Why is the Doha round sleepwalking closer to collapse? We think a major fault-line is this round's vaunted "development dimension". NGOs and most developing-country governments interpret it to mean one-sided liberalisation: the North should open its markets, but the South should be exempt from further liberalisation and rules commitments, in addition to receiving more aid.

This attitude is not accidental. With the notable exception of China, the global momentum in favour of more markets and less government intervention has slowed down considerably. Many factors are at play, but the climate of ideas has changed since the heyday of the Washington Consensus only a decade ago. There is less enthusiasm for trade liberalisation in the developing world and there is greater all-round enthusiasm for aid.

Critics make three arguments. First, there are weak links between trade liberalisation, growth and poverty reduction. A stronger version holds that trade liberalisation damages developing countries and makes the poor poorer. Second, developed countries should liberalise trade, but developing countries should not. And third, developing countries should use interventionist industrial policies to promote infant industries. This requires more flexible WTO rules.

Do these new ideas make sense?

First, most studies - in-depth country studies going back to the 1970s and 1980s, and more recent (though less dependable) studies using cross-country regression analysis - suggest strongly that countries with more liberal trade policies have more open economies and grow faster than those with more protectionist policies.

The "new globalisers" have seen dramatic reductions in poverty and improvements in human welfare indicators.

According to World Bank and Organisation for Economic Cooperation and Development (OECD) figures, since 1980 developing countries with a total population of about three billion - mostly in Asia - have more than doubled their trade-to-gross domestic product (GDP) ratios, doubled real per capita incomes and have cut average import tariffs by more than one-third. That leaves "less-globalised" developing countries with a combined population of about 1.5 billion, which have stagnant trade-to-GDP ratios and per capita incomes and much lower cuts in average import tariffs. The "new globalisers", unlike the rest, have also seen dramatic reductions in poverty and improvements in human welfare indicators.

Much has been made of recently revised World Bank estimates of future trade liberalisation effects. These are not insignificant. If long-run productivity gains were added, welfare gains to developing countries from full liberalisation of merchandise trade would rise to $200 billion per annum and about 127 million people - more than 10% of the world's very poor - would be lifted out of extreme poverty. Much greater gains would result from radical liberalisation of developing country services markets and from all-round opening of labour markets to workers from developing countries.

Of course, trade liberalisation on its own is no panacea. To fully capture productivity gains, external liberalisation must be part of broader market- based reforms and be buttressed by market-supporting institutional reforms - as Adam Smith and David Hume pointed out more than two centuries ago. But the central point remains that more prosperous developing countries are those that have liberalised external trade and foreign direct investment (FDI) massively as part of a general move towards a market economy - none more so than China and Vietnam. So much for the utterly misleading view that high protection in China and Vietnam has not deterred fast growth and has even contributed to it.

Second, should only rich countries liberalise trade in the Doha round? Northern trade barriers are indeed iniquitous; they restrict labour-intensive developing country exports. But what Oxfam and its friends fail to say is that developing countries' own protectionist policies harm them even more. The World Bank estimates a developing country gain of $142-billion a year from major agricultural liberalisation. But only $32-billion of that would result from developed country liberalisation; the rest -- $110-billion - would come from developing countries' liberalisation of their highly protected agricultural markets. It is unskilled rural labour - the poorest of the poor - who would gain most as such liberalisation would reduce the anti-agricultural bias in domestic economies. Hence Oxfam's one-sided trade liberalisation is a policy of self-harm for developing countries in the WTO.

Third, the infant-industry argument is back in favour - despite the historical record.

An alliance of old-style protectionist interests and new-style ideological forces threatens to slow down globalisation's advance and more generally the advance of the market economy. That would deprive the world's least advantaged people of the life-chances that economic freedom and freer markets offer.

Infant-industry success in 19th-century America and Germany is contested. In North-East Asia, there is scant evidence to show that protection of infants actually led to higher social rates of return and higher overall productivity growth. Southeast Asia's conspicuous success is in FDI-led electronics exports - a result of drastically lower tariffs and an open door to inward investment. The region's conspicuous failures have been in highly protected sectors such as automobiles in Malaysia and Indonesia. China, like South-East Asia, has grown fast through FDI-led exports, not infant-industry protection. Finally, infant-industry protection in Latin America, south Asia and Africa has been a disaster not dissimilar to industrial planning in ex-command economies.

The fact is that most developing-country markets are too small to support infant-industry promotion and their states are too weak, incompetent and corrupt to efficiently administer the complex instruments required. As for WTO rules, it makes sense for developing-country governments to voluntarily enter into commitments with other WTO members that bind in sensible policies (for example, to restrict subsidies and performance requirements), and provide external discipline against silly and harmful government intervention. That contradicts the argument that WTO agreements should be renegotiated to give developing countries "policy space".

These "post-Washington Consensus" ideas on trade, together with a new-found enthusiasm for foreign aid, have a common, age-old distrust of markets and faith in collectivist solutions. Collectivist thinking is hardly new, but it is on the rise again.

An alliance of old-style protectionist interests and new-style ideological forces threatens to slow down globalisation's advance and more generally the advance of the market economy. That would deprive the world's least advantaged people of the life-chances that economic freedom and freer markets offer.

These are the stakes and that is why new-old ideas on trade (not to mention aid), need to be countered with full force.






Contributed by Fredrik Erixon is the chief economist at Timbro, Sweden, and Razeen Sally is a senior lecturer at the London School of Economics. Reprinted with permission from The Globalisation Institute.

To read another Global Envision article about free trade in developing countries, see Buying a Car in Pakistan.



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