Free Trade and poverty eradication

Globalisation, better communication and more open markets have helped reduce chronic hunger and increase life expectancy in developing countries.

Mankind just witnessed the best decades ever. In the last 50 years we have increased living standards and reduced poverty more than in the 5 000 years before.

Chronic hunger in developing countries has been reduced from about 50 percent in 1950 to 17 percent and global life expectancy has increased by 20 years. If you read this article in five minutes, you will have increased your expected life-expectancy by two minutes by the end of it. Absolute poverty has been reduced from 40 to 21 percent since 1981. Almost 400 million people fewer are poor, despite the fastest population growth ever.

This is because of growth, more knowledge and scientific and technological breakthroughs. But it is globalisation, better communications and more open markets that made it possible for countries to benefit from these, even though they were often developed somewhere else on the planet.

We know this, since open countries with the right institutions grow faster, the more developed the rest of the world is, since they can borrow ideas, investments and capital from these places. According to the World Bank, 24 poor countries, representing about 3 billion people, have integrated into the global economy, by reducing tariffs three times more than others, and doubling their rate of trade to GDP in 20 years. Their annual growth rates have increased to almost 5 percent per capita, more than twice the rate in rich countries.

That is cause for optimism – and some anxiety. Optimism because we know how to abolish poverty and hunger, but anxiety since our political leaders do not act upon that knowledge.

In the best of worlds, a country would unilaterally open its markets, introducing the economy to competition and specialisation, which makes it more efficient. Hong Kong showed that this is the way to prosperity. As Joan Robinson pointed out, a country doesn’t benefit from throwing rocks in its harbour simply because others have rocks in theirs.

However in the real world, companies and unions that fear competition often block reforms.

Hence the need for an organisation like the World Trade Organisation (WTO). Multilateral free trade agreements create a momentum against these special interests, because they also enrol reform support from exporters. In other words, the WTO is our way to get the help of foreigners to do what we wanted to do all along: open our markets.

The reason for pessimism is that politicians have become slaves to the logic of negotiations, and see every opportunity for their people to buy cheaper goods and services as a threat, and a concession. Everybody demand something from others, instead of looking for the areas of their economy where they would benefit from more openness. And with more WTO members than ever, supposed to reach consensus, that is more difficult than ever.

That is why the Doha round seems to be going nowhere. Developed nations refuse to reduce the agricultural tariffs and subsidies that cost them almost one billion dollars a day. Big developing countries like India and Brazil refuse to reduce tariffs on manufactured goods and services, which create colossal inefficiencies in their economies.

In a private discussion recently a European negotiator praised China for being very constructive. The surprised Chinese representative asked why that was the case, since China had almost done nothing at all. The negotiator explained that this was exactly why China deserved praise. Unlike others, China had not talked about red lines and ultimatums.

The European Union is the biggest obstacle. A small group of farmers have, via the French government, hijacked the political process in Europe. But they can do that with the help from the G10, which includes Japan and South Korea. As long as Europe can hide its protectionism behind other’s refusal to go further, they can get away with it. And as long as others are as unwilling to face their particular special interests, not much will happen.

Who should move first? Why, of course everybody should. And anybody could. A convincing statement from any of the major trade nations that they are now willing to move in one of their favourite sectors, for their own sake, would create a new momentum.

It is not just further liberalisation that is at stake. It is the whole WTO system, the most-favoured nation principle and the dispute-settlement mechanism. This is arguably the only real achievement from the WTO’s ten-year existence, but it is a major one. It has introduced a system of rule of law in trade, reduced the risk of trade-war and given small countries a chance to challenge other’s arbitrary protectionism.

Some economists say that it doesn’t matter much if the Doha Round falls apart, as long as this system stays in place. That is a very dangerous thought. The WTO is not equipped with any sort of enforcement mechanism. Countries only abide by its decisions out of goodwill and their stake in the future of the WTO. If negotiations fell apart, resulting in a collapse of trust and goodwill between participants, that interest would be seriously undermined.

* Johan Norberg is a fellow at the Swedish think tank Timbro and a passionate supporter of globalisation as a mean to lift the world’s poor out of poverty state.