet for all the good will that Kerry would have enjoyed among European voters--for the simple reasons that he is not Bush and pays lip service to things they cherish, such as the need to combat climate change--there would have been little appetite for getting involved in the quagmire that Iraq has become. Neither Chirac nor Schroder are strong leaders; both are unpopular and are known more for their opportunism than their willingness to go out on a limb for their principles. Neither would have relished the thorny dilemma that a Kerry victory would have posed. Muddling along with Bush is politically safer--and therefore preferable.

And beyond Iraq, Bush's hardline unilateralism has proven to be a powerful tool for Chirac and Schroder. His black-and-white rhetoric--"you're either with or against us"--provides a much better foil for European leaders than Kerry's consensus-seeking style. As a result, those who dream of constructing a European counterweight to American power no doubt took succor from Bush's victory. The more Bush is seen to ignore Europe's views, the greater the potential demand for a common European response that America cannot afford to ignore. François Bayrou, the head of France's center-right Union for French Democracy party, probably spoke for many when he said after the election, "Confronted with a more determined America, Europe must bestrong." In short, a majority of ordinary Europeans genuinely mourned Kerry's loss. But many, perhaps most, of their leaders did not.

Sorry, but we just don't need the global compact

Globalisation is not perfect, but it is overwhelmingly a force for good. The rapid growth of trade and investment across national borders is spreading greater prosperity and opening up new opportunities to billions of people around the globe. China has recorded the fastest fall in poverty the world has ever seen. Global inequality is now declining for the first time since the Industrial Revolution, as China, India and others begin to catch up with the West. Those countries that are still floundering  notably in Africa  are largely victims not of globalisation, but of a lack of it.

Yet economic globalisation poses important challenges for a political order that remains anchored around nation states. States have unique powers to tax and regulate, as well as the unrivalled legitimacy that national allegiance and democratic accountability confer. Unfortunately, though, some states are incapable of enforcing their own laws, let alone providing the good governance and sound policies required for sustained economic development.

Some critics go further. They claim that globalisation is stripping governments everywhere of their powers. Huge global companies increasingly rule the roost, exploiting the poor and the environment for their own profitability, with little or no restraint. To stave off a devastating "race to the bottom" of labour and environmental standards, the global clout of multinational companies must be co-opted to achieve what critics believe to be desirable social change. In short, global companies must be compelled to be "socially responsible".

pressure groups pushing pet schemes, consultants peddling money-spinning advice, companies seeking to protect their profits from attacks on their reputation, and international organisations keen to be seen to be doing good. One of the many corporate social responsibility (CSR) schemes is the United Nations' Global Compact, a voluntary charter whose signatories pledge to uphold nine broad principles of human rights, labour standards and environmental protection throughout the world.

Hong Kong show.

Even where governments can't  or won't  regulate appropriately, companies (especially foreign ones) are ill-suited to setting and enforcing social norms. Companies' social responsibility is to make profits within the constraints of the law, not to decide how, or how much, the environment should be protected. And people generally prefer domestic misrule  even by autocrats  to foreign intervention, however well-meaning.

The UN Global Compact, according to a seemingly innocuous statement on its website, "utilises the power of transparency and dialogue to identify and disseminate good practices based on universal principles". But who decides what those "good practices" and "universal principles" are? If everyone agreed on the solution to the world's problems, there would be no need for politics. But in fact, people disagree on just about everything.

It is not only undemocratic for self-interested foreign companies blackmailed by self-selected anti-capitalist campaigners to be setting social standards in developing countries. It is also inefficient and unfair. There is no single right way to regulate: preferences and circumstances differ. Moreover, relying on a small group of big foreign companies to enforce rules ensures that any efforts will be patchy and limited. Global CSR not only has echoes of imperialism. It can also harm the people it purports to help if, for instance, imposing too costly environmental standards causes workers to lose their jobs.

The world needs more globalisation and better government. It does not need more CSR.

After Cancún: What future for multilateralism?

Optimists claim that the debacle in Cancún is just a temporary setback. As old trade hands were quick to point out, world trade summits have an unfortunate habit of failing: just cast your mind back to Seattle in 1999, Brussels in 1990 and Montreal in 1988. Eventually, though, negotiators haul the show back onto the road and a deal is clinched. It may happen again this time. But what if the acrimonious breakdown of the World Trade Organisation’s Doha round last September is actually much more serious? We cannot afford to be complacent. If the WTO is in serious trouble, the consequences could be devastating  not just for international trade, development and the world economy, but also for multilateralism and global progressive politics.

Pessimists can point to a worrying pattern of failure. 10 years have elapsed since the conclusion of the Uruguay round, the last big market-opening deal. The fault lines  notably, agriculture  on which negotiations repeatedly founder are clearly deep-seated. The WTO seems to lurch from mishap to misfortune: riots in the streets of Seattle, bruising battles over bananas, hormone-treated beef and much else besides, and now the stand-off by the beaches of Cancún. Even its biggest recent success, the launch of the Doha round, owes much to chance. It occurred only two months after September 11th, when governments wanted to make a show of working together to calm jangled nerves and restore confidence in the global economy. Until then, a new WTO round had looked unlikely; since then, it has scarcely progressed.

Some on the Left can scarcely contain their delight at the collapse of the talks in Cancún. They consider the WTO a tool of American and/or corporate power, which enforces unfair rules that entrench US and/or corporate control. Somewhat paradoxically, the same people also often see the WTO as a handmaiden of ‘neo-liberalism’ that destroys, or at least undermines, government regulations. Critics therefore consider the WTO a threat: to workers, the environment, the poor and even democracy itself  indeed, to pretty much anything they hold dear.

Yet this is plainly nonsense. Although the WTO is not perfect  indeed, it urgently needs reform ­ a rules-based system, which protects the weak in a world of unequal power, is far better than the law of the jungle, where might equals right. Because its rules apply equally to all, the WTO acts as a curb on US and corporate power: witness the Bush administration’s recent climbdown on steel after the WTO judged that the US tariffs were illegal. Nor is the WTO a threat to social democracy. Free international trade does not preclude active government intervention domestically: just look at Denmark, a small open economy with a generous Welfare State, strong labour rights and exceptionally high levels of environmental protection. And while the WTO ought to be more open and accountable, it is hardly undemocratic. Representatives of our elected governments negotiate on our behalf; every country has a veto (unlike at the United Nations, where only big powers do); and WTO agreements are ratified by parliaments.

The WTO is a vehicle of progress. Lest we forget, trade liberalisation has been the engine of the world economy over the past half century, boosting living standards in rich countries and helping millions of people in developing countries such as China escape poverty. The sustained economic growth that springs from trade liberalisation is a prerequisite for funding improvements in public services and helping the poor. Trade with developing countries is a mutually enriching form of international solidarity. Indeed, the Doha round’s potential to tear down remaining trade barriers, notably in agriculture, is central to many poor countries’ development hopes. And the assumption that global markets will remain open underpins the nascent economic recovery. Confidence - that all-important catalyst for economic success - rests on the stability and predictability of transparent and consistently enforced rules.

But there is another important reason why all progressive people have a stake in the WTO’s success. On its young and fragile shoulders rest the best hopes of showing that multilateralism can still work. A progressive vision of international relations requires that arbitrary power ­ however benevolent  be constrained by generally agreed and impartially enforced international rules that apply equally to all: big and small, rich and poor, strong and weak. Multilateralism is the means; the end is a fairer, safer, richer and greener world of greater opportunity for all.

Multilateralism has taken quite a battering in recent years. The Bush administration appears to believe that international rules should bind others, but not America. It revels in the United States’ unrivalled power and rides roughshod over those, within America as well as in Europe and elsewhere, who object. Such is America’s primacy that in most areas even its allies can at best aspire to exercise a voice of influence. With one big exception: world trade.

In international trade, a multilateral approach stands a better chance of success than elsewhere. For a start, America’s economy is not as dominant as its military. It accounts for only 21 per cent of the world economy and 12 per cent of global exports. The European Union, which makes up 20 per cent of the global economy and 39 per cent of exports, is its economic equal. Even excluding intra-EU trade, the EU accounts for 19 per cent of global goods exports, to the US’s 14 per cent. Indeed, Germany alone recently overtook the US as the world’s biggest exporter. Nor, despite all the hype, has America been the locomotive of the world economy in recent years: China has delivered a bigger share of global growth.

In the world economy, the US is not the only game in town. Moreover, whereas political relations are typically a zero-sum game, economic relations are positive sum. Every country ­ however weak or powerful  has an incentive to engage with the rest of the world to reap the mutual gains from trade. In economics, the clichés about living in an interdependent world are true. Even for America (or Europe), the costs of trying to go it alone economically would be huge.

The WTO itself has many unique strengths. With China’s accession in 2001, and Russia and Saudi Arabia among many countries queueing up to join its 148-strong membership, the WTO encompasses  or will soon include  nearly every significant trading country. Moreover, unlike talking shops such as the United Nations Environment Programme, the multilateral trading system has produced results: five decades of liberalisation. Unlike the International Labour Organisation, it has teeth: a dispute-settlement mechanism enforced by sanctions. And unlike the International Monetary Fund or World Bank, its rules are binding on all countries  even the United States. Perhaps most importantly, and despite the constraints it implies, it still commands America’s full support, unlike the United Nations, the Kyoto Protocol or the International Criminal Court.

Unfortunately, a combination of factors is hampering the WTO’s effectiveness. Since the end of the Cold War, and especially since the bitter battle over the North American Free Trade Agreement (NAFTA), the United States is no longer willing to take the lead in opening up world markets. Freeing trade was once seen by most Democrats and Republicans as an essential part of the war against communism; few consider it vital to President Bush’s war on terror. The NAFTA debate shattered the free-trade coalition: right-wingers like Ross Perot and Pat Buchanan joined left-wingers like Ralph Nader in warning of the ‘giant sucking sound’ of good US jobs disappeared to Mexico.

President Bill Clinton only secured Congressional support for NAFTA by tacking on side-agreements to ensure that Mexico did not compete unfairly by abusing labour and environmental rights. But this tactical victory came at a big cost: unions and many Democrats felt cheated when the side-agreements proved less binding than they wished, while companies and many Republicans feared that they might become too stringent. The upshot is that the US is not only divided as never before on trade, but that it has swung much further in a protectionist direction. Both George Bush and John Kerry pay lip service to free trade, while promising to protect constituencies that feel threatened by it. At the WTO, the US demands better access to foreign markets but is unwilling to reciprocate with big liberalising moves of its own. The US is not yet an obstructionist, but it is certainly no longer a leader.

Sir Leon Brittan, Pascal Lamy’s predecessor as EU trade commissioner, dreamed that Europe could take up America’s baton. But this has yet to happen. The EU has always been a reluctant liberaliser, keener on creating a single European market than a single global one. It is hamstrung too by the need to secure approval from 15  soon-to-be 25  member governments with diverging views and interests. But by far the biggest obstacle to Europe playing a constructive role at the WTO, let alone exercising global leadership, is its stubborn defence, in an unholy alliance with Japan, South Korea, Norway and Switzerland, of the Common Agricultural Policy. This poisons relations with big agricultural exporters and many developing countries, for which freer farm trade is a key demand. Worse, it gives the EU a vested interest in seeing the Doha round fail, or at best achieve only modest results, since Europe is not prepared to give ground in an area where others consider progress essential. Now that the Bush administration has responded by upping American farm subsidies to $190 billion over 10 years, the US could yet emerge as a foe of freer farm trade too.

Together, European and American farm subsidies conspire to deny developing countries’ vital export opportunities. They also give succour to those who believe that rich countries prosper from protectionism and that poor countries would therefore be ill-advised to open up their own markets. Yet the main benefits from trade liberalisation arise domestically: if developing countries keep their markets closed because they are denied export opportunities in rich countries, they are shooting themselves in the foot. People, especially the poor, have to pay higher prices; firms face less competitive pressure to become more efficient; economic growth in general is slower. The pattern of dependency on the West is also entrenched, since by keeping their own trade barriers high, developing countries stifle trade among themselves.

Exacerbating this deadlock over market access are serious issues about rules and process. The Uruguay round, which gave birth to the WTO in 1995, burdened developing countries with a set of rules that are often costly to implement and sometimes inappropriate. In particular, they must enforce the same stringent intellectual property protection  patents, copyrights and trademarks  as rich countries. This not only impedes development, by increasing the cost of using technical knowledge. It also endangers lives, because it forces up the price of life-saving drugs to combat AIDs and other killer diseases. The WTO’s intellectual property agreement is harmful in itself. But it has also made developing countries wary of signing up to new rules in areas that would actually benefit them, such as transparency in government procurement or trade facilitation (helping goods clear customs more quickly and cheaply).

Another difficulty is that WTO rules increasingly impinge on sensitive areas of primarily domestic regulation such as food safety and environmental protection. Most explosively, the US is challenging the EU’s system for approving genetically modified crops at the WTO, alleging that it is unduly slow and burdensome, and thus in effect protectionist. Although the US is right that the EU’s failure to approve any GM crops since 1998 acts as a protectionist barrier that aids European farmers at the expense of American ones, the bigger picture is that most European consumers, for health and environmental reasons, do not want to eat them, or even see them planted in Europe. At the heart of the issue are differing tastes and attitudes to risk that are not always compatible with free trade. Pascal Lamy’s office has suggested that new WTO rules are needed to accommodate such differences in ‘collective preferences’, allowing countries to restrict trade if necessary. But existing WTO rules allow the EU to maintain, for instance, its ban on hormone-treated beef. For sure, it pays a price for this, as the US has retaliated by imposing punitive tariffs on some European exports. But the EU could avoid this if it chose to reduce its trade barriers in other areas as compensation for the damage to US interests caused by its beef ban.

More broadly, the WTO’s legitimacy is undermined by not being transparent and accountable enough. This lack of legitimacy provides populist cover for vested interests in rich and poor countries who oppose freer trade for their own sakes. And it gives the pressure groups who demand a seat at the table, those self-styled representatives of true popular opinion, greater scope to impede (mostly elected) governments’ work at the WTO. Unlike governments, they have no incentive to compromise  indeed, they lambaste governments that make the necessary compromises to achieve a deal.

The longer the Doha round is stalled, the greater the risk that governments will conduct their trade policy through other means. The greatest danger is not economic isolationism. Although a limited return to protectionism is quite possible, a wholesale retreat behind national tariff walls is unlikely because it would clearly cost all countries, not least America, dear. But there are still potentially alluring alternatives to multilateralism: a unilateral, bilateral or regional approach. America’s Helms-Burton act, for instance, unilaterally penalises companies and countries that trade with Cuba. The US has bilateral trade pacts with countries such as Israel, Jordan and Chile. And it aims to extend NAFTA, its regional deal with Canada and Mexico, throughout the Americas (except Cuba).

The EU professes to be the global champion of multilateralism. Yet it is no stranger to unilateralism: think of its ban on hormone-treated beef. It has bilateral deals with most of the rest of Europe, North Africa and the Middle East, as well as with South Africa. And, itself a product of regionalism, it aspires to looser regional links with the four Mercosur countries in South America and a panoply of former European colonies in Africa, the Caribbean and the Pacific. Taking into account the 100 or so other poor countries covered by the Generalised System of Preferences, the EU’s network of preferences already covers most of the world. In fact there are only six countries  Australia, Canada, Japan, New Zealand, Taiwan and the US  with which it trades on a ‘normal’ basis.

Bilateralism and regionalism can, to some extent, coexist with a successful multilateralism. But it is a delicate balance  and the longer progress at a multilateral level remains blocked, the greater the danger that the global rules-based system could be permanently undermined by a tangled web of overlapping preferential pacts that tie the world economy up in knots.

What, then, needs to be done? The immediate task is to get the Doha round going again. Above all, the EU needs to be willing to negotiate meaningfully on agriculture. Removing the tariffs and subsidies that distort farm trade does not preclude the EU helping farmers in other ways, by paying them to look after the countryside, for instance. It would also enable the EU to reap gains in other areas, such as services trade. If the EU is serious about making multilateralism work, both to curb US power and because it is fairer than the alternatives, it has to be willing to accommodate most other WTO countries’ demands for freer farm trade.

The greater challenge is to restore popular support for the WTO in particular, and globalization in general. Politicians need to be more forthright in putting the case for globalization in terms of increasing opportunity and choice. But they also need to do more to help people adjust to economic change, whether driven by domestic productivity gains or foreign ones. The US could take a leaf out of Europe’s book by providing a more generous safety net when people lose their jobs. It should also make it easier for workers to hold on to their health and pension benefits when they lose their jobs, with the ultimate aim of providing healthcare and security in old age for all. Europe needs to reform its labour and product markets, so that people can more quickly shift from yesterday’s jobs to tomorrow’s without spending years wasting away on the dole. Both America and Europe need to do more to equip their workers with the skills needed to move to new and better jobs.

More broadly, progressives need to be clear that far from threatening government action, globalization complements it. It provides the means to pay for social democratic policies. And it may increase the demand for them if it increases the pace of economic change. The flirtation of some mainstream progressive parties with the anti-globalization agenda, in France and Italy for instance, is a blind alley. It would align the Left with the Luddites, on a course opposing modernity and progress, at huge economic and social expense.

We also need to look at new ways to tackle the problems thrown up by the differences in labour and environmental standards across the globe. Restricting trade is not the answer: it would condemn poor countries to penury, stifling the economic growth that ultimately increases the demand for, and provides the means to pay for, higher labour and environmental standards. We also need to accept that labour standards are necessarily lower in poor countries than in rich ones. This is neither a sign of exploitation nor a source of unfair competition: it is a consequence of poverty. Even so, there are basic standards that should apply everywhere.

The International Labour Organisation has drawn up four core labour standards: the right to set up a free trade union, including the right to strike and bargain collectively; the abolition of forced labour; a ban on the worst forms of child labour; and the elimination of discrimination in employment and occupation. All ILO member governments have signed up to these standards, but many do not enforce them. Rather than impose trade sanctions, rich countries could pay into a fund that gave aid to poor countries that the ILO deemed were in compliance with its core labour standards. That would give poor countries a big incentive to clamp down on sweatshops, whoever owns them and wherever they sell to. It would reward good behaviour, rather than punishing bad. And it would not be open to protectionist manipulation.

The time has also come for an effective World Environment Organisation (WEO). Action to tackle environmental problems is haphazard, patchy and uncoordinated. A sprawl of environmental law  over 200 separate multilateral environmental agreements  is not a substitute for focused, joined-up action. The world needs an authoritative global voice on the environment to match that of the WTO on trade or the WHO on health, a body to drive research and share information, and a forum for debating environmental issues and resolving disputes. Without a WEO, the environment will suffer more, and bodies that are ill-suited to dealing with green issues, such as the WTO, will be pressed into doing so as a second best.

Last but not least, we need to reconnect the WTO with voters. The WTO needs to do away with its culture of secrecy. In a democratic age, it is simply unacceptable. Even when the WTO does good, it is treated with suspicion because decisions  trade negotiations and dispute-settlement hearings  are made in private.

Defenders of the status quo object that the WTO will grind to a halt if it becomes more open. But that is not a valid defence. Our parliaments meet in public so we can see what is being decided in our name. Our courts operate in public so that we trust that justice is being done. Trade policy is now too important to people’s lives to take place in private. If that forces governments and lobbyists to behave more respectably, all the better. It may even make trade negotiations easier not harder, because governments might be too ashamed to face the public with their brazen defence of sectional lobbies at the expense of the national interest. And it would dispel fears that the WTO is conspiring to take over the world.

Greater openness is one requirement. But the WTO also needs to be more accountable. It is a government-to-government organisation, so it is mostly held to account through its member governments. Yet governments also need to develop better procedures for informing parliaments and voters about their work at the WTO, just as some EU members have done about their work in Brussels. The US is a model in this respect. National parliaments (as well as the European one) should also more become involved in the WTO’s work. Parliamentarians could hold hearings before or after meetings, and could themselves become national delegates to WTO meetings.

It is time to move beyond the old dividing lines of pro- and anti-globalization and seek instead to build a better globalization. Through the actions of elected governments, we can harness the vast potential of globalization to create a better world of opportunity for all. The starting point is reviving the Doha round.

Trade at your own risk

Markets do not exist in a vacuum; they operate in a social, political, and legal context. That insight - obvious to thinkers such as Adam Smith and Karl Marx, but forgotten in the zeal to fashion economics into a science more like physics than sociology - lies behind the revival in recent decades of the academic discipline known as “international political economy” (IPE). But although IPE scholars are right to reject a vulgar economism, they often assert the primacy of politics so vigorously that they neglect economics.

This trend leads to unfortunate misconceptions: When the world economy is seen as ultimately a zero-sum power game, the crucial point that everyone can gain from market transactions is often lost. This approach is evident in the 10th anniversary issue of the Review of International Political Economy, a leading IPE journal edited by US and British scholars. In their introductory essay, two American editors, Mark Blyth of Johns Hopkins University and Hendrik Spruyt of Arizona State University, locate the journal’s inception alongside the emergence of what they term the “second Washington Consensus,” defined as “a new orthodoxy that entailed a particular view of globalization as predestination.” They contend that the six articles in the anniversary edition provide “numerous challenges to that view,” perhaps none more so than the essay by Robert Hunter Wade, a professor of political economy and development at the London School of Economics.

In “What Strategies Are Viable for Developing Countries Today?” Wade contends that poor nations have less and less ability to follow their own development paths. Why? Because international bodies, notably the World Trade Organization (WTO), increasingly lay down and enforce rules—at the behest of the United States and Europe—that constrain developing countries’ policy options.

Wade points to three big examples. First, WTO rules force developing countries to tighten their intellectual-property protection, thereby transferring an extra $19 billion per year in royalties to U.S. companies and making it harder for poor countries to develop by copying Western ideas. They also limit developing countries’ ability to nurture infant industries through measures such as requiring foreign investors doing business in poor nations to buy intermediate goods and services locally. And the WTO’s agreement on services allegedly compels governments to open up vital sectors such as banking, education, telecommunications, and water supply to unbridled foreign competition against which local firms stand little chance.

Worse, the United States and Europe have reneged on their side of the bargain. Even as they pry open developing markets and impose Western rules, they conspicuously fail to open their own markets to exports such as textiles from developing countries. In short, the WTO is a rich man’s racket that keeps the poor in their place.

That needs to change, Wade argues. Instead of sticking to a development prescription that boils down to “liberalize” and “integrate,” he believes developing economies should have greater discretion to choose industrialization policies that suit their needs and tastes—including “import replacement” (protectionism) and capital controls.

Wade is right to point out that nearly all governments negotiating at the WTO reflect the “exports-good, imports-bad” worldview. And since the United States and European Union are more powerful than developing economies—not least because companies everywhere want access to their huge domestic markets—the mercantilist bargains struck at the WTO often reflect the lobbying demands of powerful US and European firms. Sometimes that power results in deals that harm developing countries, as in the case of the WTO’s intellectual-property agreement. Moreover, the United States and Europe hardly practice what they preach about free trade, notably in agriculture. But even if they also benefit Western multinationals, WTO deals that liberalize markets in developing countries primarily help the poor themselves.

The larger point is that developing countries are not compelled to join the WTO, let alone sign on to its agreements. They are free to take the blind alley of import substitution if they so desire. But increasingly, eyeing the success of the Asian tigers and now of China, they decide that “liberalize” and “integrate” are essential planks of a successful development strategy. Nor are countries compelled to abandon their capital controls: Rightly, China has maintained them, and Malaysia reimposed them in 1998 during the Asian financial crisis.

We unquestionably live in a world of unequal power. Since development consists of increasing opportunities, developing countries by definition have fewer options than rich ones. Yes, the WTO is imperfect, its member governments deplorably mercantilist. All the more reason to celebrate that free trade makes all countries better off; poor countries that have embraced globalization are catching up with rich ones.

The coming collapse of free trade

Last month, when World Trade Organization (WTO) talks in Cancún collapsed in acrimony, the United States responded with a brave face. Though the meeting was seen as the best chance to push forward the Doha round of trade negotiations, which aims to slash trade barriers and boost the global economy, America's negotiators insisted the United States would continue to fight for freer trade. "For over two years, the U.S. has pushed to open markets globally, in our hemisphere, and with sub-regions or individual countries," said Robert Zoellick, the U.S. trade representative. "As WTO members ponder the future, the U.S. will not wait: We will move toward free trade with can-do countries." Zoellick's message is clear: If pesky "won't-do" countries block the multilateral, WTO route to liberalization, they will be left by the wayside. The United States will instead spearhead a push for free trade through bilateral and regional agreements.

Yet Zoellick's statement blends fantasy, hubris, and hypocrisy. Rather than emerging from the Cancún wreckage to lead the charge toward liberalization, the United States looks set to undermine global free trade. The bilateral and regional agreements Zoellick promises will actually tie world trade up in knots. Worse, U.S. election-year politics combined with rising unemployment could trigger a protectionist backlash in the United States, with China the first target and Europe not far behind. The potential consequences? A global trade war and possibly even a world recession.

Though American trade negotiators claim otherwise, bilateral and regional deals offer only a facade of free trade. They are, by definition, discriminatory: By granting preferences to some countries, they impose handicaps on others. Worse, negotiating regional and bilateral deals with many countries leads to a tangled web of rules--differing tariff rates, rules-of-origin requirements, and other regulations--that constrain commerce.

Such deals are also, by definition, partial. They encompass only a small fraction of America's total trade. Under Zoellick's watch, the United States has signed bilateral trade deals with two countries: Singapore and Chile. Singapore, the eleventh-biggest destination for U.S. exports, accounts for 1.67 percent of America's trade; Chile, the thirty-fourth largest, for a further 0.34 percent. In total, then, Zoellick has signed deals with countries that account for a mere 2 percent of U.S. trade, hardly an earth-shattering achievement.

But, wait, Zoellick might protest, you ain't seen nothing yet. The United States is also negotiating potential deals with Australia, Morocco, five Central American countries, and five southern African ones. It is also looking to open talks with Bahrain and the Dominican Republic. Yet add up U.S. trade with these 14 countries, and it accounts for a mere 3 percent more of the total.

Of course, Zoellick--and President Bush--have grander trading ambitions. They dream of creating a free-trade area that stretches across the Western Hemisphere (excluding Cuba) by 2005. Yet, even including this proposed agreement, known as the Free Trade Area of the Americas (FTAA), the administration's bilateral and regional ambitions amount to liberalizing trade with countries that account for just over one-tenth of U.S. trade.

What's more, negotiating the mooted FTAA is proving just as tricky as making progress in the Doha round. A meaningful FTAA must tackle controversial issues--such as Latin American demands that the United States reduce its farm subsidies and America's insistence that Latin American countries accept rules on services and investment--on which agreement has so far proved elusive at the WTO. Yet neither side is willing to undermine its bargaining position in the Doha round by making concessions in the FTAA negotiations. The United States, for instance, has stated that it will only cut its farm subsidies if Europe and others do too, as part of a global WTO agreement. So hopes of concluding a meaningful FTAA deal while Doha remains stalled are slim.

American officials suggest that concluding bilateral and regional deals puts pressure on the European Union, China, and other leading WTO members to negotiate in earnest, a strategy Zoellick dubs "competitive liberalization." "If some countries hide behind the false security of protectionism, the U.S. will work with those that believe true economic strength is achieved through openness," he has said. "The strategy is simple: The U.S. is spurring a competition in liberalization." Perhaps--if other countries were scared that the United States was going to corner their main export markets through sweetheart trade deals. But Zoellick's grab bag of small prospective pacts poses little threat to big players like Europe, especially since the EU has already signed its own bilateral and regional agreements with many countries.

Zoellick is guilty of far worse than hype. The bigger danger is that the collapse of the Doha round will help trigger a lurch toward protectionism--with the United States leading the way. While governments are negotiating to free up trade, they are wary of giving in to the demands of protectionist interest groups that antagonize their negotiating partners and thus jeopardize chances of securing better export opportunities. But now that there is little hope of a WTO deal any time soon, governments will find it harder to resist pressures to limit imports. And history shows that, once one country acts to keep out foreign products, others are often tempted to retaliate, as happened during the 1930s.

For all its free-trade rhetoric, the United States looks set to act first. Even in the halcyon late '90s, when the economy was growing strongly and unemployment had virtually disappeared, support for free trade was weak among many Americans, as shown by a 2000 study by the Program on International Policy Attitudes, a Washington think tank.

Now that the economy has stumbled, the temptation to lash out at foreigners is much stronger. More than two million jobs have been lost since George W. Bush became president. America's goods-trade deficit rose to a whopping $538 billion in the year to August. With his reelection chances next year dependent in part on taking states like Pennsylvania and Michigan, which have been especially hard-hit by the downturn, Bush will be tempted to slap duties on imports deemed to threaten U.S. jobs. In fact, the White House has already employed protectionist measures for political gain. The administration approved an enormous farm-aid package worth $190 billion in subsidies over ten years. And, in March 2002, when Bush was riding high in the polls, he succumbed to pressure from America's steel industry and slapped emergency duties on foreign steel.

If at the height of his popularity Bush could not find the backbone to face down 160,000 steelworkers, he is hardly likely to resist the protectionist temptation now. China is already in the firing line. One in six jobs in America's manufacturing sector have been lost in the past three years-- 2.7 million in all. The powerful National Association of Manufacturers (NAM) argues that China is largely to blame. In a series of congressional testimonies and public events, the NAM has accused Beijing of gaining an unfair competitive advantage by keeping its currency, the yuan, pegged to the U.S. dollar at the same rate since 1994, making its exports artificially cheap and pricing U.S. imports out of its market. Pointing to China's $100-billion-per-year trade surplus with the United States, the NAM argues that Beijing should have let its currency rise against the dollar over the past nine years by as much as 40 percent. If the NAM can convince Zoellick's office that China's policy is unfairly harming U.S. exports, the United States could hit back with punitive tariffs on Chinese imports.

Congress is also in a China-bashing mood. Congress has held committee hearings to consider whether or not China manipulates its currency for commercial advantage. Senator Richard Durbin of Illinois and five other senators are co-sponsoring legislation that would levy a 27.5 percent tariff on imports from China unless it adjusts its exchange rate; similar measures have been proposed in the House. Democratic presidential candidates echo the protectionist noises. "We must reexamine our trade policies," says Howard Dean. "We can't allow some countries to subsidize exports, manipulate their currencies, or erect barriers to imports from the United States."

The administration is already swinging into action. President Bush has called for China to adopt a "monetary policy that is fair." On Bush's trip to Asia this week, White House officials announced that Chinese and American experts would study how Beijing could move toward a floating exchange rate. Treasury Secretary John Snow visited Beijing last month to demand that China abandon its dollar peg, let its currency float upward against the dollar, and lift its capital controls. The United States also secured limited support at September's meeting of finance ministers from the G7, the group of leading industrialized nations, for its position of pushing China to revalue. The G7 statement called for "more flexible exchange rates" to reduce global financial imbalances.

Such pressure on China could have disastrous consequences. One possibility is that, if China refuses to give in to America's demands, a trade war could erupt. Under the terms of China's entry into the WTO last year, the United States has broad discretion to slap emergency duties on Chinese imports deemed to be causing "market disruption," a clause the administration could invoke if China continues to refuse revaluation. Such protectionism would do the United States more harm than good. Higher duties on Chinese products would be a tax on American consumers and companies that rely on imports. The United States imported $103 billion from China over the past year; 27.5 percent duties would therefore be equivalent to a $28 billion tax hike on these imports. And, since many of these imports are made by the Chinese subsidiaries of U.S. firms, such protectionism would be particularly self-destructive.

Moreover, Beijing is unlikely to take any U.S. action lying down. Chinese leaders have reacted angrily to Snow's suggestions. And Beijing could do serious economic damage to the United States. If China, the second-largest buyer of U.S. Treasury bonds, sold off some of its vast holdings, it could force U.S. interest rates up, undermining the U.S. economic recovery. Beijing might also retaliate with sanctions against U.S. exports or by taking away U.S. companies' licenses to operate in the Chinese market, major blows for multinationals that view China as the world's biggest emerging market and export base. As Ronald Reagan's attacks in the 1980s on Japan showed, such commercial conflicts can quickly spiral out of control, seriously impeding trade. Indeed, according to a study by the Cato Institute, by the end of the Reagan years, one-quarter of U.S. imports were affected by trade restrictions.

A second scenario is that China caves in to U.S. pressure for a revaluation of its currency peg. This could be even more damaging--for the United States as well as China. A revaluation could harm China's economy, which has been one of the engines of global growth. Contrary to U.S. claims, the yuan is not obviously undervalued. Although China's trade surplus with the United States is huge, its surplus with the world as a whole fell to only $9 billion in the first eight months of the year--and is likely to shrink further as it opens its markets to foreign competition. Also, a revaluation could reduce the rate at which China's central bank accumulates currency reserves, much of which it has been investing in U.S. Treasury bonds. If China buys fewer Treasuries, U.S. interest rates could spike up, denting U.S. economic growth.

What's more, if China is bludgeoned into allowing the yuan to float, it would simultaneously have to open its weak financial markets. This could cause a financial crisis that might engulf the United States as well, since China's ramshackle financial system and near-bankrupt banks are still too weak to handle the instability of global capital markets. The White House appears to have forgotten the lessons of the late '90s Asian financial crisis, which almost plunged the world economy into recession. East Asian countries like Thailand that--under U.S. pressure--had opened up their underdeveloped capital markets prematurely suffered a devastating financial crisis, ruining many American investors who had bet on Asia and spreading turmoil to U.S. markets. At that time, China--thanks to its currency peg and capital controls--proved an oasis of stability. It is folly on a grand scale to risk a rerun of the late '90s by prizing open China's capital markets when its financial system is still so weak.

Whatever happens with China, the Bush administration is playing with fire by aggressively seeking a weaker dollar. Already, global financial markets have reacted to the G7 statement on flexible exchange rates by driving the dollar down, causing U.S. interest rates to rise. Worse, the dollar's decline could turn into a rout if investors pull out of the United States and lose confidence in the dollar. If the U.S. currency crashed, investors, who have allowed the United States to maintain an enormous current account deficit by purchasing U.S. assets and equities, would require much higher returns to continue buying U.S. assets. U.S. interest rates would shoot up, and stock prices could plummet. Higher interest rates could bankrupt U.S. companies dependent on borrowing and cause others to cut investment. Unemployment would rise. Consumers, who have powered the U.S. economy for the past three years, would have to save more to pay off their debts and thus might spend less, further depressing the economy. U.S. demand for foreign products could collapse, since the weaker dollar would make them prohibitively expensive. Thus a U.S. recession could soon spread around the world.

Europe has so far borne the brunt of the dollar's fall. The euro has risen by 40 percent against the U.S. currency since July 2001. At first, European policymakers welcomed the euro's rebound as a vote of confidence in the fledgling currency. But, now, they fret that its rise is stunting EU exports and economic growth. German business groups have warned that, if the euro moves "significantly above" $1.20 per euro, it would harm German exports. Indeed, if the euro rises too far too fast and Paris and Berlin think the United States is gaining an unfair competitive advantage, the European Union could be tempted to hit back at the United States.

The European Commission, which handles trade policy for the EU's 15 member states, has powerful weapons. The European Union has already won WTO authorization to impose retaliatory sanctions on U.S. imports in several important cases. By far the biggest case is that of America's foreign sales corporations (FSCs), tax breaks for U.S.-based exporters that the WTO deems an illegal export subsidy. So far, the European Union has not imposed these retaliatory sanctions, in part because Brussels did not want to antagonize Washington while the new WTO round was being negotiated. Now that the Doha round is on ice, the European Union may feel more inclined to impose sanctions, especially if it feels provoked by U.S. actions on the dollar.

This could spark an enormous trade war. In the case of FSCs alone, the European Union is entitled to slap 100 percent duties on $4 billion of U.S. imports, and Europe has already drawn up a hit list of 1,800 U.S. products. President Bush's tariffs on foreign steel also infuriate Europe. The WTO has ruled the tariffs illegal, but the United States has appealed. If the WTO's appeals court confirms the initial verdict against the United States, America could be faced with more retaliatory sanctions from Europe.

Such a tit-for-tat battle could easily escalate. The United States also has a big WTO grievance with Europe: the EU's failure to approve any new genetically modified crops since 1998, which the Bush administration views as covert protectionism. Washington initiated WTO proceedings against the European Union on genetically modified crops in May. If the WTO finds in America's favor, the United States would be entitled to hit back against European exports. Even more worryingly, France and other EU countries may use the Cancún debacle as a pretext for reversing the EU farm-subsidy reforms announced in June. This would enrage Washington and could provoke a battery of new disputes once the "peace clause," under which countries agree not to challenge each other's farm-support schemes at the WTO, expires at the end of the year.

Such disputes could not only damage political and economic relations between Washington and Brussels; they could also fatally undermine the WTO, which relies on cooperation between the United States and Europe. The failure in Cancún raises serious questions about whether the WTO can still function effectively, and, if the United States and the European Union remain at each other's throats, the organization might never recover. If it cannot, prospects for free trade are grim, since it is under the WTO aegis that the most recent major multilateral trade gains, which helped usher in global growth in the '90s, have been made. Worse, if American policymakers begin to feel that the WTO is primarily a rod with which the European Union and others can beat it, the United States might even consider withdrawing from the organization, as voices in Congress periodically propose.

Fortunately, the WTO is not dead yet. Even so, the next year or two will still pose a serious challenge. The big issue is how to deal with America's vast trade gap, which is an indicator of larger problem--the world economy is dangerously unbalanced. Americans are living beyond their means, while the Europeans and Japanese are not spending enough. The U.S. current account deficit is swelling to record highs. To sustain its economic growth, the United States needs to borrow some $2 billion extra from foreigners every working day. This is clearly unsustainable. At some point, either Americans will reduce their borrowing or foreigners will get scared and stop lending. Were this shift to happen suddenly, jacking up U.S. interest rates, America's economy would plunge into recession, dragging the rest of the world down with it.

What is needed, then, is faster growth in the rest of the world. This would boost U.S. exports, reducing the country's borrowing needs. And it would allow Americans to start to pay off some of their huge debts without their belt-tightening pushing the economy into recession. One way to achieve this is to lower interest rates and run higher budget deficits in other major economies. Another is to free up world trade. Not much chance of that now.

For richer, for poorer

Dear Philippe,

Isn't it ironic that globalisation's most startling legacy is not to be fusion food, cheap flights or the web - but debt and deflation? That those of us who worried about the Third World debt crisis, are about to confront our own First World debt crises?

And would you agree that there is a certain irony in poor, developing countries going cap-in-hand to Cancun to beg favours from rich countries, when in fact these same countries are keeping the rich in pocket? According to the World Bank, developing countries are " net lenders to developed countries". "Globalisation" allows rich countries to live beyond their means (including their environmental means) and then to raid the piggy banks of poor countries for finance. The result: huge reserves of IOUs - or debt. Can we discuss how to moderate globalisaton's most damaging legacy: the coming first world debt and deflation crisis?

Ann Pettifor

Dear Ann,

I think fears of deflation are overblown: UK inflation is 3.1%. Where prices are falling - notably Japan - domestic policy failures, not globalisation, are mainly to blame. Japan is a net lender to the world - by over $100 billion a year - not a net borrower. Poor countries can, of course, choose not to tap foreign finance. Those with underdeveloped financial markets should certainly limit destabilising surges of speculative money. But long-term foreign investment in factories can do wonders for countries that are short of domestic savings and know-how.

The big issue in Cancun, though, is trade, not finance. The evidence that freeing trade boosts economic growth - and hence reduces poverty - is incontrovertible. Witness China's great leap forward since it started opening up. The average Chinese person is over six times richer than 20 years ago - the number living on less than a dollar a day fell by 150 million between 1990 and 1998, the fastest fall in poverty ever recorded. The Chinese clearly believe freeing trade is good: that's why they recently joined the WTO. Why don't you?

Philippe

Dear Philippe,

Where did I say I was against trade? Globalisation is not primarily about trade, despite smokescreens erected by "globalisers" and "anti-globalisers" alike. Globalisation is primarily about finance; about transforming the global economy, so that the "money-changers" - not the productive trading sector, now run the world.

The truth is neatly summed up in one statistic. In 1970, 90% of all international transactions were trade transactions, and only 10% were financial transactions. By 2000, 90% of all transactions were financial, and only 10% were trade transactions.

Philippe, be honest: the money-changers have taken over the temple. Trade is now just a small part of the global economy. And the result is devastating: de-regulating international capital has made it easier for rich countries to siphon off resources from poor countries.

Ann

Dear Ann,

I didn't say you were against trade: I said you were against freeing trade. Please correct me if you have changed your views. If so, it might explain why you have not contested my point that freeing trade boosts growth and reduces poverty.

Your assertion that globalisation is primarily about finance, not trade and investment, is incorrect: the volume of transactions on financial markets bears little relation to their importance. It is also beside the point. Developing countries can reap all the benefits of opening up to foreign trade and investment, while maintaining firewalls to protect them against the instability of global financial markets. That is what Vietnam has done under its policy of doi moi - and in the ten years after 1988, when it began to open up its economy, its poverty rate halved. Who said globalisation isn't good for the poor?

Philippe

Dear Philippe,

What do you mean the "volume of financial transactions on financial markets bears little relation to their importance"? This is like saying "volumes of money bear little relation to their importance". I repeat: globalisation is largely about those with money making even bigger volumes of money.

While some countries have become richer by designing, manufacturing and trading (and I am all in favour of that), it is countries (like the UK) that make money from money that have really thrived under globalisation. Of course it's good for poor countries to trade - fairly - but whether it has enriched them is open to question. China's growth numbers, as you know, are treated with great scepticism by all. And, anyway, China's is not a globalised economy - it maintains capital controls.

Ann

Dear Ann,

Do you really think it is City traders who make Britain rich? The wealth of nations springs mainly not from their financial turnover but from their ability to use technology productively. That is why globalisation in the form of international trade and foreign investment is such a good thing. New technologies spread faster; foreign competition keeps companies on their toes; countries specialise in what they do best and buy the rest for less from abroad. For sure, if you choose to define globalisation narrowly as just the free movement of hot money, it is a mixed blessing. But trade liberalisation has an outstanding record of raising living standards and reducing poverty.

Since 1980, an amazing thing has happened. Global inequality, which had been rising since the Industrial Revolution enabled the West to race ahead, has begun to fall. China, home to one in five of the world's people, is catching up with rich countries. India, where a further sixth of the global population live, has also begun to close the gap - as have many other Asian countries. Developing countries that embrace globalisation are making up ground on the West; those that reject it are falling further behind. One can quibble with the precise data, but the broad trend is not in doubt, as any visitor to Shanghai, a futuristic city that only 15 years ago was mostly marshland, can testify.

Philippe

Dear Philippe,

Of course City traders have helped make us rich. Our own goods exports are in decline, and now as a nation, we pay our way thanks to "invisibles" - making money from money. On global inequality, I profoundly disagree. Inequality numbers are very political. No institution collects numbers on income distribution. And the numbers that are collected are of incomes - not assets. The rich have assets, not incomes. The poor have incomes and debts, not assets. If you add in assets, as we do, then globalisation is generating wealth for the rich, and debts for the poor. This is the "hoover effect" - globalisation is sucking wealth from the poor, and concentrating it in the hands of the few.

Ann

Dear Ann,

Of course, the City contributes to Britain's prosperity, but it is not the main reason our country is rich. Financial services account for only 6% of the UK economy.

Global inequality is indeed hard to measure, but simple arithmetic suggests it is falling, as more sophisticated studies can confirm. Half the people in the developing world live in China and India. Both their economies are growing much faster than the US's, Europe's and Japan's. So the gap between rich and poor is narrowing. And as the poor's incomes rise, they will save and accumulate assets - just as we have done. To claim that "the rich have assets, not incomes" suggests that far from New Economics, you have no economics: assets are only valuable because they provide a stream of future income.

Philippe

Dear Philippe,

In economics, defamation is the sincerest form of flattery. So thank you. To check the facts, read the New Economics Foundation's book, Real World Economic Outlook - which includes distinguished economists and a Nobel Prize Winner.

Ann

Dear Ann,

You ask poor readers to plough through your book. I shall be much briefer: if the world followed your prescriptions, we would all be much poorer. And let's not count Nobel prizes: as you know, the overwhelming majority of economics laureates are in favour of globalisation.

Philippe

Ann Pettifor is a director of the New Economics Foundation and was a co-founder of Jubilee 2000. Email: ann.pettifor@neweconomics.org. Philippe Legrain is the author of Open World: The Truth about Globalisation.

The world gets poorer when all we trade are insults

As Churchill might have said, the World Trade Organisation is the worst way of governing the world economy, except for all the others. That is what the seething globaphobic masses and padded ministerial suits who conspired to wreck the WTO’s recent meeting in Cancún may soon find out. With prospects for freeing world trade — the engine of global economic growth over the past 50 years — in tatters for now, the consequences could be devastating. Indeed, finance ministers who are in Dubai for the World Bank/IMF meeting have already been expressing regret for the Cancún debacle.

Worst hit will be developing countries: without freer trade, they have little chance of escaping poverty. The WTO too is on the ropes — and with it the principles of multilateralism and the rule of law that Europeans claim to hold dear. In place of global rules that apply equally to all, countries will press ahead with bilateral and regional trade deals that are by definition discriminatory: preferences granted to some are handicaps imposed on others. Robert Zoellick, the US Trade Representative, has already said that “the US will not wait: we will move towards free trade with can-do countries”. On US terms, of course: unlike at the WTO, when countries negotiate one-on-one with America, they have to take it or leave it.

Even more worryingly, the breakdown of trade talks at the WTO — the Doha Round — increases the risk of a lurch towards protectionism. While governments are negotiating to free up trade, they are wary of giving in to the demands of protectionist interest groups that antagonise their negotiating partners and jeopardise better export opportunities. But now that there is little hope of a WTO deal any time soon, governments will find it harder to resist protectionist pressures. And once one country acts to keep out foreign goods, others retaliate.

The US looks set to act first. Even during the internet boom, when unemployment had virtually disappeared, American support for free trade was wafer-thin. Now that the economy has stumbled, the temptation to lash out at foreigners is greater. More than two million jobs have been lost since President Bush took office. America’s trade deficit was a whopping $536 billion in the year to July. And with his re-election chances looking trickier, Bush may try to buy votes by slapping duties on imports that are deemed to threaten US jobs.

Bush has protectionist form. When the steel industry spuriously complained that dastardly foreigners were to blame for its ills, he caved in to their demands for emergency import duties. The WTO has since ruled that the American action is illegal — and now that the Doha Round is on ice, the EU could decide to hit back with WTO-authorised sanctions on US imports. American farmers are also benefiting from Bush’s largesse. They are gorging themselves on $190 billion in subsidies over ten years.

China is already in the firing line. Its crime: the Chinese spend some $100 billion less on American products than Americans do on theirs. John Snow, the US Treasury Secretary, accuses China of gaining an unfair competitive advantage by holding down its currency, making its exports artificially cheap and pricing American imports out of its market. The US wants China to abandon its dollar peg and let its currency float — upwards, of course — as well as lifting its capital controls.

America secured limited support for its position at the meeting of finance ministers from the Group of Seven rich countries in Dubai at the weekend. Although the G7 statement did not finger China directly, it called for more flexible exchange rates to reduce global financial imbalances.

This is potentially dangerous. If China refuses to give in to America’s demands, a trade war looms. The US Congress is already threatening to impose curbs on Chinese imports unless China adjusts its exchange rate. Beijing is hardly likely to take such aggression lying down.

Yet the consequences of China giving in to American bullying could be even worse. For a start, China’s currency is not obviously undervalued: its trade surplus with the US is huge, but it is only $21 billion a year with the world as a whole. So even a limited revaluation could do more harm than good, damping growth in one of the few economies in the world that is still thriving. But allowing China’s currency to float and throwing open its financial markets would be a disaster.

Removing China’s financial firewalls would expose its ramshackle financial system and all-but-bankrupt banks to the instability of global capital markets. It could lead to a repeat of the Asian crisis in the late 1990s that almost thrust the world economy into recession.

China is not to blame for America’s vast trade gap. The real problem is that the world economy is dangerously unbalanced. Americans are living beyond their means, while the Europeans and Japanese are not spending enough. One figure sums it up: the US current-account deficit — the amount Americans borrowed from abroad — swelled to $529 billion in the year to June. So the US economy’s continued growth relies on foreigners continuing to lend Americans nearly $2 billion extra every working day. This is unsustainable: at some point, either Americans will take fright and stop borrowing or foreigners will get scared and stop lending. Were this shift to happen suddenly, America’s economy would plunge into recession, dragging the rest of the world down with it.

What is needed, then, is faster growth in the world economy to boost US exports, reducing its borrowing needs. One way to achieve this is lower interest rates and bigger budget deficits. Another is freeing up trade. Pity ministers didn’t think about that in Cancún.