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

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Open up to migrants

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Migrants at work

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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.