Between free trade and protectionism
Hendri Tanjung and Asad Zaman, Islamabad | Mon, 05/03/2010 11:38 AM |
Few
issues are as divisive as free trade, strongly supported by academics
and some policy makers, and strongly opposed by the public.
Many policy makers have expressed concern that the current
global recession will fan the flames of protectionism, which in turn
will make economic conditions even worse.
For example, Finance Minister Sri Mulyani Indrawati, warned
countries that protectionism in the condition of global recession today
will harm both the national and global economy.
Similar statements have been made by British Premier Gordon
Brown in his policy speech at Davos on Jan. 19 last year that more
doses of the free market economy still remained the only remedy to
financial crises.
At the same time, policy makers in the US were more responsive
to public sentiment than the free trade theorists. The "Buy American"
provisions in the US$819 billion stimulus bill passed by the House of
Representatives on Jan. 28, 2009 supported protectionism against free
trade rhetoric.
Furthermore, President Obama's 2010 budget would tighten
taxation on US companies with operation overseas, limiting incentives
to do business abroad.
Many other countries have taken action to protect their
market. President Sarkozy offered a $5 billion bailout to French
automakers but they can use only French made parts and are supposed to
shift their factories located in Eastern Europe back to France. In
Britain, nationalized banks are being told to offer loans to Britons
first.
Responding to the situation, Simon Johnson, an MIT economic
professor and former chief economist at the IMF stated that what we
were seeing today was "an undoing of a lot of drivers of growth that we
relied on for the last 20 years".
The reason is clear. What has been believed by the IMF and
World Bank that "export led growth strategy" is a tool to achieve
prosperity is now vindicated to fail.
Healthy competition among equals in stable times is
beneficial. Inefficient businesses close down and are replaced by
better ones.
To survive, a business must be intelligent and energetic,
follow market trends, keep prices low, produce quality goods, etc. All
the Asian Tigers - Japan, South Korea and China - benefited by opening
their markets to healthy doses of competition in an intelligent and
planned fashion.
History teaches us that free trade is not a good policy in
times of crisis, or when there is substantial inequality between
trading partners. England, the first country to industrialize, preached
Ricardian Theory of free trade to the rest of the world, but protected
its weaker industries from competition at the same time.
Adoption of these free trade policies led to a recession in
Europe. German economist Georg Friedrich List put forth the infant
industry argument, and industry grew up in Europe after it was
protected by competition from the more advanced British industries.
Similarly, the US developed industrial strength by protecting
itself from British competition via a 40 percent manufacturing tariff
in its period of rapid expansion at the end of 19th century.
Once fully industrialized, it began advocating free trade to
poor countries as a panacea of their economic ills. During the same
period countries, which could not protect their industries from foreign
competition, did not developed industries.
In The Shock Doctrine: The Rise of Disaster Capitalism, Naomi
Klein has brilliantly documented how free markets have been imposed by
force, threats and wars, and have created wealth for multinationals at
the expense of the working classes of poorer countries.
It is increasing recognition of this free trade weapon by the
LDC's, which led to the collapse of the Doha round. The US and other
developed countries introduced liberalization in agriculture and the
service sector in the Doha Round in early 2000.
It is ironic that the talks collapsed after seven years of
negotiations because the US refused to allow the same protection of
jobs to other countries. which it had implemented in its own country.
India and other developing nations proposed to protect
sensitive agricultural products from competition in the event of a
surge of imports that would make their own farmers less competitive.
The US argued that such protection, which is not permitted now, would mean moving backward on current world trade commitments.
Free market forces wreak havoc on lives of people in times of
crisis. While a financial crisis hit Asia in 1997, Indonesia called the
IMF for help.
Then the IMF applied their five formulas: privatized basic
services, an independent central bank, "flexible" workforces, low
social spending, and total free trade.
Instead of getting a better result, Indonesia's unemployment
rate increased from 4 to 12 percent in 1999. A similar experience
occurred in all crisis situations. The IMF advised Russia to use "shock
therapy" of the free market to improve its economy.
There was a 50 percent productivity loss, and hunger and
starvation on a large scale occurred in an economy previously able to
feed its members. The promised benefits of free markets never
materialized, leaving embarrassed IMF economists looking for excuses
for their failure in Russia.
Similarly, free market forces could not eliminate huge
unemployment in the world economy for more than 20 years following the
Great Depression.
Nearly all advanced economies have learned this lesson and are
taking steps to protect their people from the shock of the current
economic crisis.
We should follow suit and not let industries collapse and
throw large amounts of people out of work in the vain hope that the
market will automatically provide new opportunities.
Australia and China chose to use economy stimulus for building
infrastructure to create employment. Taiwan distributed vouchers for
shopping to its people.
Based on Reuters' compilation, the total stimulus package will
be prepared in 2009 by 23 developed countries in North America, Europe
and Asia reaches $4 billion or ninefold the Indonesian GDP.
The US is spending trillions to protect its industries and bailout failures, in direct violation of free market principles.
What Indonesia should do to use the stimulus package? There are
at least three issues to address: stimulating the real sector,
eradicating poverty and building economic infrastructure.
Stimulating the real sector could be focused into activities
that can absorb employment, boost exports and stabilize the price of
food. It includes tax facilities, food security, export promotion,
capital incentives for financial institution, interest free banking,
and a profit sharing system for financial institutions and export
assurance.
Poverty eradication comprises a national program for society
empowerment, distributing zakat (alms) for low-income people, credit
for small enterprise and providing energy for villagers.
Economic infrastructure embraces building infrastructure post
natural disaster, railway, drinking water, housing, electrical
generator for villagers, port and stores.
The most important thing is to allocate government spending directly to low-income people and small and medium enterprises.
Hendri Tanjung is a PhD economics scholar, International
Islamic University Islamabad, Pakistan. Asad Zaman is a professor of
economics, International Islamic University Islamabad, Pakistan.
